MGT411 MONEY&BANKING LECTURE 23 - 45Prepared by MAQSOOM RAZA

VU MC090201542MBA FINANCE

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Collectively, reserves, cash items in process of collection, and deposits at other banks, are referred to as ____________in a bank balance sheet. a. secondary reserves *b. cash items c. liquid items d. compensating balances Which of the following is a bank regulatory agency? a. Comptroller of the Currency b. Federal Reserve System c. Federal Deposit Insurance Corporation *d. All of the above When economists argue that banking regulations have been a mixed blessing, they are referring to the fact that a. bank regulations foster competition at the expense of the banking system safety. *b. bank regulations foster banking system safety at the expense of competition. c. branch banking, while desired by consumers, leads to less competition d. bank regulations foster competition by limiting branching. The U.S. banking system has been labeled a dual system because a. banks offer both checking and savings accounts. b. it actually includes both banks and thrift institutions. *c. it is regulated by both federal and state governments. d. it was established during the Civil War, thus making it necessary to create separate regulatory bodies for the North and South. The most important developments that have reduced banks' cost advantages in the past thirty years include; a. the elimination of Regulation Q ceilings. b. the competition from money market mutual funds. c. the competition from junk bonds. d. all of the above. *e. only (a) and (b) of the above. Moral hazard is an important feature of insurance arrangements because the existence of insurance a. reduces the incentives for risk taking. b. is a hindrance to efficient risk taking. c. caused the private cost of the insured activity to increase. d. does all of the above. *e. does none of the above. Deposit insurance a. attracts risk-prone entrepreneurs to the banking industry. b. encourages bank managers to take on greater risks than they otherwise would. c. increases the incentives of depositors to monitor the riskiness of their banks' asset portfolios. d. does all of the above. *e. does only (a) and (b) of the above. Regular bank examinations help to reduce the ____ problem, but also help to indirectly reduce the _____problem because, given fewer opportunities to take on risk, risk-prone entrepreneurs will be discouraged from entering the banking industry. a. adverse selection; adverse selection b. adverse selection; moral hazard *c. moral hazard; adverse selection d. moral hazard; moral hazard If the FDIC decides that a bank is too big to fail, it will use the a. payoff method, effectively covering all deposits-even those that exceed the $100,000 ceiling. b. payoff method, covering only those deposits that do not exceed the $100,000 ceiling. *c. purchase and assumption method, effectively covering all deposits-even those that exceed the $100,000

ceiling. d. purchase and assumption method, covering only those deposits that do not exceed the $100,000 ceiling. The too-big-to-fail policy a. puts small banks at a competitive disadvantage relative to large banks in attracting large depositors. b. treats large depositors of small banks inequitably when compared to depositors of large banks. c. ameliorates moral hazard problems. d. does all of the above. *e. does only (a) and (b) of the above. Eliminating deposit insurance has the disadvantage of a. reducing the stability of the banking system due to an increase in the likelihood of bank runs. b. not being a politically feasible strategy. c. encouraging banks to engage in excessive risk taking. d. all of the above. *e. only (a) and (b) of the above. When a bank is well-capitalized, the bank has_____to lose if it fails and is thus_____likely to pursue risky activities. a. more: more *b. more; less c. less; more d. less; less One problem with the too-big-to-fail policy is that it_____the incentives for_____by big banks. *a. increases; moral hazard b. decreases: moral hazard c. increases: adverse selection d. decreases: adverse selection Suppose that the FDIC increases the deposit insurance premiums of banks. Banks will have the incentive to pass the higher insurance premiums to their household depositors in the form of a lower interest rate on deposits or higher service charges on their accounts. This will especially occur when the household supply curve of deposits is a. highly elastic with respect to interest-rate changes b. somewhat elastic with respect to interest-rate changes c. somewhat inelastic with respect to interest-rate changes *d. highly inelastic with respect to interest-rate changes Loans made by the Federal Reserve to depository institutions are in the form of: *a. reserves b. cash c. float d. capital accounts Technically, the Federal Reserve System is owned by: a. the U.S. Treasury b. the Department of Commerce c. the World Bank *d. the commercial banks that are Federal Reserve members The predominant source of the net income of the Federal Reserve derives from: a. priced services it makes available to depository institutions b. loans to depository institutions *c. its portfolio of U.S. government securities d. profits earned in the foreign exchange market Members of the Board of Governors of the Federal Reserve System obtain their positions through: a. appointment by the directors of the Federal Reserve banks b. appointment by the Chairman of the Board of Governors *c. appointment by the U.S. President and approval by the Senate d. appointment by the U.S. Senate and approval by the President Voting members of the Federal Open Market Committee include the following: a. the 7 members of the Board of Governors and the 12 Federal Reserve district bank presidents b. the 12 members of the Board of Governors and the 7 Federal Reserve district bank presidents *c. the 7 members of the Board of Governors and 5 of the 12 Federal Reserve district bank presidents d. none of the above accurately describe the voting members of the Federal Open Market Committee When the Federal Open Market Committee approves its directive, it is then presented to: a. the Chairman of the Board of Governors b. the Chairman of the Federal Open Market Committee *c. the manager of the System Open Market Account d. the president of the Federal Reserve Bank of New York The Federal Reserve pays to the U.S. Treasury approximately what portion of its gross income?

a. 10 percent b. 50 percent c. 75 percent *d. 90 percent A major factor contributing to the political independence of the Federal Reserve is: *a. the Fed is financially independent of congressional appropriations b. members of the Board of governors are appointed by the president of the United States c. members of the Board of Governors may serve only two terms d. all of the above are contributing factors The Federal Reserve System was created: a. to conduct monetary policy for purposes of stabilizing the economy b. primarily to hold large quantities of the ever expanding government debt *c. to provide liquidity to the banking system in time of crisis d. to supervise all national banks The primary motivation behind the creation of the Federal Reserve System was the desire to *a. lessen the occurrence of bank panics. b. stabilize short-term interest rates. c. eliminate state regulated banks. d. finance World War I. The regional Federal Reserve banks a. establish the discount rate. b. ration discount loans to banks. c. clear checks. *d. do all of the above. While the regional Federal Reserve banks "establish" the discount rate, in truth, the discount rate is determined by a. Congress. b. the president of the United States. *c. the Board of Governors. d. the Federal Reserve Advisory Council. A majority of the Federal Open Market Committee is comprised of a. the 12 Federal Reserve Bank presidents. b. the five voting Federal Reserve bank presidents. *c. the seven members of the Board of Governors. d. none of the above. Monetary policy is determined by a. the Board of Governors. b. the Federal Reserve banks from each district. *c. the Federal Open Market Committee. d. the Federal Reserve Advisory Council. Power within the Federal Reserve is essentially located in a. New York. *b. Washington, D.C. c. Boston. d. San Francisco. While the Fed enjoys a relatively high degree of independence for a government agency, it feels political pressure from the president and Congress because a. Fed members desire reappointment every 3 years. b. the Fed must go to Congress each year for operating revenues. *c. Congress could limit Fed power through legislation. d. of all of the above. e. of only (b) and (c) of the above. Supporters of keeping the Federal Reserve independent from both the executive and legislative branches of government believe that a less independent Fed would a. pursue overly expansionary monetary policies. b. be more likely to pursue policies consistent with the political business cycle. c. ignore short-run problems in favor of longer-run concerns. *d. do only (a) and (b) of the above. When Hometown Bank grants new loans in the amount of $10,000, this leads to an expansion of the money supply by: *a. $10,000 b. $10,000 times the initial excess reserves in the banking system c. $10,000 times the reciprocal of the reserve requirement d. zero

Assume you win a lottery and receive a check for $1 million. Assuming the reserve requirement is 20 percent, then the impact of your depositing your check in your bank is to: a. increase its reserves by $1 million b. increases its required reserves by $200,000 c. increase its excess reserves by $800,000 *d. do all of the above Given a 15 percent reserve requirement, Federal Reserve purchases of $1000 million of U.S. Treasury securities from dealers results in: *a. an increase in reserves of $1000 million b. an initial increase in the money supply of $6666.7 million c. an initial increase in excess reserves of $150 million d. an eventual increase in the money supply of $1 million If banks in a given week expand loans by $300 million and sell off $200 million in Treasury bills to the public, the net effect on the money supply (M1) is to: a. increase it by $300 million b. increase it by $500 million *c. increase it by $100 million d. do none of the above Banks create money when they: a. reduce loans and sell securities b. expand loans and sell securities c. reduce loans and buy securities *d. expand loans and buy securities Which of the following directly increases the money supply? a. the public withdraws cash from banks b. the public deposits cash into banks c. banks sell securities to dealers *d. none of the above The simple deposit expansion multiplier is equal to: a. one minus the reserve requirement percentage b. one time the reserve requirement percentage *c. one divided by the reserve requirement percentage d. none of the above The demand for the monetary base is composed of demand by: a. banks and the U.S. Treasury b. banks and the Federal Reserve *c. banks and the public d. the Treasury and the Federal Reserve Suppose you deposit $100 of currency into your commercial bank savings account. This action does what to the monetary base? *a. leaves it unchanged b. increases it $100 c. decreases it $100 d. does none of the above The monetary base is comprised of a. currency in circulation and Federal Reserve notes. b. currency in circulation and government securities. *c. currency in circulation and reserves. d. reserves and government securities. The sum of vault cash and bank deposits with the Fed minus required reserves is called a. the monetary base. b. the money supply. *c. excess reserves. d. total reserves. When the Fed simultaneously purchases government bonds and extends discount loans to banks, a. the money supply unambiguously falls. *b. the money supply unambiguously rises. c. the net effect on the money supply cannot be determined because the two Fed actions counteract each other. d. the Fed action has no effect on the money supply. When the Fed simultaneously extends discount loans and sells government bonds, a. the money supply unambiguously increases. b. the money supply unambiguously falls. *c. the net effect on the money supply cannot be determined without further information because the two

Fed actions counteract each other. d. the Fed action has no effect on the money supply. When the Fed wants to reduce reserves in the banking system, it will a. purchase government bonds. b. extend discount loans to banks. c. print more currency. *d. sell government bonds. The simple deposit multiplier is equal to 4 when the required reserve ratio is equal to *a. 0.25. b. 0.40. c. 0.05. d. 0.15.The First National Bank of Galata has $150 in excess reserves. If the required reserve ratio is 10%, how much extra can the First national Bank lend? a. $1500 b. $750 *c. $150 d. $0 If excess reserves in the banking system amount to $75 and the required reserve ratio is 0.20, checkable deposits could potentially expand by a. $75. b. $750. c. $37.5 *d. $375. If a member of the nonbank public purchases a government bond from the Federal Reserve with currency, then a. both the monetary base and reserves will fall. b. both the monetary base and reserves will rise. *c. the monetary base will fall, but reserves will remain unchanged. d. the monetary base will fall, but currency in circulation will remain unchanged. e. none of the above will occur. Which of the following are found on the asset side of the Federal Reserve's balance sheet? a. Treasury securities b. Treasury deposits c. Discount loans d. Both (a) and (b) of the above *e. Only (a) and (c) of the above. Which of the following are found on the liability side of the Federal Reserve's balance sheet? a. Cash items in the process of collection. *b. Deferred availability cash items. c. Gold. d. All of the above. e. Only (b) and (c) of the above. When float increases, a. currency in circulation falls. b. the monetary base falls. *c. the monetary base rises. d. the monetary supply falls. e. none of the above. A reduction in which of the following leads to an increase in the monetary base? *a. U.S. Treasury deposits at the Fed when it makes tax refunds b. Float c. Discount loans d. All of the above When comparing the simple model of multiple deposit creation with the money supply model that accounts for depositors' currency drains and bank's precautionary balances of excess reserves, the more complicated model indicates that

a. an increase in the monetary base that goes into loans is not multiplied to arrive at the change in the money supply. *b. the money multiplier is negatively related to the currency drain ratio. c. the money multiplier is positively related to the precautionary excess reserves ratio. d. the money multiplier is positively related to the required reserve ratio. e. Only (a) and (b) of the above. The money multiplier increases in value as the a. currency ratio increases. b. excess reserves ratio increases. *c. required reserve ratio decreases. d. required reserve ratio increases. Depositors often withdraw more currency from their bank accounts during the Christmas season. Therefore, one would predict that *a. the money multiplier will tend to fall during Christmas season. b. the money multiplier will tend to rise during Christmas season. c. discount borrowing will tend to fall during Christmas season.

d. none of the above will occur. The Fed lacks complete control over the monetary base because a. it cannot set the required reserve ratio on checkable deposits. b. it cannot perfectly predict the amount of discount borrowing by banks. c. it cannot perfectly predict shifts from deposits to currency. d. all of the above are true. * e. only (b) and (c) are true. The more complex money multiplier is smaller than the simple deposit multiplier when a. the currency drain ratio is greater than zero. b. the precautionary excess reserves ratio is greater than zero. c. the required reserve ratio on checkable deposits is greater than zero. *d. both (a) and (b) of the above occur. The money multiplier is negatively related to a. the excess reserves ratio. b. the currency ratio. c. the required reserve ratio on checkable deposits. *d. all of the above. e. only (a) and (b) of the above. For a given level of the monetary base, a drop in the excess reserve ratio means *a. an increase in the money supply. b. an increase in the monetary base. c. an increase in the nonborrowed base. d. all of the above. e. only (b) and (c) of the above. If a bank reduce its holdings of excess reserves by making loans, a. the monetary base will decrease. *b. the money supply will increase. c. both (a) and (b) of the above will occur. d. neither (a) nor (b) of the above will occur. The banking system's precautionary excess reserves ratio is a. negatively related to both the market interest rate and expected deposit outflows. b. positively related to both the market interest rate and expected deposit outflows. c. positively related to the market interest rate and negatively related to expected deposit

outflows.

*d. negatively related to the market interest rate and positively related to expected deposit outflows. If the required reserve ratio is one-fourth, excess reserves are not held, and checkable deposits are $1200 billion, then the money multiplier is a. 2.5. b. 3.0. c. 3.5. *d. 4.0. An important routine function of a Federal Reserve Bank is to a. supervise the liquidation of the assets of bankrupt commercial banks b. help large banks develop financial relationships with smaller banks c. advise banks as to the most profitable ways of buying securities d. * provide facilities by which banks may clear and collect checks Open market operations are of two types: a. defensive and offensive. b. dynamic and reactionary. c. actionary and passive. *d. dynamic and defensive. If the Federal Reserve wants to inject reserves into the banking system, it will usually *a. purchase government securities. b. raise the discount rate. c. sell government securities. d. lower reserve requirements. e. do either (a) or (b) of the above. To temporarily increase reserves in the banking system, the Fed engages in *a. a repurchase agreement. b. a reverse repo. c. a matched sale-purchase transaction. d. none of the above. When float increases, causing a temporary increase in reserves in the banking system, the Fed can offset the effects of float by engaging in a. a repurchase agreement. b. an interest rate swap.

*c. a matched sale-purchase transaction. d. none of the above. The type of discount loan extended by the Fed to banks that experience financial difficulties and do not qualify as fulfilling "generally sound financial condition" is called a. primary credit. b. seasonal credit. *c. secondary credit. d. installment credit. Changes in the reserve requirements (required reserve ratio) are infrequently used for changing the money supply because *a. reserve requirements changes tend to be too powerful and costly for banks to adjust to. b. reserve requirement changes tend to be ineffective. c. reserve requirement changes must be approved by the president. d. of only (a) and (c) of the above. A reduction in reserve requirements causes the money supply to rise, since the change causes a. the money multiplier to fall. *b. the money multiplier to rise. c. total reserves to fall. d. total reserves to rise. Because the discount rate is kept above the federal funds interest rate, a. the Fed must ration discount loans on a first-come, first-serve basis. *b. banks have the incentive to borrow from other banks before borrowing from the Fed. c. the Fed refuses to extend discount credit to banks that are not members of the Federal Reserve System. d. none of the above occurs. Under 100% reserve banking, the money multiplier will be a. 0. *b. 1. c. 10. d. 100. Advantages of tying the discount rate to the federal funds rate would include a. increasing the confusion concerning the Fed's intentions about future monetary policy because of the uncertainty about what a change in the discount rate is intended to signal. b. reducing the large fluctuations in the money multiplier from even small changes in the discount rate.

*c. simplifying the Fed's administration of the discount window. d. only (a) and (c) of the above. When the Fed engages in a matched sale-purchase with a bank, it first ______ securities which the bank agrees to______ back to the Fed within a few days. a. buys; buy b. buys; sell c. sells; buy *d. sells; sell When the Fed wants to decrease bank reserves on a temporary basis, it engages in a _______. a. outright purchase of securities from banks b. outright sale of securities from banks *c. reverse repurchase agreement with banks d. repurchase agreement with banks The Fed extends______ to financially sound banks that experience unexpected withdrawals of funds by depositors. *a. primary credit loans b. seasonal credit loans c. secondary credit loans d. emergency loans If either Treasury deposits or foreign deposits at the Fed are predicted to_______, a ______ open market ______ would be needed to offset the expected decrease in the monetary base. a. rise; dynamic; purchase b. fall; dynamic; sale *c. rise; defensive; purchase d. fall; defensive; purchase When the Fed raises the discount rate, as it did on May 16, 2000, the_____ curve in the market for reserves shifts to the______, thereby causing the federal funds interest rate to________. a. supply; right; fall b. supply; right; rise *c. supply; left; rise d. demand; right; fall e. demand; left; rise

Even if the Fed could completely control the money supply, not everyone would be happy with monetary policy, since *a. the Fed is asked to achieve many goals, some of which are incompatible with one another. b. the goals that are stressed by the Fed do not include high employment, making labor unions a vocal critic of Fed policies. c. the Fed places primary emphasis on exchange rate stability, often to the detriment of domestic conditions. d. its mandate requires it to keep Treasury security prices high. Because timely information on the price level and economic growth is generally unavailable, the Fed has adopted a strategy of a. targeting the exchange rate, since the Fed has the ability to control this variable. b. targeting the price of gold, since it is closely related to economic activity. *c. using an intermediate target such as an interest rate. d. stabilizing the consumer price index, since the Fed has a high degree of control over the CPI. Which of the following is true about the Federal Reserve System? *a. There are 12 regional Federal Reserve Banks b. The head of the U.S. Treasury also chairs the Federal Reserve Board c. There are 14 members of the Federal Reserve Board d. The Federal Reserve receives its operating funds from the federal government Many economists questions the desirability of targeting real interest rates by pointing out that a. the Fed does not have direct control over real interest rates. b. changes in real interest rates have little effect on economic activity. c. real interest rates are extremely difficult to measure. d. all of the above are correct. *e. only (a) and (c) of the above are correct. The Federal Reserve regulates the money supply mainly by a. controlling the production of coins and paper money issued by the U.S. mint b. altering the reserve requirements of commercial banks c. issuing discount loans to financially troubled commercial banks d. *altering the reserve of banks through purchases/sales of government securities Open market operation change a. The size of the monetary multiplier, but not commercial bank reserves b. *Commercial bank reserves, but not the size of the monetary multiplier c. Neither commercial bank reserves nor the size of the monetary multiplier d. Both commercial bank reserves and the size of the monetary multiplier A decrease in the required reserve ratio increases a. The total reserves of commercial banks b. The required reserves of commercial banks c. *The excess reserves of commercial banks d. The actual reserves of commercial banks The interest rate that banks charge one another on overnight loans is called the a. *Federal funds rate b. Prime lending rate c. Subprime lending rate d. Discount rate To decrease the federal funds rate, the Fed can a. *Buy securities from banks or the public b. Sell securities to banks or the public c. Increase the discount rate d. Increase the prime interest rate If the Fed was attempting to decrease demand-pull inflation, the proper policies would be to a. Sell government securities, raise reserve requirements, and lower the discount rate b. Sell government securities, lower reserve requirements, and lower the discount rate c. Buy government securities, raise reserve requirements, and raise the discount rate d. *Sell government securities, raise reserve requirements, and raise the discount rate Which of the following best describes the cause-effect chain of a restrictive (tight) monetary policy? a. A decrease in the money supply will lower the interest rate, increase investment spending, and increase aggregate demand and GDP b. *A decrease in the money supply will raise the interest rate, decrease investment spending, and decrease aggregate demand and GDP c. An increase in the money supply will raise the interest rate, decrease investment spending, and decrease aggregate demand and GDP d. An increase in the money supply will lower the interest rate, decrease investment spending, and

increase aggregate demand and GDP Opponents of the Federal Reserve's adoption of an inflation targeting strategy argue that it would a. Result in the federal government "crowding out" private investment spending b. Expand the Federal Reserve's monetary powers beyond reasonable limits c. Reduce the size of the banking system's money multiplier d. *limit the Fed's ability to engage in countercyclical monetary policy If the Federal Reserve is targeting interest rates, during an economic downturn it will a. Use open market purchases to lower interest rates b. * Use open market sales to increase interest rates c. Avoid open market operations so as not to interfere with the adjustment of interestrates d. Impose limits on the interest rates banks may charge on credit cards Which of the following is not considered to be a goal of monetary policy? a. *Fair wages b. High employment c. Price stability d. Economic growth A decrease in Federal Reserve float will a. Increase excess reserves of commercial banks b. Increase required reserves of commercial banks c. *Increase the federal funds rate d. Decrease the federal funds rate In the federal funds market diagram, an open market sale by the Fed a. Shifts the supply curve of reserves to the right b. *Shifts the supply curve of reserves to the left c. Shifts the demand curve for reserves to the right d. Shifts the demand curve for reserves to the left

While reading your bank's annual report, you notice that the bank was forced to write offseveral million dollars of bad loans it made to finance Arnold Schwarzenegger's biggest bomb,The Last Action Hero. On the asset side of the bank's balance sheet, you would see a decline in ________, and on the liability side of the balance sheet, you would notice a corresponding decrease in _________.a. reserves, capital accountsb. capital accounts, deposits*c. loans, capital accountsd. loans, depositse. none of the above occurs. The elimination of Regulation Q in the 1980s caused banks toa. be able to invest in corporate stockb. engage in speculation in the foreign exchange marketc. form holding companies as a way to participate in interstate banking*d. have to pay a competitive interest rate for their savings deposits If a bank has $1 million of checkable deposits and a required reserve ratio of 5%, and it holds $100,000 in total reserves, then it must rearrange its balance sheet if there is a deposit outflow of*a. $60,000. b. $20,000.c. $30,000.d. $40,000. Preparing for a celebration following a nail-biting victory at your school's latest football game, you proceed to the ATM to withdraw $40 from your checking account. This action:a. reduces your bank's excess reserves by $40b. reduces your bank's capital accounts by $40*c. reduces your bank's liabilities by $40d. reduces your bank's required reserves by $40 The U.S. Treasury Secretary who attempted to establish a nationwide banking system in 1791 wasa. Benjamin Franklinb. Thomas Jefferson*c. Alexander Hamiltond. Abraham Lincoln A purpose of the Federal Reserve paying interest on the deposits of banks is toa. place a ceiling on the federal funds rate*b. place a floor on the federal funds ratec. provide additional revenue for banks to use in purchases of corporate stock

d. provide additional revenue for banks to use in foreign currency speculation

With the passage of the National Banking Act of 1863,a. state-chartered banks greatly declined in importance *b. state-chartered banks proliferated as never beforec. banks were allowed to establish branches that crossed state linesd. all banks were subject to the regulation of the Federal Reserve The National Banking Act of 1863 accomplished the following:a. allowed the federal government to charter banksb. ended the free banking erac. allowed for issuance of a uniform currency*d. all of the above During the 1860s, Congress got state-chartered banks out of the business of issuing their bank notes as currency by putting a ______ tax on their issuance.a. 5 percent*b. 10 percentc. 15 percentd. 20 percent Compared to small banks, large banksa. may be able to take advantage of economies of scaleb. may be able to take advantage of economies of scopec. tend to be better diversified so they have a lower risk of failure*d. all of the above The Glass-Steagall Act of 1933*a. separated commercial banks from other financial services such as investment bankingb. called for the Office of Thrift Supervision to regulate savings and loan associationsc. allowed banks to have either state charters or federal chartersd. eliminated branching across state lines for commercial banks National banks are chartered by:a. the Federal Deposit Insurance Corporationb. the Federal Reservec. the Securities and Exchange Commission*d. the Comptroller of the Currency The U.S. historic emphasis of small, “unitary” banks has often been associated with*a. a high rate of bank failuresb. a low rate of banks failuresc. banks that are highly capitalized and thus insulated from runs by nervous depositorsd. banks that are diversified and not tied to a particular local economy If a usury law applied to mortgage loans becomes “binding,”a. a surplus of funds tends to flow to mortgage customers*b. a shortage of funds frustrates some mortgage customersc. banks lower the points (fees) that they apply to mortgage loansd. banks make higher profits by placing funds into mortgage loans The Banking Act of 1933a. was primarily concerned about stemming the tide of bank failuresb. eliminated interest payments on demand depositsc. imposed interest-rate ceilings on savings/time deposits*d. all of the above Regulation Qa. imposed barriers on the interstate branching of commercial banksb. resulted in the Federal Reserve paying interest on deposit accounts of banksc. separated investment banking and commercial banking*d established ceilings on interest rates that banks could pay on savings/time deposits Depositors sometimes make “runs” on banks because theya. face stiff competition from other financial intermediariesb. are overregulated by the government, thus lessening their ability to make loansc. specialize in making mortgage loans to high income households*d. offer deposits that are highly liquid, permitting panic to easily occur Which act/law phased out interest-rate ceilings applied to time/savings deposits?a. the Humphry-Hawkins Act of 1948b. the Glass-Steagall Act of 1956*c. the Monetary Control Act of 1982d. the Riegel-Neal Act of 1994 A bank will want to hold less excess reserves (everything else equal) when

*a. it expects to have deposit inflows in the near future.b. brokerage commissions on selling bonds rise.c. both (a) and (b) of the above occur.d. neither (a) nor (b) of the above occurs. Which of the following occurred during the 1990s?a. the FDIC was created, providing a system of national deposit insuranceb. laws were passed that eliminated state-chartered banks*c. interstate banking was allowed, resulting in large nationwide banksd. the Comptroller of the Currency was given the authority to regulate national banks Concerning an adjustable rate mortgage (ARM)*a. the interest rate on your mortgage will decline if other interest rates declineb. there is a limit, or cap, on the amount of interest that can be chargedc. you always pay equal principal/interest installments over the duration of your mortgage d. if interest rates increase, your monthly mortgage will not go up When a bank faces a reserves deficiency because of a deposit outflow, it will try to do which of the following first?a. call in loansb. borrow from the Fedc. sell securities*d. borrow from other banks Which statement correctly characterizes the trends regarding the number of unit banks and the number of bank branches in the past 40 years?a. the number of unit banks and the number of branches have fallen*b. the number of unit banks has fallen; number of branches has risenc. the number of unit banks has risen; number of branches has risend. none of the above One large company that holds many different banks as subsidiaries is called a (an)a. investment bankb. euro bank*c. bank holding companyd. deposit bank Which of the following agencies is primarily responsible for supervising bank holding companies?a. U.S. Treasury*b. Federal Reserve Systemc. Securities and Exchange Commissiond. Federal Deposit Insurance Commission The recent wave of large bank mergers in the United States can be explained by which of the following economic forces?a. economies of scale, where average cost falls as production volume increasesb. economies of scope, where the joint costs of producing two complementary outputs are less than the combined costs of producing the two outputs separatelyc. the potential for risk diversificationd. the tendency for managerial compensation to increase with firm size*e. all of the above With the advent of deposit insurance, federal regulation of banking is needed because*a. deposit insurance decreases the motivation for depositors to scrutinize banksb. bank managers try to maximize profit by purchasing U.S. government securitiesc. federally chartered banks have very modest failure ratesd. federally chartered banks are prevented from crossing state lines Restrictions on branch banking ultimately led to:a. creation of bank holding companiesb. creation of nonbank banksc. stimulus to the development of electronic banking*d. all of the above From a public policy viewpoint, the most legitimate reasons to espouse a laissez faire policy toward bank mergers is that they may be motivated by:a. desire for monopoly power*b. economies of scalec. higher executive compensationd. diseconomies of scale From a public policy viewpoint, the most legitimate reasons to espouse a laissez faire policy toward bank mergers is that they may be motivated by:a. desire for monopoly power*b. economies of scale

c. higher executive compensationd. diseconomies of scale Economists believe that the existence of FDIC deposit insurance does which of the following?a. reduces the propensity for bank panicsb. increases the moral hazard problem in banking*c. does both of the aboved. does none of the above Regarding FDIC deposit insurance, which of the following is true?a. the limits of coverage have increased more slowly than the U.S. price level*b. the maximum coverage per depositor per bank is now $250,000c. the percentage of bank deposits insured has declined over the past 30 years.d. all of the above are true

Which exchange rate system involves a strategy of “leaning against the wind?”a. fixed exchange ratesb. floating exchange rates*c. managed floating exchange ratesd. pegged exchange rates If Argentina commits to dollarization, then *a. it eliminates the possibility of a speculative attack on its domestic currencyb. its monetary policy is free to combat domestic inflation and unemploymentc. it pursues a policy of freely floating exchange ratesd. its currency becomes tied to the dollar If Hong Kong adopts a currency board, ita. replaces its currency with the U.S. dollar, for its moneyb. increases the possibility of a speculative attack against its currency*c. gives up its option of pursuing an independent monetary policyd. increases the likelihood that inflation will intensify in its economy Currency crises are typically caused by all of the following except*a. budget surpluses financed by higher taxesb. weak financial systemsc. lack of confidence in the domestic governmentd. pegging a currency at an unrealistic exchange rate A speculative attack against a weak currency might be lessened or eliminated by all of the following excepta. the adoption of capital controlsb. the taxation of foreign exchange transactions*c. the renewal of high inflationd. the switch from budget surpluses to budget deficits When nations of Europe replaced their currencies with the euro, all of the following were predicted to occur for participating nations excepta. more uniform pricesb. lower transaction costs*c. more uncertainty for investorsd. enhanced competition According to the theory of optimal currency areas, the euro would have the best chance of success if the participating countriesa. have dissimilar business cyclesb. have dissimilar economic structuresc. high legal and cultural barriers preventing labor mobility across national borders*d. a flexible system of prices and wages Market-determined exchange rates are best represented by a system ofa. fixed exchange ratesb. pegged exchange ratesc. managed floating exchange rates*d. floating exchange rates Which of the following is a fundamental commercial bank accounting identity?a. assets plus capital equals liabilitiesb. assets plus liabilities equals capital*c. assets minus liabilities equals capitald. none of the above Which of the following is a source of commercial bank funds?a. depositsb. capital

c. nondeposit borrowing*d. all of the above Which of the following is a use for commercial bank funds?a. loansb. securitiesc. reserves*d. all of the above On the commercial bank balance sheet, which of the following is an asset?a. capital accounts*b. deposits with Federal Reservec. transactions depositsd. all of the above If a bank has total assets of $100 million and capital accounts of $8 million, then:*a. its total liabilities are $92 millionb. its total liabilities are $108 millionc. it has an equity multiplier of 10d. none of the above are true

Which of the following pay a higher interest rate than some checking accounts but have only limited check-writing privileges?a. NOW accountsb. ATS accounts*c. MMD accountsd. Negotiable CDS If a bank is subject to a 10 percent reserve requirement, has checkable deposits of $100 million, and has excess reserves of $2 million, then:a. its required reserves are $12 million*b. its total reserves are $12 millionc. its legal reserves are $14 milliond. none of the above are true The securities purchased by a bank for investment purposes are known asa. primary reserves*b. secondary reservesc. equity capitald. discounts Typically, the largest portion of bank profits stems from:*a. loansb. securitiesc. fees for servicesd. derivatives When a bank writes off a loan as bad, its:a. total assets and total liabilities decrease by that amountb. total liabilities and capital decrease by that amount*c. total assets and capital decrease by that amountd. total assets, total liabilities and capital decrease by that amount Which of the following bank assets is the most liquid?a. Consumer loans.b. State and local government securities.c. Physical capital.*d. U.S. government securities. Tools of bank liability management include:a. buying federal fundsb. issuing negotiable CDSc. issuing repurchase agreements*d. all of the above A bank can increase its leverage by increasing its ratio of:a. earnings/total assets*b. total assets/equity capitalc. earnings/equity capitald. equity capital/total assets Total reservesa. equal the deposits banks hold at the Fed.b. include bank holdings of U.S. government securities.*c. can be divided up into required reserves plus excess reserves.

d. equal both (a) and (c) of the above. When a $1000 check written on Citibank is deposited in an account at the Bank of America, thena. the liabilities of Citibank increase by $1000.b. the reserves of Citibank increase by $1000.c. the liabilities of Bank of America fall by $1000.*d. the reserves of Bank of America increase by $1000. When you deposit a $100 check in your bank account at the First National Bank of Chicago and you withdraw $50 in cash, thena. the liabilities of First National Bank rise by $100.b. the reserves of First National Bank rise by $100.c. the assets of the First National Bank rise by $100.*d. the liabilities of the First National Bank rise by $50. Commercial banks obtain funds by:a. issuing demand depositsb. borrowing from other banksc. issuing ownership claims (equity)*d. all of the above Which of the following may be considered a form of commercial bank lending?*a. federal funds soldb. discounts and advancesc. issuance of negotiable CDSd. issuance of MMDs A bank's primary reserves include:a. vault cashb. deposits at the Federal Reservec. Treasury bills, notes, and bonds*d. a and b For commercial banks, the ratio of loans to assets _______ during economic expansions, while the ratio of bank security holdings to assets_______ during periods of recession.a. increases; decreasesb. decreases; increasesc. decreases; decreases*d. increases; increasesThe level of the exchange rate is of importance to a nation because its level determines in part:a. the price of domestically produced goods to be sold abroadb. the price of foreign-produced goods to be sold domesticallyc. the price that domestic citizens pay for foreign assets*d. all of the above One reason the purchasing power parity theory of exchange rates seems to be unreliable in explaining short-term exchange rate movements is that:a. Price elasticities of demand for foreign products are lowb. export and import activities have been rising over timec. interest rates and inflation rates often move together*d. export and import activity is quite small relative to international capital flows In the long run, the U.S. dollar appreciates if:a. U.S. prices rise and U.S. productivity falls*b. U.S. prices fall and the U.S. increases tariffs on importsc. U.S. prices fall and the U.S. removes all import quotasd. U.S. interest rates rise and the U.S. removes all tariffs on imported goods In the short-run model of exchange rate determination, if we consider the U.S.-European exchange rate (euros per dollar), if the European Central Bank unexpectedly boosts interest rates, then this will cause the a. euro to depreciateb. dollar to appreciate*c. euro to appreciated. all of the above The U.S. dollar tends to appreciate against the Italian lira when:a. real Italian interest rates riseb. nominal U.S. interest rates rise*c. real U.S. interest rates rised. real U.S. interest rates fall A major reduction in the U.S. federal budget deficit, other things being equal, would most likely:a. reduce the capital inflow and increase the U.S. trade deficitb. reduce the trade deficit and attract increased foreign capital

c. raise interest rates and reduce the U.S. trade deficit (imports exceed exports)*d. reduce the capital inflow and reduce the U.S. trade deficit (imports exceed exports) The underlying axiom of the purchasing power parity theory is: a. the principle of comparative advantageb. the interest parity conditionc. the principle of opportunity cost*d. the law of one price Suppose that purchasing power parity holds, and that the current exchange rate between the dollar and the yen is 110 yen/$. If inflation in the U.S. runs at 4 percent and inflation in Japan runs at 2 percent, next year we would expect the exchange rate to be roughlya. 112 yen/$*b. 108 yen/$c. 116 yen/$d. 102 yen/$ The largest volume of activity in foreign exchange markets is related to:*a. international flows of financial capitalb. exports and importsc. government transactions abroadd. firms building plants abroad When the Swiss franc appreciates (holding everything else constant), then*a. Swiss watches sold in the United States become more expensive.b. American computers sold in Switzerland become more expensive.c. Swiss army knives sold in the United States become cheaper.d. American toothpaste sold in America becomes cheaper.e. Both (a) and (d) of the above are true. The theory of purchasing-power parity indicates that if the price level in the United States rises by 5% while the price level in Mexico rises by 6%, then*a. the dollar appreciates by 1% relative to the peso.b. the dollar depreciates by 1% relative to the peso.c. the exchange rate between the dollar and the peso remains unchanged.d. the dollar appreciates by 5% relative to the peso.e. the dollar depreciates by 5% relative to the peso. If, in retaliation for “unfair” trade practices, Congress imposes a quota on Japanese cars, but at the same time Japanese demand for American goods increases, then in the long runa. the Japanese yen should appreciate relative to the dollar.*b. the Japanese yen should depreciate relative to the dollar.c. the dollar should depreciate relative to the yen.d. it is not clear whether the dollar should appreciate or depreciate relative to the yen. If the interest rate on dollar-denominated assets is 10% and it is 8% on euro-denominated assets,then if the euro is expected to appreciate at a 5% rate,*a. dollar-denominated assets have a lower expected return than euro-denominated assets.b. the expected return on dollar-denominated assets in euros is 2%.c. the expected return on euro-denominated assets in dollars is 3%.d. none of the above will occur. Of the following factors, which will not cause the expected return schedule for foreign deposits to shift?a. A change in the expected future exchange rate.b. A change in the foreign interest rate.*c. A change in the current exchange rate.d. A change in the productivity of American workers. All other things equal, an increase in inflation in Mexico shifts the supply of dollars _______, the demand for dollars to the _________, and causes a(n) _______ in the peso relative to the dollar.a. right; left; appreciation*b. left; right; depreciationc. right; left; depreciationd. left; right; appreciation When U.S. real interest rates rise, the*a. expected returns for U.S. investments increases, and the dollar appreciates.b. expected return for U.S. investments decreases, and the dollar appreciates.c. expected return U.S. investments increases, and the dollar depreciatesd. expected return U.S. investments decreases, and the dollar depreciates. If the interest rate on dollar deposits is 10 percent, and the dollar is expected to appreciate by seven percent over the coming year, then the expected return on the dollar deposit in terms of foreign currency is

a. 3%*b. 17%c. -3%d. 10% A lower domestic money supply causes the domestic currency to a. depreciate more in the short run than in the long run.b. depreciate more in the long run than in the short run.*c. appreciate more in the short run than in the long run.d. appreciate more in the long run than in the short run. The gold standard was essentially a*a. fixed exchange rate systemb. floating exchange rate systemc. managed floating exchange rate systemd. all of the above If the Federal Reserve wants the dollar to appreciate, it will likely adopt a (an)*a. expansionary monetary policyb. contractionary monetary policyc. expansionary fiscal policyd. contractionary fiscal policy To stop a speculative attack against a weak currency, the government of this currency mighta. revalue the currency*b. devalue the currencyc. increase the domestic money supplyd. reduce taxes on households and business

In the Keynesian liquidity preference framework; when income is_____during a business cycle contraction, interest rates will_______.a. rising, riseb. rising, fallc. falling, rise*d. falling, fall According to J. M. Keynes, the demand for money is underlaid by aa. transactionary demandb. precautionary demandc. speculative demand*d. all of the above The most plausible explanation for why interest rates would rise isa. the economy entering into a recession.b. the demand for money falling in the loanable funds market.c. rapid declines in the level of national income.*d. The continual increase in expected inflation. The “term structure of interest rates” involves the relationship between:a. marketability and yieldb. tax treatment and yieldc. risk and yield*d. time to maturity and yield According to the “risk structure of interest rates,” _______ play a role in explaining interest rates:a. default riskb. liquidityc. income tax considerations*d. all of the above In drawing a yield curve, which of the following is not held constant?a. default riskb. tax treatment*c. length of time to maturityd. marketability A yield curve will slope downward when*a. short-term interest rates are above long-term ratesb. long-term interest rates are above short-term ratesc. short-term interest rates equal long-term ratesd. inflation rates are high Concerning Treasury securities, which of the following patterns of the “term structure of interest rates” tend to occur most frequently?*a. ascending yield curve

b. descending yield curvec. flat yield curved. humped yield curve According to the expectations theory, expected inflation should make the yield curvea. flatter*b. steeperc. horizontald. downward sloping

In the liquidity premium theory of term structure, a horizontal yield curve is interpreted to mean that the market expects:a. interest rates to rise*b. interest rates to fallc. interest rates to remain constantd. inflation is to rise If the Federal Reserve adopts an expansionary monetary policy, the yield curve tends toa. shift upward*b. shift downwardc. become verticald. become horizontal Risk premiums on securities are caused bya. default riskb. liquidity considerationsc. tax considerations*d. all of the above If interest rates are expected to rise sharply, wise investors will prefer to hold:*a. Treasury billsb. Treasury bondsc. Treasury notes Which of the following long-term bonds tend to have the highest interest rate?a. corporate Baa Bondsb. U. S. Treasury bonds*c. corporate Caa bondsd. municipal bonds When the default risk on corporate bonds increase, other things equal, the demand curve for corporate bonds shifts to the ___ and the demand curve for Treasury bonds shifts to the ____. a. right: rightb. right; left*c. left; rightd. left; left When the corporate bond market becomes less liquid, other things equal, the demand curve for corporate bonds shifts to the ___ and the demand curve for Treasury bonds shift to the ____. a. right; rightb. right; leftc. left; left*d. left; right The risk premium on corporate bonds tends to fall when*a. corporate bonds are rated AAA rather than AA.b. a flurry of major corporate bankruptcies occurs.c. the Treasury bond market becomes more liquid.d. both (b) and (c) of the above occur. The interest rate on municipal bonds rises relative to the interest rate on corporate bonds when*a. there is a major default in the municipal bond market.b. income tax rates are raised.c. Treasury securities become more widely traded.d. corporate bonds becomes riskier. If the expected path of 1-year interest rates over the next 3 years is 4, 1 and 1%, then the expectations theory predicts that today's interest rate on the 3-year bond isa. 1%. *b. 2%. c. 3%. d. 4%. If the expected path of 1-year interest rates over the next 5 years is 2, 2, 4, 3, and 1%, the expectations theory predicts that the bond with the highest interest rate today is the one with a maturity of a. 1 year. b. 2 years. c. 3 years. *d. 4 years.If the yield curve slopes upward mildly for short maturities and then slopes sharply upward for

longer maturities, the liquidity premium theory (assuming a mild preference for short-term bonds) indicates that the market is expectinga. a rise in short-term interest rates in the near future and a decline further out in the future.*b. constant short-term interest rates in the near future and a rise further out in the future.c. a decline in short-term interest rates in the near future and a rise further out in the future.d. a decline in short-term interest rates in the near future which levels off further out in the future. Municipal bonds issued by state and local governmentsa. tend to be more liquid than U.S. Treasury bondsb. are generally considered to be default free*c. interest payments are exempt from federal income taxesd. tend to rise in value during periods of inflation

The Foreign Exchange Market/International Financial System: Chapters 17-18 If the dollar moves from 100 yen to 110 yen, then:a. the dollar has depreciatedb. the yen has appreciatedc. both of the above have occurred*d. none of the above have occurred A nation's currency will appreciate in the long run if the nation exhibits which of the following characteristics?a. high inflation and high productivity growth*b. high productivity growth and increased tariffs on importsc. high productivity growth and reduced tariffs on importsd. none of the above

Which asset carries the greatest default risk?a. corporate bond*b. corporate stockc. long-term Treasury bondd. money market mutual fund shares In the loanable funds model, which of the following would shift the demand curve for loanable funds rightward?a. an increase in the money supplyb. a reduction in the federal budget deficit*c. an increase in business confidenced. an increase in the private saving rate In the loanable funds model, which of the following would shift the supply curve of loanable funds leftward?a. a reduction in expected inflationb. an increase in the federal budget deficit*c. households becoming less thriftyd. none of the above Assume Congress threatens to default on U.S. government bonds. In terms of the supply and demand for loanable funds in the U.S. government securities market, which of the following would occur?a. demand for funds would rise and interest rates would rise*b. supply of funds would fall and interest rates would risec. demand for funds would fall and interest rates would rised. supply of funds would fall and interest rates would fall In terms of the loanable funds market, an increase in the expected rate of inflation shifts:*a. demand for funds right, supply of funds left, and interest rates rise.b. demand for funds right, supply of funds right, and interest rates rise.c. demand for funds left, supply of funds right, and interest rates fall.d. supply of funds left, demand for funds left, and interest rates rise Suppose that the real interest rate remains constant at 3 percent while expected inflation increases from 4 percent to 6 percent. Then the nominal interest rate: a. increases from 4 percent to 6 percent*b. increases from 7 percent to 9 percentc. increases from 1 percent to 3 percentd. does none of the above Referring to the loanable funds market, in a severely declining economy the:a. supply of funds rises and interest rates riseb. supply of funds falls and interest rates rise*c. demand for funds falls and interest rates fall

d. demand for funds rises and interest rates rise The decline in interest rates tends to be most pronounced in:a. the first half of recessions*b. the second half of recessionsc. the first half of recoveriesd. the second half of recoveries If market interest rates rise:a. bond prices must rise*b. bond prices must fallc. bond prices cannot falld. bond prices will either rise or fall The predominant factor driving the long-run behavior of interest rates has been:a. budget deficitsb. business cycles*c. expected inflationd. exchange rate behavior Higher expected inflation shoulda. decrease the nominal interest rate and decrease the real interest rateb. decrease the nominal interest rate and increase the real interest ratec. increase the nominal interest rate and decrease the real interest rate*d. increase the nominal interest rate, but its effect on the real interest rate is unclear If market interest rates rise:*a. long-term bondholders will experience capital losses as they sell bondsb. long-term bondholders will experience capital gains as they sell bondsc. Treasury bill holders lose; bondholders do notd. then none of the above occur Net suppliers of loanable funds in the U.S. tend to be:a. business firms and households*b. foreigners and householdsc. government and business firmsd. business firms and foreigners The interest rate that large banks often use as a benchmark rate to set their various loan rates is known as:*a. the prime loan rateb. the standard loan ratec. the bank rated. the discount rate If government substantially relaxes depreciation allowances for firms, we would expect:a. the supply of loanable funds to increase and real interest rates to fallb. the supply of loanable funds to decrease and real interest rates to rise*c. the demand for loanable funds to increase and real interest rates to rised. the demand for loanable funds to decrease and real interest rates to rise When the interest rate is below the equilibrium interest rate, there is an excess ______ for (of) bonds and the interest rate will_______.a. supply; fall*b. supply; risec. demand; rised. demand; fall In a recession, the demand for bonds tends to shift to the ______, and the supply of bonds issued by business shifts to the _____ .a. right; rightb. right; left*c. left; leftd. left; right In the money market, when the interest rate is below the equilibrium interest rate, there is an excess_____for (of) money. People will try to sell bonds, and the interest rate will_______.*a. demand; riseb. demand; fallc. supply; falld. supply; rise If the Fed wants to permanently lower interest rates, then it should raise the rate of money growth ifa. there is a fast adjustment of expected inflation.b. there is slow adjustment of expected inflation.c. the liquidity effect is smaller than he expected inflation effect.

*d. the liquidity effect is larger than the other effects. When the growth rate of the money supply is increased, interest rates will rise immediately if the liquidity effect is _____ the inflationary expectations effect.a. equal tob. larger than*c. smaller thand. all of the above When the interest rate on a bond is____the equilibrium interest rate, in the bond market there is excess______and the price of bonds will_____.a. below; demand; riseb. above; demand; fall*c. below; supply; falld. above; supply; rise What is the risk premium on a 10-year corporate bond that pays 9 percent interest while a 10-year U.S. Treasury bond yields 7 percent?a. 1 percent*b. 2 percentc. 8 percentd. 16 percentThe conversion of a barter economy to one that uses moneya. increases efficiency by reducing the need to exchange goods.*b. increases efficiency by reducing transaction costs.c. has no effect on economic efficiency since efficiency is a production concept, not an exchange concept.d. decreases efficiency by reducing the need to specialize. Generally, the problem of defining money becomes__________troublesome as the pace of financial innovation________.a. less; quickens*b. more; quickensc. more; slowsd. more; stops If an individual “cashes in” a U.S. savings bond for currency,a. M1 increases and M2 stays the same.b. M1 stays the and M2 increases.c. M1 stays the same and M2 stays the same.*d. M1 increases and M2 increases. Generally speaking, the initial data on the monetary aggregates reported by the Fed area. not a reliable guide to the short-run behavior of the money supply.b. a reliable guide to the long-run behavior of the money supply.c. a reliable guide to the short-run behavior of the money supply.*d. both (a) and (b) of the above.

Student loans and mortgage loans are examples ofa. “simple” loans*b. fixed-payment loansc. coupon loand. discount loans A sharp decline in market interest rates will:*a. increase the price of existing bondsb. increase the yield on existing bondsc. decrease the price of existing bondsd. do none of the above The prime loan rate (prime interest rate):a. is set by the Federal Reserveb. is the loan rate charged to small businesses and consumers*c. is a benchmark interest rate set by large banksd. exerts only a weak influence over bank loan rates The real interest rate is defined as:a. the actual interest rate plus the rate of inflation*b. the actual interest rate minus the rate of inflationc. the actual rate people pay rather than the advertised rated. none of the above According to the Fischer Effect, interest rates rise whena. national income increasesb. the economy moves into a recession

c. price deflation occurs*d. expected inflation rises The U.S. experience over the past 60 years suggests that interest rates*a. rise during business cycle expansions and fall during contractionsb. rise during business cycle contractions and fall during expansionsc. fall during business cycle contractions and remain constant during expansionsd. fall during business cycle expansions and remain constant during contractions In 1997, the U.S. Treasury began to issue indexed securities whose interest and principal payments are adjusted for changes in the consumer price index. These securities are known asa. Treasury billsb. Treasury notesc. Treasury bonds*d. TIPS Assume the nominal interest rate is 12 percent, the expected inflation rate is 5 percent, and the marginal income tax rate is 25 percent. Then the after-tax real interest rate is:a. 7 percentb. negative 2 percent*c. 4 percentd. none of the above The passage of a balanced budget amendment to the U.S. Constitution requiring the federal budget to be balanced annually would tend to result ina. the bond demand curve shifting rightwardb. the bond demand curve shifting leftwardc. the bond supply curve shifting rightward*d. the bond supply curve shifting leftward If nominal interest rates are 8 percent, expected inflation is 4 percent, and therelevant marginal tax rate is 25 percent:a. the real rate of interest is 6 percentb. the aftertax real rate of interest is 2.25 percentc. the real rate of interest is 2 percent*d. the aftertax real rate of interest is 2 percent The early years of the Reagan administration witnessed deregulation in several industries, including banking, communications, airlines, and others. This widespread deregulation tended to______ the marginal productivity of capital and ______ real interest rates.*a. increases, increasesb. increases, decreasesc. decreases, increasesd. decreases, decreases In which of the following situations would you rather be borrowing?a. the interest rate is 20% and expected inflation rate is 15%b. the interest rate is 4% and expected inflation rate is 1%.c. the interest rate is 13% and expected inflation rate is 15%*d. the interest rate is 10% and expected inflation rate is 15% It is normally true that, the longer the time to maturity of a U.S. Treasury bill:a. the lower the discount rate*b. the less liquid the assetc. the lower the level of taxation on the Treasury billd. the lower the market risk in the Treasury bill Transactions costs are lowest in:*a. Treasury billsb. common stocksc. U.S. government bondsd. municipal bonds The least liquid asset below is:*a. Treasury bondb. money market mutual fund sharec. passbook savings accountd. checking account deposit To be considered highly liquid, an asset must:a. be easily convertible to the medium of exchangeb. not fluctuate sharply in valuec. be sellable without substantial transactions costs*d. exhibit all of the above qualities Which of the following bears the most market risk?

*a. corporate bondb. savings account depositc. certificate of deposit (CD)d. checking account deposit Which of the following is NOT true?*a. liquidity and risk are positively relatedb. risk and yield are positively relatedc. liquidity and yield are inversely relatedd. all of the above are trueWhich of the following markets in the United States in never set up as an organized exchange?a. Stock marketb. Corporate bond market*c. U. S. government bond marketd. Futures market Which of the following is traded in a money market?a. U.S. Treasury bondsb. Mortgagesc. Common stocks*d. Federal fundse. None of the above Which of the following is a depository institution?a. Life insurance company*b. Credit unionc. Pension fundd. Finance company The primary assets of a mutual savings bank area. money market instruments.b. corporate bonds and stock.c. consumer and business loans.*d. mortgages. The primary liabilities of a savings and loan association area. bonds.b. mortgages.*c. deposits.d. commercial paper. Savings and loan associations are regulated by thea. Office of the Comptroller of the Currency.b. Federal Home Loan Bank System and FSLIC.c. Securities and Exchange Commission.*d. The Office of Thrift Supervision. A bond denominated in a currency other than that of the country in which it is sold is called a(n)a. foreign bond.*b. eurobond.c. equity bond.d. currency bond. Financial intermediaries promote efficiency and thereby increase people's wealtha. by reducing the transaction cost of linking together lender and borrowers.b. to the extent that they help solve problems created by adverse selection and moral hazard. c. by providing additional jobs.*d. because of only (a) and (b) of the above. Contractual savings institutions include:a. commercial banks and thrifts.*b. life insurance companies and pension funds.c. finance companies and mutual funds.d. all of the above. Typically, lenders have inferior information relative to borrowers about the potential returns and risks associated with any investment project. This difference in information is called_________, and it gives rise to the ________problem.a. asymmetric information; moral hazard*b. asymmetric information; adverse selectionc. adverse selection; moral hazardd. adverse selection; asymmetric information U. S. Treasury bills area. issued in three-, six-, nine-, and twelve-month maturities.

b. the most liquid of the money market instruments.c. the safest of all the money market instruments.*d. are only (b) and (c) of the above. Federal funds are loans made by thea. Federal Reserve System to commercial banks.*b. one commercial bank to another.c. the U.S. Treasury to the Federal Reserve.d. the Federal Reserve to the U. S. Treasury. All of the following are financial intermediaries excepta. commercial banksb. insurance companiesc. pension fundsd. mutual funds*e. none of the above Life insurance policies typically contain a clause stating that the company will not be required to pay death benefits in the event that the insured commits suicide. Life insurance companies include such clauses in insurance contracts to protect against the ________ problema. time value of money*b. adverse selectionc. restrictive covenant d. defined contribution General Motors Acceptance Corporation (GMAC) is an example of a*a. sales finance companyb. consumer finance companyc. business finance companyd. public finance company Lisa wants to add a new room to her house. What type of finance company will she deal with in getting the loan to finance the room addition?a. sales finance company*b. consumer finance companyc. business finance companyd. public finance company Mutual funds that charge a sales commission when shares are purchases are calleda. no-load funds*b. loaded fundsc. sinking fundsd. sinking-charge funds When an investment bank purchases a new issue of securities in the hopes of making a profits, it is said to ________ the issue.a. pawnb. backstockc. syndicate*d. underwrite Brokers are distinguished from the dealers in that brokers do not*a. hold inventories of securitiesb. make profitsc. incur lossesd. deal directly with the public To encourage higher enrollments at colleges and universities, the government created the following agency to purchase student loans granted by financial institutions under the Guaranteed Student Loan Program.a. Fannie Maeb. Ginnie Mae*c. Sallie Maed. Freddie Mac Charging insurance premiums on the basis of how much risk a policyholder poses for the insurance company is a time-honored principle of insurance management to reducea. moral hazard*b. adverse selectionc. free ridingd. principal-agent problems Which of the following describes the relationship between legal tender and money?a. being legal tender is a necessary but not sufficient condition for a substance to be money.*b. being legal tender is a sufficient but not necessary condition for a substance to be money

c. being legal tender is a necessary and sufficient condition for a substance to be moneyd. being legal tender is neither necessary nor sufficient for a substance to be money Which of the following is not legal tender?a. a dimeb. a $20 dollar bill*c. a checking account in a commercial bankd. none of the above--that is, all of the above are legal tender A six pack of Mountain Dew is priced at $2.79. This example illustrates money serving as:a. a medium of exchange*b. a standard of valuec. a means of paymentd. a store of value In the 1970s, the U.S. price level doubled. In the 1970s, money served which function very poorly?a. standard of valueb. unit of accountc. means of payment*d. store of value Our current monetary system may be characterized as a:a. gold standard systemb. commodity money system*c. credit or fiat money systemd. representative full-bodied monetary system Today, our money is "backed"a. 25 percent by gold certificates held by the Federal Reserveb. 40 percent by gold certificates held by the Federal Reservec. by a combination of gold certificates and silver certificates*d. by faith that our government will keep the growth of money in moderation Which of the following is not included in M2?a. currency and coinsb. demand depositsc. money market mutual fund shares*d. corporate bonds held by firms and individuals Which of the following payments instruments are least efficient from society's point of view?a. currencyb. a system of electronic funds transfers*c. credit cardsd. all are equally efficient Which of the following have not served as money at some time?a. goldb. tobacco*c. credit cards d. silver The designation "legal tender":a. applies to all forms of M1 money todayb. is a necessary condition for an item to be considered money *c. means that a seller cannot refuse payment made in that formd. all of the above Which of the following can serve as a store of value?a. artb. moneyc. gold*d. all of the above Which of the following assets is most liquid?a. 2-year Treasury bondsb. shares of common stock*c. passbook savings accountsd. gold bars The $20 gold piece so common in old Western films is an example of:*a. full-bodied commodity moneyb. representative full-bodied commodity moneyc. fiat moneyd. barter money The development of representative full-bodied commodity money stemmed mainly from the underlying commodity's lack of:

a. scarcity*b. portabilityc. durabilityd. none of the above When an economist talks about the impossibility of barter, she really is not saying that barter is impossible. Rather, she means to imply that*a. barter transactions are relatively costly. b. barter has no useful place in today's world. It is impossible for barter transactions to leave the parties to an exchange better off.c. it is impossible for barter transactions to leave the parties to an exchange better off.d. each of the above is true. The resources expended trying to find potential buyers or sellers and negotiating over price and terms are calleda. barter costs.*b. transaction costs.c. information costs.d. enforcement costs. If cigarettes serve as a medium of exchange, a unit of account, and a store of wealth, cigarettes are said to function asa. bank deposits.b. reserves.*c. money.d. loanable funds. Because money reduces both the time it takes to make exchanges and the necessity of a double coincidence of wants, people will find that they can more easily pursue their individual comparative advantages. Thus moneya. encourages nonproductive pursuits.*b. encourages specialization.c. forces people to become too specialized.d. causes a waste of resources due to the duplication of many activities.

As the transaction costs of selling an asset rise, the asset is said to becomea. more valuable.b. more liquid.*c. less liquid.d. more moneylike. Which of the following are problems with a payments system based largely on checks?a. Checks are costly to process.b. Checks are costly to transport.c. Checks take time to move through the check-clearing system.*d. All of the above.e. Only (a) and (b) of the above. Starting January 1, 1999 the ______ became the official currency of countries joining the European Monetary System:*a. eurob. francc. dollard. yen Which of the following is not included in the money aggregate M2?a. Currencyb. Money market deposit accountsc. Small denomination CDs (time deposits)*d. Savings bonds Which of the following best describes the behavior of the money aggregates M1 and M2?*a. While both M1 and M2 tend to rise and fall together, they can grow at very different rates.b. M1 always grows at a much faster rate than M2.c. While both M1 and M2 tend to move closely together over periods as short as a year, in the long run they tend to move in opposite directions.d. While both M1 and M2 tend to move closely together over periods as short as a year, in the long run their growth rates are vastly different.Suppose you buy $1,000 worth of newly issued IBM bonds. Which of the following is correct?a. You now own a small portion of IBM corporation.*b. You have loaned $1,000 to IBM corporation.c. Both of the above are correct.

d. None of the above are correct. A graph depicting money growth rates and inflation rates for a cross-section of nations would likely indicate that:*a. countries with high money growth tend to have high inflationb. countries with high money growth tend to have low inflationc. there is no clear correlation between money growth rates and inflation rates across countriesd. the United States had the lowest inflation rate of any country Monetary policy consists of:a. controlling taxes to influence consumer and business spending*b. influencing the availability of bank credit by changing interest ratesc. adjusting the level of government expenditures to stimulate economic activityd. all of the above Inflation is most often caused by:a. supply side forces such as oil prices which increase costs to producersb. demand side forces which depress the level of consumer spending*c. rapid expansion of the money supplyd. unreasonable wage demands on the part of labor unions The interest rate is:a. the cost of using borrowed fundsb. a key variable that influences investment in capital goodsc. strongly influenced by monetary policy actions*d. all of the above Common stocks (or corporate stocks): a. represent an IOU on the part of the issuing firmb. entitle the holder to contractual paymentsc. were a poor investment over the period 1982-1996*d. allow the holder to share in the earnings of the firm Financial intermediaries:a. channel funds from savers to borrowersb. greatly enhance economic efficiencyc. have been an source of many financial innovations*d. have done all of the above The real interest rate is defined as:a. the actual interest rate plus the rate of inflation*b. the actual interest rate minus the rate of inflationc. the actual rate people pay rather than the advertised rated. none of the above e. None of the above. Which of the following is a short-term financial instrument?*a U.S. Treasury bill.b. Share of IBM stock.c. New York City bond with a maturity of 2 years.d. Residential mortgage. Which of the following statements about the characteristics of debt and equity is true?a. They can both be short-term financial instruments.b. Bond holders are a residual claimant.c. The income from bonds is typically more variable than that from equities.d. Bonds pay dividends.*e. None of the above.Money appears to have a major influence ona. inflation.b. the business cycle.c. interest rates.*d. each of the above. Budget deficits are important to study in a money and banking class becausea. budget deficits cause banks to fail.b. without budget deficits banks would not exist.*c. budget deficits may influence the conduct of monetary policy.d. of each of the above. An increase in the growth rate of the money supply is most likely to be followed bya. a recession.b. a decline in economic activity.*c. inflation. d. all of the above.

A sharp decrease in the growth rate of the money supply is most likely to be followed by*a. a decline in economic activity.b an upswing in the business cycle.c. inflation.d. all of the above. Suppose that due to a fear that the United States is about to enter a long period of stagnant growth, stock prices fall by 50% on average. Predict what would happen to spending by consumers.a. spending would probably increase.*b. spending would probably fall.c. spending would probably be unaffected.d. the change in spending would be ambiguous. Budget deficits can be a concern because they mighta. ultimately lead to lower inflation.b. lead to lower interest rates.*c. lead to a higher rate of money growth which causes inflation.d. cause all of the above to occur.Which of the following is most likely to result from a stronger euro?*a. U.S. goods exported aboard will cost less in Germany, and so Germans will buy more of them.b. U.S. goods exported aboard will cost more in Germany, and so Germans will buy more of them. c. U. S. goods exported abroad will cost more in Germany, and so Germans will buy fewer of them.d. Americans will purchase more foreign goods. Which of the following are true statements?a. Inflation is defined as a continual increase in the money supply.b. Inflation is a condition of a continually rising price level.c. The inflation rate is measured as the rate of change in the aggregate price level. *e. Only (b) and (c) of the above are true statements. When the dollar depreciates in value, it benefits_______ and harms________.*a. American exporters; American consumersb. American exporters; foreign consumersc. foreign exporters; American exportersd. foreign exporters; American tourists The Federal Reserve System is:a. a large commercial bankb. another name for the U.S. Treasury*c. the central bank in the United Statesd. the organization that insures bank deposits in the U.S. When a nation's money supply persistently increases at a faster rate than the nation can increase its output of goods and services, which of the following happens?a. budget deficits increase*b. inflation occursc. real output acceleratesd. living standards rise Assuming that the inflation rate is positive, which of the following statements characterizes the relationship between the actual or observed interest rate and the real interest rate?a. they are the same thingb. real interest rates are higher than actual interest rates*c. real interest rates are lower than actual interest ratesd. none of the above is necessarily true A chief concern about large budget deficits is that they may lead to:*a. lower living standards in the futureb. lower interest rates in the presentc. deflation in the futured. all of the above When you purchase shares of corporate stock, then:a. you have loaned money to the corporation*b. you own part of the corporationc. you have made new funds available to the corporationd. all of the above Suppose XYZ corporation earns profits of $2 per share, is priced at $30 per share, and pays an annual dividend of $1.50 per share. Which of the following is correct?a. the PE ratio of XYZ stock is 15b. the dividend yield of XYZ Corporation is 5 percentc. the company pays out 75 percent of its profits in dividends*d. all of the above are correct

Suppose Hi-Tech Corporation currently sells at $100 per share, earns profits of $2 per share, and pays an annual dividend of 50 cents per share. Which of the following is correct?a. the market expects relatively slow growth for High-Techb. the dividend yield is 5 percent*c. the PE ratio is 50d. none of the above is correct______________________________________________________________________________________Which of the following type/s of transaction/s affect the balance sheets of both the central bank and the banking system? An open market operationA foreign exchange interventionCentral bank’s extension of a discount loanAll of the given optionsHigh State Bank purchases some U.S. Treasury bonds. We would view such bonds as being free of:

Credit risk Interest rate risk Reinvestment risk All of the given optionsStock market bubbles can lead to: An inefficient allocation of resourcesStock market crashesPatterns of volatile returns from the stock market All of the given options__________ are the economies Central nervous system. Financial InstrumentsFinancial MarketsFinancial InstitutionsFinancial CompaniesWhich of the following would be considered characteristic of money? It is store of valueIt pays a higher return than most assetsIt is in fixed supplyIt is legal tender everywhere in the world The Fed lacks complete control over the money supply because it cannot perfectly predict: Discount borrowing by the banksShifts from deposits to currencyExcess reserves held by banksAny of the aboveWhen the Fed wants to increase the level of reserves in the banking system, it can: Buy bonds from the publicBuy bonds from banksIncrease discount loans to banksAll of the given optionsIf a bank has excess reserves of $15,000 and demand deposit liabilities of $80,000, and if the reserve requirement is 20%, then the bank has total reserves of: $11,000$31,000$26,000$20,000A bank can usually offer a saver a higher return for the same risk because: The bank can usually purchase assets at a higher cost than any one saverThe bank can pool the resources of larger savers and purchase lower denominated assetsEconomies of scale can be applied by the bank in its purchase of assetsNone of the given optionsWhich one the following is NOT the way to manage liquidity risk? By holding sufficient excess reservesThrough diversificationBy adjusting assetsBy adjusting liabilitiesCurrency-to-deposit ratio is a factor that affects the quantity of money. This factor is controlled by which of the following? Central bankBank regulators

Commercial banksNon bank publicWhat will be the effect on the present value if we double the future value of the payment? It will decrease the value by one-halfIt will increase the value by one-halfIt will equally increase the value i.e. doubles the valueIt will have no effect on the valueWhich of the following financial instruments used primarily as store of value? OptionsStocksHome mortgageBonds_____________ are organized to eliminate the need of costly information gathering. Central bankCommercial banksStock exchangesInsurance companiesThe broad class of securities firms includes which of the following? BrokeragesInvestment banksMutual fund companiesAll of the given optionsWhich of the following is NOT the component of monetary base? Currency in the hands of the publicReserves of the banking systemDeposits at the central bankAll of the given optionsIn the simple model of multiple deposit creation in which banks do not hold excess reserves, the increase in checkable deposits equals the product of the change in reserves and the: Inverse of the excess reserve ratioThe simple money multiplierInverse of the simple money multiplierDiscount rate

Which of the following is NOT a depository institution? Commercial banksSavings institutionsCredit unionsBrokerage houseIf YTM equals the coupon rate the price of the bond is __________. Greater than its face valueLower than its face valueEquals to its face valueInsufficient informationAn increase in wealth shifts the demand for bonds to the __________. LeftRightNo changeAll of the given options Everything else equal, if the growth rate of a country exceeds its sustainable rate: The central bank will keep interest rates low to keep the momentumThe central bank is likely to raise interest rates to slow the rate of growthThe central banks will now identify this new rate as the sustainable rate and try to maintain it. The central bank is likely to lower the interest rate thinking a slowdown is coming to offset this boom.Combination of term life insurance and a savings account is called as __________. Term life insuranceWhole life insurance***** life insuranceNone of the given optionFactors that cause the excess reserve ratio to rise include: A rise in expected deposit outflowsA decline in market interest ratesA rise in market interest ratesBoth rise in expected deposit outflows and decline in market interest rates of the above

Sum of all the probabilities should be equal to which one of the following? ZeroOneTwoThreeWhich of the following is the true about bank statement? Total Bank Assets = Total Bank Liabilities + Bank CapitalTotal Bank Liabilities = Bank CapitalTotal Bank Assets +Total Bank Liabilities = Bank CapitalTotal Bank Assets = Total Bank Liabilities - Bank CapitalWhich of the following are the primary uses of funds of depositror institution? Cash, loans, securitiesCorporate bonds, Government bonds, StocksCommercial paper, Bonds, MortgagesMortgages, Consumer loans, Business loansThe fact that common stockholders are residual claimants means: The stockholders receive their dividends before any other residuals are paidThe stockholders receive the remains after everyone else is paidThe stockholders are paid any past due dividends before other claims are paidThe common stockholders are responsible for all corporate debtsA business cycle downturn shifts the bond supply to the: RightLeftNo changeNone of the given optionsWhich of the following are the primary uses of funds of Insurance Company? Cash, loans, securitiesCorporate bonds, Government bondsCommercial paper, Bonds, MortgagesMortgages, Consumer loans, Business loansWhich of the following best describes default risk? The chance the issuer will be unable to make interest payments or repay principalThe chance the issuer will retire the debt earlyThe chance the issuing firm will be sold to another firmThe chance the issuer will sell more debtBeside default risk which one if the following factor affects the return on bond? TaxesMonetary policyJunk bondsDebtIf a bond sells at a premium, where price exceeds face value, then we would expect to see: Market interest rate the same as the coupon rateMarket interest rates above the coupon rate Market interest rates below the coupon rate All of the given options Which of the following is the measure of likelihood that an event will occur? RiskProbabilityFrequencyOutcomeThe risk premium of a bond will: Higher for investment-grade bonds than for high-yield bondsPositive but small if the risk of default is zeroDecrease when the default risk risesIncrease when the risk of default rises