1) The price paid for the rental of borrowed funds (usually expressed as a percentage of

the rental of $100 per year) is commonly referred to as the A) inflation rate. B) exchange rate. C) interest rate.

D) aggregate price level. Answer: C

2) Financial markets and institutions

A) involve the movement of huge quantities of money. B) affect the profits of businesses.

C) affect the types of goods and services produced in an economy. D) do all of the above.

E) do only (A) and (B) of the above. Answer: D

3) Which of the following can be described as involving direct finance? A) A corporation?s stock is traded in an over-the-counter market. B) People buy shares in a mutual fund.

C) A pension fund manager buys commercial paper in the secondary market.

D) An insurance company buys shares of common stock in the over-the-counter markets.

E) None of the above. Answer: E

4) The purpose of diversification is to A) reduce the volatility of a portfolio?s return. B) raise the volatility of a portfolio?s return. C) reduce the average return on a portfolio. D) raise the average return on a portfolio. Answer: A

5) When the interest rate on a bond is _________ the equilibrium interest rate, there is excess_________ in the bond market and the interest rate will _________. A) below; demand; rise B) below; demand; fall C) below; supply; rise D) above; supply; fall Answer: C

6) In a recession when income and wealth are falling, the demand for bonds _________ and the

demand curve shifts to the _________. A) falls; right

B) falls; left C) rises; right D) rises; left Answer: B

7) When people begin to expect a large stock market decline, the demand curve for bonds shifts to the _________ and the interest rate _________. A) right; falls B) right; rises C) left; falls D) left; rises Answer: A

8) The spread between interest rates on low quality corporate bonds and U.S. government bonds

_________ during the Great Depression. A) was reversed

B) narrowed significantly C) widened significantly D) did not change Answer: C

9) If income tax rates were lowered, then

A) the interest rate on municipal bonds would fall. B) the interest rate on Treasury bonds would rise. C) the interest rate on municipal bonds would rise. D) the price of Treasury bonds would fall. Answer: C

10) According to the expectations theory of the term structure,

A) yield curves should be equally likely to slope downward as to slope upward.

B) when the yield curve is steeply upward-sloping, short-term interest rates are expected to

rise in the future.

C) when the yield curve is downward-sloping, short-term interest rates are expected to remain relatively stable in the future. D) all of the above.

E) only A and B of the above. Answer:E

11) According to the efficient market hypothesis

A) one cannot expect to earn an abnormally high return by purchasing a security.

B) information in newspapers and in the published reports of financial analysts is already

reflected in market prices.

C) unexploited profit opportunities abound, thereby explaining why so many people get

rich by trading securities. D) all of the above are true.

E) only A and B of the above are true. Answer: E

12) To say that stock prices follow a ?random walk? is to argue that A) stock prices rise, then fall.

B) stock prices rise, then fall in a predictable fashion. C) stock prices tend to follow trends.

D) stock prices are, for all practical purposes, unpredictable. Answer:D

13) The efficient market hypothesis suggests that

A) investors should purchase no-load mutual funds which have low management fees. B) investors can use the advice of technical analysts to outperform the market. C) investors let too many unexploited profit opportunities go by if they adopt a ?buy and

hold? strategy.

D) only A and B of the above are sensible strategies. Answer: A

14) Which of the following is empirical evidence indicating that the efficient market hypothesis

may not always be generally applicable? A) Small-firm effect B) January effect

C) Market Overreaction D) All of the above Answer: D

15) An open market purchase of securities by the Fed will

A) increase assets of the nonbank public and increase assets of the banking system. B) decrease assets of the nonbank public and increase assets of the Fed. C) decrease assets of the banking system and increase assets of the Fed.

D) have no effect on assets of the nonbank public but increase assets of the Fed. E) increase assets of the banking system and decrease assets of the Fed. Answer: D

16) Under usual circumstances, an increase in the discount rate causes A) the federal funds rate to fall. B) the federal funds rate to rise.

C) no change in the federal funds rate.