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  1. Which of the following activities affecting the financial system is conducted by the U.S. Treasury Department?
    (RM 571)

    I Debt management policy

    II Fiscal policy 

    A. I only   
    B. Both I and II   
    C. Neither I nor II 
    D. II only   
    B. Both I and II

    The U.S. Treasury conducts fiscal policy through the taxing and spending programs of the government. The U.S. Treasury conducts debt management policy through the financing and refunding of government debt. 
     
    (this multiple choice question has been scrambled)
  2. Which of the following was estimated to be the most important source of federal government revenue in 2009?
    (RM 573) \

    A. Individual income taxes   
    B. Social insurance taxes and contributions   
    C. Corporate income taxes   
    D. Excise, estate, and gift taxes 
    A. Individual income taxes   

    Individual income taxes produced almost 44% of federal revenues in 2009. Social insurance taxes produced about 42%, while corporate income taxes produced only about 6.6%.
     
    (this multiple choice question has been scrambled)
  3. Excluding undefined activities, which of the following were estimated to be the most important uses of federal funds in 2009?
    (RM 573-574) 
      
    A. Interest 
    B. Income security programs   
    C. National defense   
    D. Social Security and Medicare   
    D. Social Security and Medicare 

    All four of the categories listed were important, but Social Security and Medicare combined topped the list in 2009, accounting for about 31% of federal government expenditures.
    (this multiple choice question has been scrambled)
  4. Which of the following statements concerning financing deficits by borrowing from Federal Reserve Banks is (are) correct?
    (RM 575)

    I             It is as inflationary as printing more money because reserves and the money supply increase.

    II            Interest rates will tend to rise as national income and savings fall because of the increase in the money supply. 

    A. I only   
    B. II only   
    C. Both I and II   
    D. Neither I nor II
    A. I only   

    II is incorrect because when the federal government borrows from the Federal Reserve Banks and then spends the money by issuing checks, the money supply and the level of reserves, income, and savings rise. This will tend to drive interest rates down.
     
    (this multiple choice question has been scrambled)
  5. Which of the following statements concerning the traditional view of the crowding-out effect of increased government borrowing is (are) correct?           
    (RM 575)
    I             The effect is to increase private borrowing because the drop in securities prices makes government securities easier to buy.II            The effect is to decrease private investment because more government borrowing increases interest rates and discourages some private borrowers. 

    A. Both I and II   
    B. I only   
    C. II only   
    D. Neither I nor II 
    C. II only   

    I is incorrect because the crowding-out effect results from high interest rates due to added government borrowing. This will discourage borrowing by others, as indicated in II.
    (this multiple choice question has been scrambled)
  6. Which of the following statements concerning the effects of government borrowing is correct?            
    (RM 575-577) 

    A. Recent research shows that interest rates rise due to increased government borrowing and spending.   
    B. Evidence suggests budget deficits are more likely the result of past inflation than vice versa. 
    C. There is ample evidence that government budget deficits cause inflation.   
    D. Recent research shows that in an efficient market security prices rise from increased government borrowing and spending.   
    B. Evidence suggests budget deficits are more likely the result of past inflation than vice versa. 

    Evidence suggests budget deficits are more likely the result of past inflation than vice versa. Recent research shows that in an efficient market, interest rates and security prices may not respond to increased government borrowing and spending.
    (this multiple choice question has been scrambled)
  7. All the following statements concerning the federal debt are correct, EXCEPT:           
    (RM 579-581) 

    A. TIPs are inflation-protected securities that have become a larger part of the public debt.   
    B. Most nonmarketable federal debt is owned by government agencies or trust funds.   
    C. Approximately 38% of federal debt is owned by the federal government.   
    D. The percentage of federal debt owned by foreign investors and governments has steadily decreased because of high energy prices and U.S. imports.
    D. The percentage of federal debt owned by foreign investors and governments has steadily decreased because of high energy prices and U.S. imports.

    The percentage of the U.S. federal debt owed to foreign investors and governments has risen in recent years, due partly to the rise in U.S. imports relative to its exports. This has provided funds in foreign countries that often have been used to buy U.S. government securities.
     
    (this multiple choice question has been scrambled)
  8. Which of the following statements concerning marketing of new issues of federal debt securities is (are) correct?
    (RM 583-584)

    I             The main method for marketing federal security issues is by auction.

    II            Competitive and non-competitive tenders are accepted in the marketing process. 

    A. Neither I nor II 
    B. Both I and II   
    C. I only   
    D. II only   
    B. Both I and II 

    Both I and II correctly describe ways of marketing new issues of federal government securities.
     
    (this multiple choice question has been scrambled)
  9. All the following are techniques used in marketing new issues of U.S. Treasury securities, EXCEPT:

    A. Dutch auctions, where all buyers pay the same price   
    B. Price auctions, where buyers pay different prices at or above the Treasury’s minimum   
    C. Negotiated sales through underwriting syndicates of dealers   
    D. Yield auctions, where successful bidders offer the lowest bids   
    C. Negotiated sales through underwriting syndicates of dealers   

    U.S. Treasury securities are not marketed through underwriting syndicates at negotiated prices. The auction method is the principal way in which government securities are sold.
     
    (this multiple choice question has been scrambled)
  10. Which of the following statements concerning the book-entry form of federal securities is (are) correct?
    (RM 584-585)

    I             All new securities are now issued in book-entry form, rather than as certificates with interest coupons.

    II            Securities held in book-entry form can be transferred before maturity on the Federal Reserve’s electronic wire network. 

    A. I only   
    B. Both I and II   
    C. II only   
    D. Neither I nor II 
    B. Both I and II   

    Both I and II correctly describe features of the book-entry form of federal securities.
     
    (this multiple choice question has been scrambled)
  11. All the following are goals of federal debt-management policies, EXCEPT:           
    (RM 586)  

    A. To avoid high rates of inflation 
    B. To minimize the interest cost of the debt   
    C. To increase the frequency of refundings   
    D. To promote full employment and economic growth   
    C. To increase the frequency of refundings

    A goal of federal debt-management policies is to reduce the number of times the Treasury must go to the financial markets to refund old securities or issue new ones and, thereby, to avoid destabilizing those markets.
    (this multiple choice question has been scrambled)
  12. Which of the following statements concerning federal debt-management policy is (are) correct?           
    (RM 586)

    I             It is an instrument of policy that can be useful because it can complement more powerful fiscal and monetary policies.

    II            It can affect liquidity and the shape of the yield curve, but it is not likely to have a major impact on important economic conditions.  

    A. II only   
    B. I only   
    C. Both I and II   
    D. Neither I nor II 
    C. Both I and II   

    Both I and II correctly describe the impact of federal debt-management policy.
     
    (this multiple choice question has been scrambled)
  13. Which of the following statements concerning federal debt-management policy is (are) correct?           
    (RM 586-587)
    I            Offering longer-term debt at higher yields is appropriate during recessions as a way to reduce interest rates and to promote increases in employment.II            Offering shorter-term debt at lower yields is an appropriate policy at times of full employment as a way to increase liquidity and reduce inflation. 

    A. I only   
    B. II only   
    C. Both I and II   
    D. Neither I nor II 
    • D. Neither I nor II I is incorrect because lengthening the average maturity of government securities probably causes interest rates to rise and dampens spending. II is incorrect because the use of short-term debt probably lowers interest rates and encourages spending, which would be inflationary in a time of full employment.
    •  
  14. Which of the following statements concerning "municipals" is (are) correct?           
    (RM 588)

    I             "Municipals" is the general name for debt securities of state and local governments; safety and easy marketability make them desirable investments.

    II            Historically, most "municipals" have paid interest income that has been exempt from federal income taxes as well as the income taxes of the states where they are issued. 

    A. Neither I nor II 
    B. Both I and II   
    C. I only   
    D. II only   
    B. Both I and II   

    Both I and II correctly describe characteristics of "municipals."
     
    (this multiple choice question has been scrambled)
  15. All the following are seen as factors causing growth in municipal borrowing, EXCEPT:           
    (RM 588-589) 

    A. Continued growth of suburban and rural communities in some regions 
    B. Rapid increases in population   
    C. Uneven distribution of increases in population   
    D. Downgrading of public expectations of the quality of public services   
    D. Downgrading of public expectations of the quality of public services

    Public expectations that public services must improve in quality have been a factor causing increased borrowing by state and local governments.
    (this multiple choice question has been scrambled)
  16. All the following are important sources of state and local government revenues, EXCEPT:           
    (RM 589-591)

    A. Corporate taxes income taxes 
    B. Sales taxes   
    C. Individual income taxes   
    D. Property taxes   
    A. Corporate taxes income taxes 

    General sales taxes, income taxes, and property taxes are all major revenue sources for state and local governments. Corporate income taxes are a very minor source.
    (this multiple choice question has been scrambled)
  17. Excluding miscellaneous revenues, which of the following was the most important source of tax revenues for state and local governments in fiscal year 2005 – 2006?
     
    A. Federal government revenue   
    B. Sales and gross receipts taxes 
    C. Property taxes   
    D. Individual and corporate income taxes   
    B. Sales and gross receipts taxes 

    Federal revenues account for more than 20% of revenue sources.
     
    (this multiple choice question has been scrambled)
  18. Which of the following functions accounted for the greatest amount of state and local government expenditures?
    (RM 590) 

    A. Highways   
    B. Public welfare 
    C. Education   
    D. Interest   
     
    C. Education 

    Education was the largest expenditure category for state and local governments, almost twice as much as public welfare. The other expenditure categories listed in the question were much smaller.
     
    (this multiple choice question has been scrambled)
  19. All the following are reasons for state and local government borrowing, EXCEPT:            (RM 591-593) 

    A. To finance temporary cash shortages, as before tax due dates   
    B. To take advantage of low interest rates when future borrowing needs and higher interest rates are anticipated 
    C. To support long-term capital investments in facilities   
    D. To finance advance refunding of securities before maturity and to issue new ones at higher rates of interest   
    D. To finance advance refunding of securities before maturity and to issue new ones at higher rates of interest   

    Government borrowing for the advance funding of debt before maturity would be done only if new securities could be issued at lower rates of interest.
     
    (this multiple choice question has been scrambled)
  20. Which of the following is a form of long-term state and local government debt security?           
    (RM 593-596) 

    A. Revenue bonds payable only from specific revenue sources   
    B. Revenue-anticipation notes   
    C. Tax-anticipation notes   
    D. Bond-anticipation notes 
    • A. Revenue bonds payable only from specific revenue sources  
    •  
    • Revenue-anticipation notes, tax-anticipation notes, and bond-anticipation notes all are short-term types of state and local government securities.
    •  
  21. All the following are types of revenue bonds, EXCEPT:
    (RM 595) 

    A. Industrial development bonds   
    B. General obligation bonds   
    C. Hospital revenue bonds 
    D. Student loan bonds   
    B. General obligation bonds   

    General obligation bonds are backed by the full faith, credit, and taxing power of the issuing governmental unit. Student loan bonds, industrial development bonds, and hospital revenue bonds are backed only by the revenue-generating abilities of the projects involved.
     
    (this multiple choice question has been scrambled)
  22. Which of the following statements concerning floaters or option bonds is (are) correct?           
    (RM 596)

    I             A floater may be sold back to an issuer after some period of time but before maturity and pays a fixed interest rate.

    II            An option bond pays interest at a rate that may fluctuate during the term of the bond as some other rate, like that of Treasury bills fluctuates. 

    A. I only   
    B. Neither I nor II 
    C. Both I and II   
    D. II only   
    B. Neither I nor II 

    I is incorrect because a floater pays a floating or variable interest rate and may not be sold back to the issuer at the option of the investor. II is incorrect because an option bond carries a fixed interest rate but may be sold back to the issuer at par after a specified period.
     
    (this multiple choice question has been scrambled)
  23. Which of the following statements concerning the federal income tax treatment of municipal bonds is (are) correct?
    (RM 597)

    I             An important purpose of the favorable federal income tax treatment of municipal bonds is to provide a subsidy to low-income investors.

    II            The higher the marginal federal income tax bracket of investors, the more attractive is the yield to them from municipal bonds. 

    A. Neither I nor II
    B. Both I and II   
    C. I only   
    D. II only   
    D. II only   

    I is incorrect because the favorable federal income tax treatment of many types of municipal securities works primarily to benefit high-income investors, as indicated in II.
     
    (this multiple choice question has been scrambled)
  24. All the following statements concerning the federal income tax treatment of municipal bonds are correct, EXCEPT:
    (RM 597-598) 

    A. Federal tax legislation during the 1980s generally served to increase the attractiveness of municipal bonds.   
    B. Their federal income tax treatment in effect limits the demand for municipal bonds to high-income individuals, commercial banks, property-casualty insurance companies, and large nonfinancial corporations.   
    C. Their federal income tax treatment contributes to the volatility of the market for municipal bonds.   
    D. Their federal income tax treatment contributes to rising prices of municipal bonds during periods when corporate and individual incomes are rising. 
    A. Federal tax legislation during the 1980s generally served to increase the attractiveness of municipal bonds.   

    Federal tax legislation during the 1980s, and particularly the Tax Reform Act of 1986, tightened the eligibility standards for several types of municipal securities to receive favorable federal income tax treatment. It thus decreased the attractiveness of many types of municipal securities.
    (this multiple choice question has been scrambled)
  25. Which of the following statements concerning term and serial municipal bonds is (are) correct?
    (RM 602)

    I             Term bonds are all issued with the same maturity and usually are repaid from sinking funds that have received annual contributions.

    II            Serial bonds are all issued with the same maturity and sinking fund provisions as term bonds, but investors take turns in receiving interest payments as they become available. 

    A. II only   
    B. Neither I nor II 
    C. I only   
    D. Both I and II   
    C. I only

    II is incorrect because serial bonds are issued with different maturity dates. Their staggered maturity dates provide an automatic, gradual repayment of the debt.
    (this multiple choice question has been scrambled)
  26. Which of the following statements concerning marketing of municipals is (are) correct?           
    (RM 602-603)

    I             They may be sold with competitive bidding among underwriter syndicates, where the winning bid has the highest net interest cost.

    II            They may be sold in negotiations with a single securities dealer or underwriting syndicate that may offer some services not usually available from competitive bidders. 

    A. Neither I nor II 
    B. II only   
    C. Both I and II   
    D. I only   
    B. II only 

    I is incorrect because if municipals are sold with competitive bidding, the winner is the one offering the lowest net interest cost to the issuing governmental unit.
     
    (this multiple choice question has been scrambled)
  27. Which of the following statements concerning problems in the municipals market is (are) correct?           
    (RM 603-604)

    I             Some see the tax-exemption feature of many municipals as an inducement to state and local governments to borrow more because of low interest rates.

    II            Taxpayer revolts and an increasing burden of local taxes are seen as making borrowing easier than collecting taxes because it is a way to avoid having higher state and local taxes.

    A. I only   
    B. II only   
    C. Both I and II   
    D. Neither I nor II
    A. I only 

    II is incorrect because taxpayer revolts and an increasing burden of local taxes have made additional borrowing by state and local governments more difficult. Taxes are needed to pay interest and principal amounts at maturity.
     
    (this multiple choice question has been scrambled)

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