Question

Given the following statements regarding fiscal policy, which is/are TRUE? (i). A decrease in a government’s budget deficit should lead to a fall in interest rates in a country. (ii). Changes in tax rates do not directly affect monetary policy. (iii). Increased borrowing by a government generally leads to a drop in interest rates. (iv). When a country is in recession, then decreasing taxes may deepen the recession. (v). For a progressive tax system, when people earn more, a country’s income tax revenues increase. A. All of the given statements. B. (i), (ii), and (iv) only. C. (ii), (iii) and (iv) only. D. (i), (ii) and (iii) only. E. (i) and (v) only.

Which of the following goals is NOT associated with regulation of a financial system? A. To provide stability of the money supply. B. To direct the flow of funds to priority areas. C. To maintain the soundness and stability of the financial system. D. To lower the cost of capital for businesses. ANS not for market economies E. To maintain public confidence in the financial system.

In relation to interest rate risk: A. If interest rates are expected to rise, then a bank will benefit if it has a negative GAP. B. The price of a fixed-interest security will fall if interest rates fall. C. A three-year bond with six months to maturity remaining is regarded as rate-sensitive. D. A financial institution will try to have a positive gap if interest rates are expected to fall. E. Banks use duration gap analysis to examine the sensitivity of their income to interest rate changes.

Answer 1

Given the following statements regarding fiscal policy, which is/are TRUE?

Answer: E. (i) and (v) only.

Which of the following goals is NOT associated with regulation of a financial system?

Answer: D. To lower the cost of capital for businesses.

In relation to interest rate risk:

Answer: Assuming the question requires the true statement/s, the answer is D. A financial institution will try to have a positive gap if interest rates are expected to fall.