1. The Security Market Line depicts the relationship between the
A. average expected rate of return on stocks and the average expected rate of return on bonds.
B. risk level of a financial asset and the prime interest rate.
C. average expected rate of return of a financial asset and the discount rate.
D. average expected rate of return and risk level of a financial asset.

2. Payments to shareholders from corporate profits are known as
A. appreciation.
B. capital gains.
C. dividends.
D. interest.

3. Paper money (currency) in the United States is issued by the
A. national banks.
B. United States Treasury.
C. Federal Reserve Banks.
D. United States Mint.

4. Which one of the following statements is correct?
A. A $20 bill is a Treasury note.
B. A $20 bill is a gold certificate.
C. A $20 bill is a Treasury bill.
D. A $20 bill is a Federal Reserve Note.

5. The process by which investors seek to profit by simultaneously selling an asset with a lower rate of return and buying an otherwise identical asset with a higher rate of return is known as
A. passive fund management.
B. arbitrage.
C. hedging the market.
D. portfolio balancing.

6. Which one of the following statements about present value is correct?
A. Present value is best defined as the worth in the future of a current flow of returns or costs.
B. Present value is best defined as the worth today of future expected returns or costs.
C. Present value is best defined as the current worth of a financial asset purchased in the past.
D. Present value is best defined as the expected future value of a financial asset purchased today.

7. What concept describes how quickly an investment increases in value when interest is paid not only on the original amount invested, but also on the accumulated interest payments?
A. Future value
B. Real rate of interest
C. Present value
D. Compound interest

8. When a commercial bank has excess reserves,
A. it's in a position to make additional loans.
B. it's charging too high an interest rate on its loans.
C. its reserves exceed its assets.
D. its actual reserves are less than its required reserves.

9. Which one of the following statements about risky investments is correct?
A. Riskier investments tend to sell for higher prices; that is why they are considered to be riskier.
B. Riskier investments tend to sell for prices directly correlated with expected rates of return.
C. Riskier investments tend to sell for lower prices so they provide a higher expected rate of return to compensate for risk.
D. Riskier investments tend to sell for higher prices so they provide a higher expected rate of return to compensate for risk.
10. Reserves must be deposited in the Federal Reserve Banks by
A. only commercial banks which are members of the Federal Reserve System.
B. state chartered commercial banks only.
C. federally chartered commercial banks only.
D. all depository institutions, that is, all commercial banks and thrift institutions.

11. Which one of the following statements about open-market operations is correct?
A. Open-market operations refer to the purchase or sale of government securities by the Fed.
B. Open-market operations refer to central bank lending to commercial banks.
C. Open-market operations refer to the specifying of loan maximums on stock purchases.
D. Open-market operations refer to purchases of stocks in the New York Stock Exchange.

12. Most modern banking systems are based on
A. commodity money.
B. 100 percent reserves.
C. money of intrinsic value.
D. fractional reserves.

13. In 1999 and 2000 the Fed increased the federal funds rate several times. The Fed's purpose was to
A. strengthen the international value of the dollar.
B. reduce the unemployment rate.
C. stimulate economic growth.
D. prevent rising inflation.

14. To say that the Federal Reserve Banks are quasi-public banks means that
A. they deal only with banks of foreign nations and don't have direct business contact with U.S. banks.
B. they deal only with commercial banks, and not the public.
C. they're publicly owned, but privately managed.
D. they're privately owned, but managed in the public interest.

15. During periods of rapid inflation, money may cease to work as a medium of exchange
A. because it's too scarce for everyone to have enough for transactions.
B. because people and businesses won't want to accept it in transactions.
C. unless it has been designated legal tender.
D. unless it's backed by gold.

16. Which one of the following institutions is least likely to default on a bond?
A. A small corporation
B. A local government
C. The U.S. Federal government
D. A large corporation



17. Michelle buys a bond for $5,000. Every year that she holds the bond, she'll receive interest payments of $250. The interest rate on the bond is
A. 20 percent.
B. 40 percent.
C. 5 percent.
D. 2 percent.

18. When shares of stock are sold for more than they're purchased, the difference received by the seller is referred to as
A. economic profit.
B. interest.
C. a dividend.
D. a capital gain.

19. If a corporation goes bankrupt,
A. stockholders must honor the debts to bondholders out of personal assets if necessary.
B. neither stockholders nor bondholders receive any money.
C. stockholders get paid from the sale of company assets before bondholders do.
D. bondholders get paid from the sale of company assets before stockholders do.

20. Checkable deposits are classified as money because
A. banks hold currency equal to the value of their checkable deposits.
B. they can be readily used in purchasing goods and paying debts.
C. they're ultimately the obligations of the Treasury.
D. they earn interest income for the depositor