7.      Does the efficient markets hypothesis imply that the average investor will not earn anything by purchasing stock?

A.  No, the efficient market hypothesis implies that the average investor should not expect to receive abnormally high returns on a consistent basis.

B.  Yes, the efficient markets hypothesis implies that the best that the average investor can do is break even.

C.  No, the efficient market hypothesis implies that the investor will consistently earn abnormally high returns by purchasing stock.

D.  Yes, the efficient markets hypothesis implies that stock purchases are extremely risky and that the average investor has no hope of recovering any loss.

8.      The most frequent causes of financial crisis in advanced economies include, besides a stock market crash or the failure of a major financial institution, _________.

A.  Low interest rates

B.  Low asset prices

C.  High financial regulation

D.  High uncertainty

9.       A credit card debt is

A.  secured debt.

B.  unsecured debt.

C.  restricted debt.

D.  unrestricted debt.

10.    Using the Taylor's rule, when the equilibrium real federal funds rate is 3 percent, the positive output gap is 1 percent, the target inflation rate is 1 percent, and the actual inflation rate is 2  percent, the nominal federal funds rate target should be

A.  5 percent.

B.   5.5 percent.

C.   6 percent.

D.  6.5 percent.

11.    If John creates a new demand deposit account at CBA and deposits $200 of his cash into the account:

A.  M1 decreases and M2 stays the same.

B.  M1 increases and M2 stays the same.

C.  M1 stays the same and M2 increases.

D.  M1 stays the same and M2 stays the same.

12.    If a bank has excess reserves of $5,000 and checkable deposit liabilities of $80,000, and if the reserve requirement is 25 percent, then total reserve amount the bank has is

A.  $25,000.

B.  $21,000.

C.  $20,000.

D.  $5,000.

13.    Suppose an article in the Australian Financial Review announced the acquisition ofAldi by Coles, which is expected to greatly increase Coles’ profitability. According to the efficient market            hypothesis, ifyou decide to invest in Coles shares, you can expect to earn

A.  below average returns since supermarkets have low dividend payments, as most profits are reinvested.

B.  a normal return since stock prices adjust to reflect expected changes in profitability almost immediately.

C.  above average returns since you will share in the higher profits.

D.  above average returns since your stock price will definitely appreciate as higher profits are earned.

14.    A ________ pays out cash flows from a collection of assets in different tranches, with the highest- rated tranch paying out first, while lower ones paid out less if there are losses on the underlying     assets.

A.  adjustable-rate mortgage

B.  negotiable CD

C.  discount bond

D.  collateralized debt obligation (CDO)

15.    Everything else held constant, in the market for reserves, when the cash rate is 2%, decreasing the discount rate (the RBA lending rate) from 3% to 1.5%

A.  decreases the cash rate.

B.  has no effect on the cash rate.

C.  increases the cash rate.

D.  has an indeterminate effect on the cash rate.

16.    The lower a security's price in the secondary market, the ________ funds a firm can raise by selling securities in the ________ market.

A.  more; primary

B.  more; secondary

C.  less; primary

D.  less; secondary

17.    Bitcoin fails to satisfy which two of the three functions of money?

A.  unit of account and store of value

B.  medium of exchange and unit of account

C.  medium of exchange and store of value

D.  bitcoin satisfies all of the functions of money

18.    If reserves in the banking system increase by $200, then checkable deposits will increase by $1,000 in the simple model of deposit creation when the required reserve ratio is

A.  0.01.

B.  0.05.

C.  0.10.

D.  0.20.

19.    During the Global Financial Crisis, the Fed conducted large amounts of asset purchases, resulting  in a drastic increase in the monetary base. However, the money supply did not increase drastically. What was the main reason?

A.  The Fed also increased the required reserve ratio.

B.  The Fed also conducted open market sales.

C.  Most of the additional monetary base became excess reserve.

D.  The discount loan decreased.

20.    The principal-agent problem would not occur if ________ of a firm had complete information about actions of the ________.

A.  owners; customers

B.  owners; managers

C.  managers; customers

D.  managers; owners

21.    According to the Taylor Rule, when the inflation rate ________, the nominal interest rate should be ________ by ________ than the change in inflation rate.

A.  decreases; increased; less

B.  increases; decreased; more

C.  increases; increased; more

D.  decreases; decreased; less

22.    In the bond market, the bond suppliers are the ________ and the bond demanders are the

________ .

23.    With no government regulation, how much bank capitals would banks hold?

A.  Too much capital, reducing the profitability of banks.

B.  Too much capital, making it more difficult to obtain loans.

C.  Too little capital, reducing the profitability of banks.

D.  Too little capital, making it more likely to fail.

24.    People hold money even during inflationary episodes when other assets prove to be better stores of value. This can be explained by the fact that money is

A.  extremely liquid.

B.  a unique good for which there are no substitutes.

C.  the only thing accepted in economic exchange.

D.  backed by gold.

25.    Which of the following actions is the least preferred by a bank to increase its reserve?

A.  Selling Treasury bills.

B.  Calling in loans.

C.  Borrowing from the central bank.

D.  Borrowing from other banks.

PART B: SHORT-ANSWER QUESTION (75 MARKS)

•    Show all workings.

•    Round your answers to two decimal places.

•    Fully label your graphs, if you are required to draw one.

•   Questions in Part B carry marks as indicated.

B1. (12 marks)

The following table shows the nominal interest rate for U.S. Treasury bonds with different maturities in September between 2020 and 2022:

Source: U.S. Treasury

Use the liquidity premium theory to answer the following questions:

(a) (9 marks) According to the table, what is the market predicting about the movement of future short- term interest rates in each of the three periods? Explain your answer using the shape of the yield curve.  (b) (3 marks) In September 2021, the spread between the six-month and 10-year Treasury bonds is the highest out of three years. Why is that the case?

B2. (7 marks)

Suppose the balance sheet of the Lyona Bank can be divided as follows

(a) (2 marks) Use the gap analysis to calculate the change in the bank’s profit if the interest rate increases from 2% to 5%.

(b) (5 marks) Suppose that the average duration of its assets is five years, while the average duration of its liabilities is four years. Use the duration analysis to calculate the approximate change of the bank’s   net worth as a percentage of the total original asset value if the interest rate increases from 2% to 5%.

B3. (15 marks)

Suppose that the required reserve is $400 billion, excess reserve is $500 billion, currency in circulation is $2000 billion, and the currency ratio is 0.5.

(a) (5 marks) Calculate the money supply, and the money multiplier.

(b) (4 marks) Suppose the central bank conducts an open market purchase of $500 billion of bonds from commercial banks. Assuming the ratios you calculated in part (a) remain the same, predict the change of the money supply, and the resulting money supply in the market after the purchase.

(c) (2 marks) Can the money multiplier value be less than 1? Explain your answer.

(d) (4 marks) In March 2020, the Fed removed reserve requirements for all U.S. banks (0%). What is the main reason behind the Fed’s decision? Explain using the money multiplier.

B4. (9 marks)

The figure below shows how interest rates respond over time to an increased rate of growth.

money supply

(a) (2 marks) According to this figure, is the liquidity effect larger than the other three effects? In addition, how fast is the adjustment of expected inflation?

(b) (7 marks) Explain your answer by describing how money demand or supply moves after each          effect, and the overall effect on the interest rate. Use a money demand and supply graph in your answer.

B5. (10 marks)

Using graphs of the market for reserves, explain and indicate what happens to the cash rate,               borrowed reserves, and nonborrowed reserves in the following situations, holding everything else      constant. Note that different starting positions of the graph can result in different results; your answer must cover all potential scenarios.

(a) (5 marks) The RBA increases the reserve requirement for Australian banks.

(b) (5 marks) The RBA engages in a defensive open market operation to keep the cash rate constant in light of a sudden outflow of cash withdrawal prior to the lockdown.