Economics 50 Multiple Choice Questions


Question 1

The central bank of the United States is:


a. The Bank of America

b. The Federal Reserve System

c. The U.S. Treasury

d. Citibank

0.5 points

Question 2

In the United States control of the money supply is given to:


a. The President

b. The Federal Reserve System

c. The Bureau of Printing and Engraving

d. The Department of the Treasury

0.5 points

Question 3

Which best describes money as a means of payment?


a. Money provides an immediate double coincidence of wants

b. Money makes sure a double coincidence of wants never occurs

c. Money requires at least two transactions to obtain the double coincidence of wants

d. To obtain a double coincidence of wants without money is impossible

0.5 points

Question 4

Money as a means of payments refers only to:


a. Actual currency

b. Coins and currency

c. Coins, currency and credit cards

d. Anything that is generally accepted as payment for goods and services

0.5 points

Question 5

The statement “risk requires compensation” implies that people:


a. Do not take risk

b. Only accept risk when they absolutely have to

c. Will only accept risk when they are rewarded for doing so

d. Avoid risk at all cost

0.5 points

Question 6

Which of the following statements best describes financial instruments?


a. All financial instruments are a means of payment

b. Financial instruments can transfer resources between people but not risk

c. Financial instruments can transfer resources and risk between people

d. Financial instruments can transfer risk but not resources between people

0.5 points

Question 7

Which of the following statements best describes financial markets?


a. Financial markets are a good example of unregulated markets

b. Financial markets increase the speed of buying and selling, but they also increase the cost since people are earning fees for these transactions

c. Financial markets today offer fewer instruments than they did in the past

d. Financial markets lower the cost and increase the speed of buying and selling financial instruments

0.5 points

Question 8

Identify which item is not one of the six parts of the financial system.


a. Credit cards

b. Financial institutions

c. Central banks

d. Financial markets

0.5 points

Question 9

Identify which of the following is not one of the five core principles of money and banking?


Information is the basis for decisions

Time has value

Risk requires compensation

Stability creates risk

0.5 points

Question 10

Checks are:


a. Not a means of payment

b. Not money

c. Not a promise of any kind

d. Not acceptable by the U.S. Government for payment of taxes

0.5 points

Question 11

The use of money makes us more efficient because:


a. We spend more time trading and more time producing

b. People can specialize in what they do well

c. With money we borrow less

d. Money increases in value over time

0.5 points

Question 12

The high transaction costs associated with a barter system refers to:


a. The fact that, often times, these exchanges are taxed by governments

b. The risk associated with having to carry an inventory of goods to trade

c. The high cost associated with finding someone with whom to exchange

d. The cost of drawing up complete contracts

0.5 points

Question 13

The expected value of an investment:


a. Is what the owner will receive when the investment is sold

b. Is the sum of the payoffs

c. Is the probability-weighted sum of the possible outcomes

d. Cannot be determined in advance

0.5 points

Question 14

Another name for the expected value of an investment would be:


a. The mean value

b. The upper-end value

c. The certain value

d. The risk-free value

0.5 points

Question 15

The expected value of an investment:


a. Is what the owner will receive when the investment is sold

b. Is the sum of the payoffs

c. Is the probability-weighted sum of the possible outcomes

d. Cannot be determined in advance

0.5 points

Question 16

Another name for the expected value of an investment would be:


a. The mean value

b. The risk-free value

c. The certain value

d. The upper end value

0.5 points

Question 17

Given a choice between two investments with the same expected payoff:


a. Most people will choose the one with the lower standard deviation

b. Most people will opt for the one with the higher standard deviation

c. Most people will be indifferent since the expected payoffs are the same

d. Most people will calculate the variance to assess the relative risks of the two choices

0.5 points

Question 18

The money aggregate M2 includes:


a. Stock and bond mutual fund shares

b. Large denomination time deposits

c. M1

d. Savings deposits but not money market deposit accounts

0.5 points

Question 19

An advantage that money has over other assets is that it:


a. Provides a higher return to the owner

b. Is a safer asset to hold during times of inflation

c. Increases in value over time

d. Has lower transaction costs to use as a means of payment than other assets

0.5 points

Question 20

An automobile is an asset, but it is not liquid because:


a. The automobile may not be in good repair

b. The owner may still be making payments on the loan

c. The automobile cannot be sold without a loss in value

d. The transactions costs for the used automobile market are high

0.5 points

Question 21

To say an asset is liquid implies that:


a. We are only considering U.S. currency

b. We are considering any asset that can be sold

c. We are focusing on a category of assets that are in a physically liquid form, like oil

d. We are considering assets that may be readily converted into a means of payment

0.5 points

Question 22

The risk premium for an investment:


a. Is negative for U.S. Treasury Securities

b. Is zero (0) for risk-averse investors

c. Increases with risk

d. Is a fixed amount added to the risk-free return, regardless of the level of risk

0.5 points

Question 23

A risk-averse investor will:


a. Always accept a greater risk with a greater expected return

b. Only invest in assets providing certain returns

c. Sometimes accept a lower expected return if it means less ri

d. Never accept lower risk if it means accepting a lower expected return

0.5 points

Question 24

Which of the following investment strategies involves generating a higher expected rate of return through increasing risk?


a. Leverage

b. Value at risk           

c. Diversifying

d. Hedging risk

0.5 points

Question 25

In order to benefit from diversification, the returns on assets in a portfolio must:


a. Not be perfectly positively correlated

b. Have the same idiosyncratic risks

c. Be perfectly positively correlated

d. Be perfectly negatively correlated

0.5 points

Question 26

When a loan is amortized, it means:


a. The principal is never repaid, only interest

b. The principal and interest are paid off by the borrower over the life of the loan

c. The borrower is in default

d. The interest is due entirely at the maturity date

0.5 points

Question 27

When the price of a bond equals the face value:


a. The yield to maturity will be below the coupon rate

b. The yield to maturity is greater than the current yield

c. The yield to maturity will be above the coupon rate

d. The current yield is equal to the coupon rate

0.5 points

Question 28

If the quantity of bonds demanded exceeds the quantity of bonds supplied, bond prices:


a. Will rise and yields would increase

b. Would fall and yields would increase

c. Would rise and yields would fall

d. Will rise and yields will remain constant

0.5 points

Question 29

Interest-rate risk results from:


a. Bond prices being fixed over the life of the bond

b. Inflation being uncertain

c. A mismatch between an individual’s investment horizon and a bond’s maturity

d. The fact that most people hold bonds until they mature

0.5 points

Question 30

The bid price for a bond quote is:


a. Fixed over the life of a bond

b. The price at which the bond dealer is willing to purchase the bond

c. The price at which the bond dealer is willing to sell the bond

d. Determined solely by the time left to maturity

0.5 points

Question 31

A zero-coupon bond refers to a bond which:


a. Does not pay any coupon payments because the issuer is in default

b. Promises a single future payment

c. Pays coupons only once a year

d. Pays coupons only if the bond price is above face value

0.5 points

Question 32

The most common form of zero-coupon bonds found in the United States is:


a. AAA rated corporate bonds

b. U.S. Treasury bills

c. 30-year U.S. Treasury bonds

d. Municipal bonds

0.5 points

Question 33

A 10-year Treasury note has a face value of $1,000, price of $1,200, and a 7.5% coupon rate. Based on this information, we know:


a. The present value is greater than its price

b. The current yield is equal to 8.33%

c. The coupon payment on this bond is equal to $75

d. The coupon payment on this bond is equal to $90

0.5 points

Question 34

In quoting exchange rates:


a. One should always quote these as units of foreign currency over a unit of domestic currency

b. One should always quote the rate as the units of domestic currency over a unit of foreign currency

c. Usually one should quote the rate in such a way that the value is greater than one

d. Each country’s central bank determines how the rate is to be quoted

0.5 points

Question 35

The real exchange rate is defined as:


a. The nominal exchange rate plus the rate of inflation

b. The spot exchange rate

c. The rate at which one can exchange the goods and services from one country for the goods and services from another country

d. The exchange rate that would exist if nominal rates were not fixed by government

0.5 points

Question 36

An American traveling to Europe will find it easier to make purchases now because:


a. Most countries in Europe accept U.S. dollars

b. Most of the countries of Europe have adopted the British pounds as the standard currency

c. Many of the countries in Europe now use the same currency, the euro

d. All of the countries in Europe now use the same currency, the euro

0.5 points

Question 37

If an American traveling abroad can obtain 115 euros for $100 U.S, the current euro per $ exchange rate is:


a. 0.870 euros/$

b. 1.15 euros/$

c. 115euros/$

d. 1euro/1.15$

0.5 points

Question 38

If the Japanese yen appreciates against the U.S. dollar:


a. Americans should find Japanese goods are now less expensive

b. Japanese residents would find Japanese goods are relatively less expensive than American goods

c. U.S. goods should have an easier time competing against Japanese goods in both countries

d. Japanese goods should have an easier time competing against U.S. goods in both countries

0.5 points

Question 39

Users of commodities are:


a. Usually not participants in futures contracts.

b. Speculators preferring to get the large returns which result from large risk.

c. Buyers of futures

d. Likely to take the short position in a futures contract.

0.5 points

Question 40

A key use of interest-rate swaps is to: 


a. Earn the fees for constructing the swaps

b. Provide a hedge against interest-rate risk

c. Manage government revenues.

d. Eliminate risk for both parties involved in the transaction

0.5 points

Question 41

Forward contracts are:


a. Contracts usually involving the exchange of a commodity or financial instrument.

b. Easily resold

c. Always standardized

d. An agreement between more than two parties

0.5 points

Question 42

The strike price of an option is:


a. The market price at the time the option is exercised

b. The market price at the time the option is written

c. Always above the market price

d. The price at which the option holder has the right to buy or sell

0.5 points                                                             

Question 43

Interest-rate swaps are:


a. Exchanges of equity securities for debt securities

b. Agreements involving swapping of option contracts

c. Agreements that allow both parties to convert floating interest rates to fixed interest rates.

d. Agreements between two parties to exchange periodic interest-rate payments over some future period

0.5 points

Question 44

An expected appreciation of the dollar, everything else held constant, should cause


a. The supply of dollars to increase

b. The demand for dollars to increase

c. The dollar to depreciate now relative to other currencies

d. The demand for dollars to decrease

0.5 points

Question 45

A foreign exchange intervention is:


a. Synonymous with a fixed exchange rate

b. The use of public statements by government officials to impact

c. The buying/selling of currencies to affect supply or demand which impacts the exchange rate

d. Only used in crisis situations

0.5 points

Question 46

The nominal exchange rate:


a. Is the amount of one country’s goods that could be obtained with the same goods of another country

b. Is a synonymous term for the swap rate

c. Is the rate that one can exchange the currency of one country for the currency of another country

d. Is always expressed as units of a foreign currency per U.S. dollar

0.5 points

Question 47

The theory of purchasing power parity says:


a. The real exchange rate is always greater than one

b. The real exchange rate is always less than one

c. The dollar price of a basket of goods in the U.S. should equal the yen price of a basket of goods in Japan

d. A dollar should buy the same goods no matter where in the world you go

0.5 points

Question 48

The forward exchange rate:


a. Is the same as the spot rate

b. Is a synonymous term for the nominal exchange rate

c. Is the rate at which Foreign Exchange Basics dealers are willing to commit to buying or selling a currency in the future

d. Is always above the spot rate since it carries greater risk

0.5 points

Question 49

Current U.S. monetary policy is best described as:


Aimed at keeping inflation low and stable and growth high and stable

Determining the denominations of a country’s currency

One of the most important functions of Congress

Attempting to keep inflation constant at zero percent

0.5 points

Question 50

The primary function of central banks is to:


a. Increase risk and volatility to increase compensation

b. Control inflation and help reduce business cycle fluctuations

c. Increase the uncertainty that firms face in making investment decisions

d. Eliminate the need for banks to collect financial information

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