Question
The next four questions involve the following situation. Consider two identical countries, a and b, in our overlapping generations framework. In each country, the population
The next four questions involve the following situation.
Consider two identical countries, a and b, in our overlapping generations framework. In
each country, the population of every generation is 200 and each young person wants
money balances worth 50 goods. Assume that country a's currency is the only one that
circulates in the two countries. There are $800 of country a's currency split equally
among the initial old of both countries.
30. What is the real value of country a's dollar?
(A) 50.
(B) 25.
(C) 200.
(D) 800.
31. What is the initial old's consumption?
(A) 10,000.
(B) 20,000.
(C) 30,000.
(D) 40,000.
32. Country b instead issues its own money, giving 10 to each of the inital old of
country b. To ensure demand for this currency, b also implements foreign exchange
controls. What is the value of a b's currency unit?
(A) 5.
(B) 10.
(C) 25.
(D) 50.
33. If country b adopts its own currency, as question 32 describes, what is the consump-
tion of the initial old in country b?
(A) 10,000.
(B) 20,000.
(C) 30,000.
(D) 40,000.
34. Suppose that the Bank of Canada wants to keep the Canadian dollar (CAD) at a
consistent value below that of the U.S. dollar (USD), in order to ensure that Canada
is competitive in exporting its goods and services. In other words, Canadian exports
should be cheap for American consumers.
The U.S. Federal Reserve engages in a radical program of monetary contraction: selling
bonds, raising the reserve requirement, and increasing the target for the federal funds
rate - its key policy interest rate. Assuming that the quantity theory of money holds
for both countries, what should the Bank of Canada's reaction be?
(A) The Bank of Canada should immediately buy bonds in the open market.
(B) The Bank of Canada should purchase USD in exchange for CAD.
(C) The Bank of Canada should immediately lower its target for the overnight rate.
(D) The Bank of Canada should immediately raise its target for the overnight rate.
35. Why are short-term bond yields usually lower than long-term bond yields?
(A) Governments always purchase short-term bonds, driving down yields.
(B) Long-term bonds are fraught with default and in ation risk.
(C) Short-term bonds have a lower supply.
(D) The yield curve is at.
36. Which insurance instrument was primarily responsible for American International
Group's (AIG) insolvency during the 2007-2008 financial crisis?
(A) Interest-rate swaps.
(B) Option puts on housing yields.
(C) Credit default swaps.
(D) Mortgage stocks.
37. Which of the following statements is FALSE?
(A) ETFs typically outperform comparable mutual funds.
(B) ETFs can be traded on public exchanges.
(C) ETFs have low management fees.
(D) An ETF is only composed of equities.
38. Which scientist lost his money in the South Sea Bubble?
(A) Blaise Pascal.
(B) Isaac Newton.
(C) John Locke.
(D) Edvard Grieg.
39. Which of the following has the highest stock-
ow ratio?
(A) Bitcoin.
(B) Canadian dollars.
(C) Copper.
(D) Wheat.
40. Suppose that two countries, A and B, are operating under the gold standard,
and engage in free trade with each other under the price-specie ow mechanism, which
operates eciently. If B exports goods to A, then what happens to the exchange rate
between the two countries?
(A) The exchange rate will undergo volatility.
(B) B's currency increases relative to A's, due to B's increased GDP.
(C) Almost nothing.
(D) B's currency decreases relative to A, since A now has more goods.
41. Germany and Italy were on the classical gold standard. Suppose that in Germany,
6 marks could be exchanged for one ounce of gold. In Italy, 30 lira could be exchanged
for one ounce of gold. What is the exchange rate between the two nations?
(A) One lira for one mark.
(B) 5 lira for one mark.
(C) 0.2 lira for one mark.
(D) 10 lira for one mark.
42. Why did the United States go off the gold standard from 1861 to 1879?
(A) To fund Western expansion and railway building.
(B) To fund the Civil War.
(C) To provide credit to farmers hurt by crop failures.
(D) To recuperate interest payments on loans.
43. Until 1933, all American debts that were contracted in U.S. dollars could be settled
in gold. President Franklin Delano Roosevelt put an end to this gold clause provision.
What is the most plausible explanation for this?
(A) Roosevelt wanted to borrow in order to fund large government programs.
(B) Credit rating agencies would have downgraded U.S. bonds.
(C) The Dust Bowl decimated the Midwest's agricultural output.
(D) Gold had ceased to be a viable asset, due to a decline in mining activity.
44. What government regulation does NOT reduce the moral hazard associated with
deposit insurance?
(A) Closing insolvent banks.
(B) Reserve requirements.
(C) Capital requirements.
(D) Bailing out banks that have negative net worth.
45. From 1858 until 1913, Canada pegged its currency to gold at the rate of 20.67 CAD
per troy ounce of gold. When WWI started, Canada went off the gold standard. Why?
(A) It lacked the gold reserves to satisfy increasing demands for redeemability.
(B) The gold standard limited the government's ability to pay for war.
(C) The gold standard's associated capital requirements and reserve requirements im-
peded the country from contributing to the war effort.
(D) All of the above.
46. How is most currency in Canada created?
(A) Through open market operations.
(B) Through commercial paper trading.
(C) Through the government digitally increasing bank reserves.
(D) Through private bank lending.
47. Under which of the following conditions is barter more effective than a monetary
system of exchange?
(A) In a low-trust society.
(B) In a hyperin ationary setting.
(C) When a country is rich in natural resources.
(D) When there is a strong state.
39. Which of the following has the highest stock- ow ratio?
(A) Bitcoin.
(B) Canadian dollars.
(C) Copper.
(D) Wheat.
48. You are a nancial advisor working with high net-worth clients. A well-dressed man
enters your oce, sweating profusely. He sits down, and tells you that he is concerned
about cost-push in ation in the future, and has $3 million to spend. Which of the
following assets would you recommend he invest in?
(A) An ETF linked to the Dow Jones Industrial Average.
(B) Agricultural land.
(C) Gold.
(D) Residential real estate.
49. Which of the following is a necessary but not a sucient condition for a bank run
to occur?
(A) A bank's liabilities exceed its assets.
(B) A bank does not have enough reserves to cover a surge in depositor demands.
(C) A recession occurs, meaning that people need to liquidate their assets.
(D) Everyone rushes to the bank to withdraw their deposits, which have been mostly
lent out.
50. You are the sole shareholder in a bank, with limited liability. The bank currently
has deposits of $800,000, and assets of $200,000. If the bank fails tomorrow, how much
would you owe the bank's creditors?
(A) $600,000.
(B) $200,000.
(C) $0.
(D) $800,000.
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