Money appears to have a major influence on
a. 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 because
A. 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 by
a. 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
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 might
a. 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.
c.
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 consumers
b. American exporters; foreign consumers
c. foreign exporters; American exporters
d. foreign exporters; American tourists
The Federal Reserve System is:
a. a large commercial bank
b. another name for the U.S. Treasury
*c. the central bank in the
d. the organization that insures bank deposits in the
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 occurs
c. real output accelerates
d. 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 thing
b. real interest rates are higher than actual interest rates
*c. real interest rates are lower than actual interest rates
d. 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 future
b. lower interest rates in the present
c. deflation in the future
d. 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 corporation
c. you have made new funds available to the corporation
d. 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 15
b. the dividend yield of XYZ Corporation is 5 percent
c. 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‑Tech
b. the dividend yield is 5 percent
*c. the PE ratio is 50
d. none of the above is correct
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 inflation
b. countries with high money growth tend to have low inflation
c. there is no clear correlation between money growth rates and inflation rates across countries
d. the
Monetary policy consists of:
a. controlling taxes to influence consumer and business spending
*b. influencing the availability of bank credit by changing interest rates
c. adjusting the level of government expenditures to stimulate economic activity
d. all of the above
Inflation is most often caused by:
a. supply side forces such as oil prices which increase costs to producers
b. demand side forces which depress the level of consumer spending
*c. rapid expansion of the money supply
d. unreasonable wage demands on the part of labor unions
The interest rate is:
a. the cost of using borrowed funds
b. a key variable that influences investment in capital goods
c. 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 firm
b. entitle the holder to contractual payments
c. 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 borrowers
b. greatly enhance economic efficiency
c. 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 inflation
c. the actual rate people pay rather than the advertised rate
d. none of the above
Which of the following cannot be described as indirect finance?
a. You take out a mortgage from your bank.
b. An insurance company lends money to General Motors Corporation.
*c. You borrow $1000 from your best friend.
d. You buy shares in a mutual fund.
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.
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.
Which of the following markets in the United States
a. Stock market
b. Corporate bond market
*c. U. S. government bond market
d. Futures market
Which of the following is traded in a money market?
a. U.S. Treasury bonds
b. Mortgages
c. Common stocks
*d. Federal funds
e. None of the above
Which of the following is a depository institution?
a. Life insurance company
*b. Credit union
c. Pension fund
d. Finance company
The primary assets of a mutual savings bank are
a. money market instruments.
b. corporate bonds and stock.
c. consumer and business loans.
*d. mortgages.
The primary liabilities of a savings and loan association are
a. bonds.
b. mortgages.
*c. deposits.
d. commercial paper.
Savings and loan associations are regulated by the
a. 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 wealth
a. 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 selection
c. adverse selection; moral hazard
d. adverse selection; asymmetric information
U. S. Treasury bills are
a. 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 the
a. Federal Reserve System to commercial banks.
*b. one commercial bank to another.
c. the
d. the Federal Reserve to the
All of the following are financial intermediaries except
a. commercial banks
b. insurance companies
c. pension funds
d. 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 ________ problem
a. time value of money
*b. adverse selection
c. restrictive covenant
d. defined contribution
General Motors Acceptance Corporation (GMAC) is an example of a
*a. sales finance company
b. consumer finance company
c. business finance company
d. 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 company
c. business finance company
d. public finance company
Mutual funds that charge a sales commission when shares are purchases are called
a. no-load funds
*b. loaded funds
c. sinking funds
d. 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. pawn
b. backstock
c. syndicate
*d. underwrite
Brokers are distinguished from the dealers in that brokers do not
*a. hold inventories of securities
b. make profits
c. incur losses
d. 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 Mae
b. Ginnie Mae
*c. Sallie Mae
d. 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 reduce
a. moral hazard
*b. adverse selection
c. free riding
d. 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 money
d. being legal tender is neither necessary nor sufficient for a substance to be money
Which of the following is not legal tender?
a. a dime
b. a $20 dollar bill
*c. a checking account in a commercial bank
d. 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 value
c. a means of payment
d. a store of value
In the 1970s, the
a. standard of value
b. unit of account
c. means of payment
*d. store of value
Our current monetary system may be characterized as a:
a. gold standard system
b. commodity money system
*c. credit or fiat money system
d. representative full‑bodied monetary system
Today, our money is "backed"
a. 25 percent by gold certificates held by the Federal Reserve
b. 40 percent by gold certificates held by the Federal Reserve
c. 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 coins
b. demand deposits
c. 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. currency
b. a system of electronic funds transfers
*c. credit cards
d. all are equally efficient
Which of the following have not served as money at some time?
a. gold
b. tobacco
*c. credit cards
d. silver
The designation "legal tender":
a. applies to all forms of M1 money today
b. is a necessary condition for an item to be considered money
*c. means that a seller cannot refuse payment made in that form
d. all of the above
Which of the following can serve as a store of value?
a. art
b. money
c. gold
*d. all of the above
Which of the following assets is most liquid?
a. 2‑year Treasury bonds
b. shares of common stock
*c. passbook savings accounts
d. gold bars
The $20 gold piece so common in old Western films is an example of:
*a. full‑bodied commodity money
b. representative full‑bodied commodity money
c. fiat money
d. barter money
The development of representative full‑bodied commodity money stemmed mainly from the underlying commodity’s lack of:
a. scarcity
*b. portability
c. durability
d. 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 called
a. 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 as
a. 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 money
a. 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 become
a. 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
*a. euro
b. franc
c. dollar
d. yen
Which of the following is not included in the money aggregate M2?
a. Currency
b. Money market deposit accounts
c. 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.
The conversion of a barter economy to one that uses money
a. 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__________trouble some as the pace of financial innovation________.
a. less; quickens
*b. more; quickens
c. more; slows
d. more; stops
If an individual “cashes in” a
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 are
a. 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 of
a. “simple” loans
*b. fixed-payment loans
c. coupon loan
d. discount loans
A sharp decline in market interest rates will:
*a. increase the price of existing bonds
b. increase the yield on existing bonds
c. decrease the price of existing bonds
d. do none of the above
The prime loan rate (prime interest rate):
a. is set by the Federal Reserve
b. is the loan rate charged to small businesses and consumers
*c. is a benchmark interest rate set by large banks
d. 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 inflation
c. the actual rate people pay rather than the advertised rate
d. none of the above
According to the Fischer Effect, interest rates rise when
a. national income increases
b. the economy moves into a recession
c. price deflation occurs
*d. expected inflation rises
The U.S.
*a. rise during business cycle expansions and fall during contractions
b. rise during business cycle contractions and fall during expansions
c. fall during business cycle contractions and remain constant during expansions
d. fall during business cycle expansions and remain constant during contractions
In 1997, the
a. Treasury bills
b. Treasury notes
c. 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 percent
b. negative 2 percent
*c. 4 percent
d. none of the above
The passage of a balanced budget amendment to the
a. the bond demand curve shifting rightward
b. the bond demand curve shifting leftward
c. 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 the
relevant marginal tax rate is 25 percent:
a. the real rate of interest is 6 percent
b. the aftertax real rate of interest is 2.25 percent
c. 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, increases
b. increases, decreases
c. decreases, increases
d. 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
a. the lower the discount rate
*b. the less liquid the asset
c. the lower the level of taxation on the Treasury bill
d. the lower the market risk in the Treasury bill
Transactions costs are lowest in:
*a. Treasury bills
b. common stocks
c.
d. municipal bonds
The least liquid asset below is:
*a. Treasury bond
b. money market mutual fund share
c. passbook savings account
d. checking account deposit
To be considered highly liquid, an asset must:
a. be easily convertible to the medium of exchange
b. not fluctuate sharply in value
c. be sellable without substantial transactions costs
*d. exhibit all of the above qualities
Which of the following bears the most market risk?
*a. corporate bond
b. savings account deposit
c. certificate of deposit (CD)
d. checking account deposit
Which of the following is NOT true?
*a. liquidity and risk are positively related
b. risk and yield are positively related
c. liquidity and yield are inversely related
d. all of the above are true
Which asset carries the greatest default risk?
a. corporate bond
*b. corporate stock
c. long‑term Treasury bond
d. 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 supply
b. a reduction in the federal budget deficit
*c. an increase in business confidence
d. 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 inflation
b. an increase in the federal budget deficit
*c. households becoming less thrifty
d. none of the above
Assume Congress threatens to default on
a. demand for funds would rise and interest rates would rise
*b. supply of funds would fall and interest rates would rise
c. demand for funds would fall and interest rates would rise
d. 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 percent
c. increases from 1 percent to 3 percent
d. 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 rise
b. 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 recessions
c. the first half of recoveries
d. the second half of recoveries
If market interest rates rise:
a. bond prices must rise
*b. bond prices must fall
c. bond prices cannot fall
d. bond prices will either rise or fall
The predominant factor driving the long‑run behavior of interest rates has been:
a. budget deficits
b. business cycles
*c. expected inflation
d. exchange rate behavior
Higher expected inflation should
a. decrease the nominal interest rate and decrease the real interest rate
b. decrease the nominal interest rate and increase the real interest rate
c. 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 bonds
b. long‑term bondholders will experience capital gains as they sell bonds
c. Treasury bill holders lose; bondholders do not
d. then none of the above occur
Net suppliers of loanable funds in the
a. business firms and households
*b. foreigners and households
c. government and business firms
d. 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 rate
b. the standard loan rate
c. the bank rate
d. 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 fall
b. 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 rise
d. 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; rise
c. demand; rise
d. 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; right
b. right; left
*c. left; left
d. 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; rise
b. demand; fall
c. supply; fall
d. supply; rise
If the Fed wants to permanently lower interest rates, then it should raise the rate of money growth if
a. 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 to
b. larger than
*c. smaller than
d. 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; rise
b. above; demand; fall
*c. below; supply; fall
d. above; supply; rise
What is the risk premium on a 10-year corporate bond that pays 9 percent interest while a 10-year
a. 1 percent
*b. 2 percent
c. 8 percent
d. 16 percent
In the Keynesian liquidity preference framework; when income is_____during a business cycle contraction, interest rates will_______.
a. rising, rise
b. rising, fall
c. falling, rise
*d. falling, fall
According to J. M. Keynes, the demand for money is underlaid by a
a. transactionary demand
b. precautionary demand
c. speculative demand
*d. all of the above
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The most plausible explanation for why interest rates would rise is
a. 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 yield
b. tax treatment and yield
c. 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 risk
b. liquidity
c. income tax considerations
*d. all of the above
In drawing a yield curve, which of the following is not held constant?
a. default risk
b. tax treatment
*c. length of time to maturity
d. marketability
A yield curve will slope downward when
*a. short-term interest rates are above long-term rates
b. long-term interest rates are above short-term rates
c. short-term interest rates equal long-term rates
d. 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 curve
c. flat yield curve
d. humped yield curve
According to the expectations theory, expected inflation should make the yield curve
a. flatter
*b. steeper
c. horizontal
d. 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 fall
c. interest rates to remain constant
d. inflation is to rise
If the Federal Reserve adopts an expansionary monetary policy, the yield curve tends to
a. shift upward
*b. shift downward
c. become vertical
d. become horizontal
Risk premiums on securities are caused by
a. default risk
b. liquidity considerations
c. tax considerations
*d. all of the above
If interest rates are expected to rise sharply, wise investors will prefer to hold:
*a. Treasury bills
b. Treasury bonds
c. Treasury notes
Which of the following long-term bonds tend to have the highest interest rate?
a. corporate Baa Bonds
b. U. S. Treasury bonds
*c. corporate Caa bonds
d. 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: right
b. right; left
*c. left; right
d. 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; right
b. right; left
c. 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 is
a. 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.
e. 5 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 expecting
a. 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 governments
a. tend to be more liquid than U.S. Treasury bonds
b. are generally considered to be default free
*c. interest payments are exempt from federal income taxes
d. tend to rise in value during periods of inflation
If the dollar moves from 100 yen to 110 yen, then:
a. the dollar has depreciated
b. the yen has appreciated
c. 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 imports
c. high productivity growth and reduced tariffs on imports
d. none of the above
The 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 abroad
b. the price of foreign‑produced goods to be sold domestically
c. 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 low
b. export and import activities have been rising over time
c. 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.
*b.
c.
d.
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 depreciate
b. dollar to appreciate
*c. euro to appreciate
d. all of the above
The U.S. dollar tends to appreciate against the Italian lira when:
a. real Italian interest rates rise
b. nominal
*c. real
d. real
A major reduction in the
a. reduce the capital inflow and increase the
b. reduce the trade deficit and attract increased foreign capital
c. raise interest rates and reduce the
*d. reduce the capital inflow and reduce the
The underlying axiom of the purchasing power parity theory is:
a. the principle of comparative advantage
b. the interest parity condition
c. 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
a. 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 capital
b. exports and imports
c. government transactions abroad
d. firms building plants abroad
When the Swiss franc appreciates (holding everything else constant), then
*a. Swiss watches sold in the
b. American computers sold in
c. Swiss army knives sold in the
d. American toothpaste sold in
e. Both (a) and (d) of the above are true.
The theory of purchasing-power parity indicates that if the price level in the
*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 run
a. 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
a. right; left; appreciation
*b. left; right; depreciation
c. right; left; depreciation
d. left; right; appreciation
When U.S.
*a. expected returns for
b. expected return for
c. expected return
d. expected return
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 system
b. floating exchange rate system
c. managed floating exchange rate system
d. all of the above
If the Federal Reserve wants the dollar to appreciate, it will likely adopt a (an)
*a. expansionary monetary policy
b. contractionary monetary policy
c. expansionary fiscal policy
d. contractionary fiscal policy
To stop a speculative attack against a weak currency, the government of this currency might
a. revalue the currency
*b. devalue the currency
c. increase the domestic money supply
d. reduce taxes on households and business
Which exchange rate system involves a strategy of “leaning against the wind?”
a. fixed exchange rates
b. floating exchange rates
*c. managed floating exchange rates
d. pegged exchange rates
If Argentina
*a. it eliminates the possibility of a speculative attack on its domestic currency
b. its monetary policy is free to combat domestic inflation and unemployment
c. it pursues a policy of freely floating exchange rates
d. its currency becomes tied to the dollar
If Hong Kong adopts a currency board, it
a. replaces its currency with the U.S. dollar, for its money
b. increases the possibility of a speculative attack against its currency
*c. gives up its option of pursuing an independent monetary policy
d. 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 taxes
b. weak financial systems
c. lack of confidence in the domestic government
d. 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 except
a. the adoption of capital controls
b. the taxation of foreign exchange transactions
*c. the renewal of high inflation
d. the switch from budget surpluses to budget deficits
When nations of
a. more uniform prices
b. lower transaction costs
*c. more uncertainty for investors
d. enhanced competition
According to the theory of optimal currency areas, the euro would have the best chance of success if the participating countries
a. have dissimilar business cycles
b. have dissimilar economic structures
c. 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 of
a. fixed exchange rates
b. pegged exchange rates
c. managed floating exchange rates
*d. floating exchange rates
Which of the following is a fundamental commercial bank accounting identity?
a. assets plus capital equals liabilities
b. assets plus liabilities equals capital
*c. assets minus liabilities equals capital
d. none of the above
Which of the following is a source of commercial bank funds?
a. deposits
b. capital
c. nondeposit borrowing
*d. all of the above
Which of the following is a use for commercial bank funds?
a. loans
b. securities
c. 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 Reserve
c. transactions deposits
d. 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 million
b. its total liabilities are $108 million
c. it has an equity multiplier of 10
d. 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 accounts
b. ATS accounts
*c. MMD accounts
d. 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 million
c. its legal reserves are $14 million
d. none of the above are true
The securities purchased by a bank for investment purposes are known as
a. primary reserves
*b. secondary reserves
c. equity capital
d. discounts
Typically, the largest portion of bank profits stems from:
*a. loans
b. securities
c. fees for services
d. derivatives
When a bank writes off a loan as bad, its:
a. total assets and total liabilities decrease by that amount
b. total liabilities and capital decrease by that amount
*c. total assets and capital decrease by that amount
d. 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.
Tools of bank liability management include:
a. buying federal funds
b. issuing negotiable CDS
c. 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 capital
c. earnings/equity capital
d. equity capital/total assets
Total reserves
a. equal the deposits banks hold at the Fed.
b. include bank holdings of
*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
a. 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, then
a. 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 deposits
b. borrowing from other banks
c. 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 sold
b. discounts and advances
c. issuance of negotiable CDS
d. issuance of MMDs
A bank’s primary reserves include:
a. vault cash
b. deposits at the Federal Reserve
c. 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; decreases
b. decreases; increases
c. decreases; decreases
*d. increases; increases
While reading your bank’s annual report, you notice that the bank was forced to write off
several million dollars of bad loans it made to finance
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 accounts
b. capital accounts, deposits
*c. loans, capital accounts
d. loans, deposits
e. none of the above occurs.
The elimination of Regulation Q in the 1980s caused banks to
a. be able to invest in corporate stock
b. engage in speculation in the foreign exchange market
c. 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 $40
b. reduces your bank’s capital accounts by $40
*c. reduces your bank’s liabilities by $40
d. reduces your bank’s required reserves by $40
The U.S. Treasury Secretary who attempted to establish a nationwide banking system in 1791 was
a. Benjamin Franklin
b. Thomas Jefferson
*c. Alexander Hamilton
d. Abraham Lincoln
A purpose of the Federal Reserve paying interest on the deposits of banks is to
a. place a ceiling on the federal funds rate
*b. place a floor on the federal funds rate
c. 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 before
c. banks were allowed to establish branches that crossed state lines
d. 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 banks
b. ended the free banking era
c. 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 percent
c. 15 percent
d. 20 percent
Compared to small banks, large banks
a. may be able to take advantage of economies of scale
b. may be able to take advantage of economies of scope
c. 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 banking
b. called for the Office of Thrift Supervision to regulate savings and loan associations
c. allowed banks to have either state charters or federal charters
d. eliminated branching across state lines for commercial banks
National banks are chartered by:
a. the Federal Deposit Insurance Corporation
b. the Federal Reserve
c. the Securities and Exchange Commission
*d. the Comptroller of the Currency
The U.S.
*a. a high rate of bank failures
b. a low rate of banks failures
c. banks that are highly capitalized and thus insulated from runs by nervous depositors
d. 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 customers
c. banks lower the points (fees) that they apply to mortgage loans
d. banks make higher profits by placing funds into mortgage loans
The Banking Act of 1933
a. was primarily concerned about stemming the tide of bank failures
b. eliminated interest payments on demand deposits
c. imposed interest-rate ceilings on savings/time deposits
*d. all of the above
Regulation Q
a. imposed barriers on the interstate branching of commercial banks
b. resulted in the Federal Reserve paying interest on deposit accounts of banks
c. 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 they
a. face stiff competition from other financial intermediaries
b. are overregulated by the government, thus lessening their ability to make loans
c. 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 1948
b. the Glass-Steagall Act of 1956
*c. the Monetary Control Act of 1982
d. 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 insurance
b. laws were passed that eliminated state-chartered banks
*c. interstate banking was allowed, resulting in large nationwide banks
d. 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 decline
b. there is a limit, or cap, on the amount of interest that can be charged
c. 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 loans
b. borrow from the Fed
c. 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 risen
c. the number of unit banks has risen; number of branches has risen
d. none of the above
One large company that holds many different banks as subsidiaries is called a (an)
a. investment bank
b. euro bank
*c. bank holding company
d. deposit bank
Which of the following agencies is primarily responsible for supervising bank holding companies?
a. U.S. Treasury
*b. Federal Reserve System
c. Securities and Exchange Commission
d. 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 increases
b. economies of scope, where the joint costs of producing two complementary outputs are less than the combined costs of producing the two outputs separately
c. the potential for risk diversification
d. 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 banks
b. bank managers try to maximize profit by purchasing U.S. government securities
c. federally chartered banks have very modest failure rates
d. federally chartered banks are prevented from crossing state lines
Restrictions on branch banking ultimately led to:
a. creation of bank holding companies
b. creation of nonbank banks
c. 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 scale
c. higher executive compensation
d. 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 compensation
d. diseconomies of scale
Economists believe that the existence of FDIC deposit insurance does which of the following?
a. reduces the propensity for bank panics
b. increases the moral hazard problem in banking
*c. does both of the above
d. 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 $250,000
c. the percentage of bank deposits insured has declined over the past 30 years.
d. all of the above are true
A feature of FDIC insurance that would work to promote efficiency is:
a. zero deposit insurance premiums
b. insuring 100 percent of deposits
*c. risk‑based deposit insurance premiums
d. none of the above
The moral hazard problem increases:
a. the greater the amount of equity at stake
*b. the more fully a certain event is insured against
c. the more closely the regulator’s information resembles the regulated’s information
d. all of the above reduce the moral hazard problem
Economies of scale:
a. are experienced when it is cheaper to produce a group of services together rather than separately
*b. are experienced when the average cost curve for the bank is negatively sloped
c. have not been proven to exist in banking services
d. occur due to the confusion and duplication associated with a large bureaucracy
A bank failure is more likely to occur when
a. a bank holds more U.S. government securities
*b. a bank suffers large deposit outflows.
c. a bank hold more excess reserves.
d. a bank has more bank capital.
When interest rates are expected to fall in the future, a banker is likely to
a. make short-term rather than long-term loans.
b. buy short-term rather than long-term bonds.
*c. buy long- term rather than short-term bonds.
d. do both (a) and (b) of the above.
If a bank manager determines that his bank’s gap between rate-sensitive assets and rate-sensitive liabilities is a positive $20 million, then a five percentage point increase in interest rates will cause bank profits to
*a. increase by $1 million.
b. decrease by $1 million.
c. increase by $10 million.
d. decrease by $10 million.
Items listed on the liability side of banks’ balance sheets include
*a. bank capital.
b. loans.
c. reserves.
d. all of the above.
e. only (a) and (b) of the above.
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
The Federal Reserve pays to the U.S.
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
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
*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.
*b.
c.
d.
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
*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
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 interest rates
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
Temporary, short-term discount loans to banks in areas in which agriculture and tourism are important are known as
a. Primary credit
b. Secondary credit
c. *Seasonal credit
d. Extended credit
The Federal Reserve’s Open Market Trading Desk is another name for security traders at the Federal Reserve Bank of
a.
b.
c.
d. *
The margin requirement set by the Federal Reserve is the
a. *Proportion of the purchase price of a security that an investor must pay in cash
b. Difference between the interest rate banks may charge on loans and the interest rate they pay to depositors
c. Same thing as the required reserve ratio on checking deposits
d. Difference banks must maintain between the value of their assets and the value of their liabilities
Under the Federal Reserve Act, which banks must be members of the Federal Reserve System?
a. All commercial banks
b. *National banks
c. State banks
d. All banks with capital in excess of $100 million
Money and Banking MCQs
1- A lender is promised a $100 payment (including interest) one year from today. If the
lender has an 8% opportunity cost of money, he should be willing to accept what amount
today?
A. $100.00
B. $108.20
C. $92.59 100/(1+0.8)^1 page= 23
D. $96.40
Money and Banking (MGT411) Quiz 01
Virtual
2- The higher the Future Value (FV) of the payment, the higher will be the:
A. Discount rate
B. Present value p=25
C. Liquidity
D. Cost of borrowing
3- The procedure of finding out the Present Value (PV) is known as:
A. Discounting
B. Compounding
C. Time value of money
D. Bond pricing
4 ---------------- tells us after how much time period the amount of money will become
double.
A. Real interest rate
B. Nominal interest rate
C. Rule of 72 p=25
D. Time value of money
5- The interest rate used in the present value calculation is often referred to as:
A. Discount rate p=27
B. Inflation rate
C. Nominal rate
D. None of the given option
6- The procedure of finding out the Future Value (FV) is known as:
A. Discounting
B. Compounding
C. Time value of money
D. Bond pricing
7- The price of a bond is the ---------------- of its payments.
A. Present Value p=29
B. Future Value
C. Coupon rate
D. Principal amount
Money and Banking (MGT411) Quiz 01
Virtual
8- The ---------------is defined as the probability weighted average of the squared
deviations of the possible outcomes from their expected value.
A. Standard deviation
B. Variance p=34
C. Mean
D. Median
9- The difference between real and nominal interest rate is
A. The cost of borrowing
B. The effect of inflation p=30
C. The price of bonds
D. None of the given option
10- The Future Value (FV) of $1000 in 5 years at 5% interest rate will be:
A. $1000.00
B. $1276.28 fv=1000*(1+.5)^5 p=23
C. $999.99
D. $1500.52
11- Stock exchange is an example of:
A. Financial instrument
B. Financial institution
C. Financial market
D. Bank
12- Which of the following is NOT an example of financial institutions?
A. Banks
B. Securities firms
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C. Stock exchanges
D. Insurance companies
13. Which of the following are used to monitor and stabilize the economy?
A. Governments
B. Commercial Banks
C. Central Banks
D. Financial institutions
Money and Banking (MGT411) Quiz 01
Virtual
14. Financial instruments are evolved just as much as _____________.
A. Currency
B. Stocks
C. Bonds
D. Commodity
15. Previously financial markets are located in which of the following?
A. Coffee houses or Taverns
B. Stock exchanges
C. Bazaar
D. Coffee houses and Stock exchanges
16. We need __________ to carry out day to day transactions
A. Money
B. Bonds
C. Stocks
D. Loans
17- Among the following which one is less liquid asset?
A. Checking account
B. Car
C. Share
D. Debit card
18- Which of the following is the final mode of payment?
A. Money
B. ATM
C. Cheque
D. Yet to discover
19- Debit card works in the same way as which one of the following?
A. Cheque p=9
B. Credit card
C. Store value card
D. Pay order
Money and Banking (MGT411) Quiz 01
Virtual
20- Banks use to handle transactions among themselves, through which one of the
following?
A. Debit card
B. Electronic transfers p=9
C. Credit card
D. Store value card
1- The present value of an asset can be found by __________________ the future value.
A. Stripping
B. Discounting
C. Compounding
D. Annualizing
2- The interest rate used in the present value calculation is often referred to as the
A. Internal rate of return
B. Inflation rate
C. Discount rate
D. Nominal rate
3- When the yearly coupon payments rises then
A. The value of the coupon bond falls
B. The value of the coupon bond rises
C. The price of the coupon bond rises
D. The price of the coupon bond falls
4- Bond prices are
A. Equal to the face value of the bond
B. Equal to the real interest rate
C. Equal to the nominal interest rate
D. Inversely related to the interest rate
5- If the inflation rate is expected to be 5 % and nominal interest rate is 9%, then the real interest rate will be
A. 14%
B. 9%
C. 5%
D. 4%
6- Riskier investment must have
A. Lower expected returns
B. Higher expected returns
C. No expected return
D. None of the above
7- If market interest rate is higher than the individual’s personal discount rate then people will
made
A. Higher savings
B. Lower savings
C. Dissavings
D. None of the above option
8- The internal rate of return is the interest rate that equates
A. The present value of an investment with its future value
B. The present value of an investment with its cost
C. The future value of an investment with its cost
D. None of the given options
9- The central bank of
A. Federal Reserve
B. Securities and Exchange Commission
C. State Bank
D. Department of the Treasury
10- Studying money, banking, and financial markets will help you to
B. Answer basic questions about financial relationships from family members
C. Better understand financial newspapers
D. Get a job after your graduate
E. All of the above
1. “Don’t put all your eggs in one basket” is the famous statement of:
A. Moral hazard
B. Indirect finance
C. Asymmetric information
D. Diversification
2. According to which principle, people and companies concentrate on such activities for which their opportunity cost is lower?
A. Principle of absolute advantage
B. Principle of comparative advantage
C. Principle of management
D. None of the given options
3. The problem of “asymmetric information” arises because:
A. Lender knows more than the borrower
B. Borrower knows more than the lender
C. Borrower and lender have different goals
D. Borrower and lender know the future much less than they do the present
4. Nonprofit depository institutions that are owned by people with a common bond are known as:
A. Commercial banks
B. Central banks
C. Credit unions
D. Insurance companies
5. Which of the following is true?
A. Total bank assets = Total bank liabilities + Bank capital
B. Bank capital = Total bank assets – Total bank liabilities
C. Total bank liabilities = Total bank assets – Bank capital
D. All of the above are true
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6. Securities are highly liquid and can be sold quickly if the bank needs cash, that’s why these are also called:
A. Primary reserves
B. Secondary reserves
C. Excess reserves
D. None of the given options
7. Cash has a high opportunity cost because:
A. It earns no interest
B. It earns less interest
C. It earns more interest
D. Both B & C
8. The net worth of banks is known as the:
A. Bank capital
B. Bank liability
C. Bank assets
D. Bank profit
9. ____________ is a measure of how efficiently a particular bank uses its assets:
A. Return on assets
B. Return on equity
C. Return on bonds
D. None of the given options
10. If return on equity is higher for larger banks then it shows the existence of:
A. Economies of scope
B. Economies of scale
C. Diseconomies of scale
D. All of the given options
1) Instruments that are not directly under the control of the Central Bank are referred to as:
E. Operating instruments
F. Intermediate targets
G. Economic instruments
H. Social instruments
2) Every country with high inflation has ____________ money growth:
A. High
B. Low
C. Medium
D. Zero
3) Which of the following statement is true?
A. Nominal GDP = PY
B. Nominal GDP > PY
C. Nominal GDP <>
D. Nominal GDP ≠ PY
4) According to Milton Friedman, Central Banks should set money
growth at a __________ rate:
A. Increasing rate
B. Decreasing rate
C. Constant rate
D. Zero rate
5) ____________ is one of the financial instruments that we can hold in our investment portfolios:
A. Bonds
B. Shares
C. Money
D. Term finance certificates (TFC)
6) Increases in price level will ____________ the purchasing power of money:
A. Increase
B. Decrease
C. No change
D. Balance
7) At long run real interest rate:
A. AD = Potential Output
B. AD > Potential Output
C. AD <>
D. None of the given options
8) __________ curve is downward sloping because higher inflation reduces real money balances:
A. Aggregate Demand Curve
B. Aggregate Supply Curve
C. IS Curve
D. LM Curve
9) Increases in government purchases will ________ the aggregate demand:
A. Increase
B. Decrease
C. No change
D. Balance
10) A change in cost of producing output causes the ________ curve to shift:
A. Aggregate Demand Curve
B. Aggregate Supply Curve
C. IS Curve
D. LM Curve
1. Future value is equal to:
- PV/ i
- PV + PV +i
- PV + i
- None of the given options.
2. In compounding we calculate the future value for:
- Less than 1 year.
- Equal to 1 year.
- More than 1 year.
- All of the given options.
3. ___________ is used in the calculation of present value:
- Compounding
- Discounting.
- Yield to maturity.
- None of the given options.
4. You receive a check for $100 two years from today. The discounted present value of this $100 is:
- $100*(1+i)2
- $100/ (1+i)
- $100/(1+i)2
- $100*(1+i)
5. As bond prices increase:
- Yields to maturity increase.
- Yields to maturity do not change.
- Yields to maturity decrease.
- All of the given options.
6. For a $1000 one year discount bond with a price of $975, the yield to maturity is:
$1000/$975
($1000 – $975)/$975
($1000 – $975)/ ($1000)
$975/$1000
7. For a coupon bond, the current yield is calculated as:
- Coupon Payment/Price
- The current yield is the same as the coupon rate.
- Coupon Payment/Face Value
- Coupon Payment/((Price + Face Value)/2)
8. For a coupon bond, the yield to maturity is the:
- Difference between the bond's price and its face value.
- Annual interest payment divided by the bond's face value.
- Interest rate that equates the bond's present value with its face value.
- Interest rate that equates the bond's present value with its price.
9. The real interest rate is:
- The nominal rate plus the expected inflation rate.
- The nominal interest rate/the CPI.
- The product of the nominal rate and the CPI.
- The nominal rate minus the expected inflation rate.
10. Other things remaining equal, which of the following will increase the demand (shift the demand curve to the right) for bond J?
- An increase in the risk level of bond J.
- An increase in the interest rate on bond K.
- An increase in the level of wealth in the economy.
- An increase in the interest rate on bond J.
11. At a bond price above the equilibrium,
- There is an excess supply and the price will tend to rise.
- There is an excess supply and the price will tend to fall.
- There is an excess demand and the price will tend to rise.
- There is an excess demand and the price will tend to fall.
12. Using money demand and money supply:
- An increase in prices will increase money demand and decrease the interest rate.
- An increase in expected inflation will decrease money demand and decrease interest rates.
- An increase in income will increase money demand and increase the interest rate.
- An increase in the money supply will increase the interest rate.
13. According to the ________ effect, an increase in the money supply lowers the interest rate.
- Price-level
- Liquidity
- Income
- Expected-inflation
14. Riskier investment must have:
- Lower expected returns
- Zero expected returns
- Higher expected returns.
- None of the given options.
15. _____________ risks affect everyone.
- Idiosyncratic
- Systematic
- Hedging
- None of the given options.
16. Zero- Coupon bonds are sold at a price:
- Equal t their face value
- Below their face value.
- Above their face value.
- None of the given options.
17. If the bond is selling above the face value than it is called:
- Discount
- Compound
- Premium
- None of the given options.
18. Municipal bonds generally have lower interest rates than
- They have less risk.
- They are more liquid.
- They never mature.
- They are exempt from Federal taxes.
19. Yield curves show:
- The relationship between liquidity and bond interest rates (yields).
- The relationship between risk and bond interest rates (yields).
- The relationship between bond interest rates (yields) and bond prices.
- The relationship between time to maturity and bond interest rates (yields).
20. The expectations theory of the term structure assumes:
- Buyers of bonds prefer bonds with longer maturities.
- Buyers of bonds consider bonds of different maturities to be perfect substitutes.
- Buyers of bonds prefer bonds with shorter maturities.
- Markets for different maturity bonds are completely separate.
1. According to the liquidity premium theory of the term structure, when the yield curve has its usual slope, the market expects:
- Short-term interest rates to rise sharply.
- Short-term interest rates to stay near their current levels.
- Short-term interest rates to drop sharply.
- None of the above.
2. When the yield curve slopes down,
- The expectations theory suggests that short-term interest rates are expected to fall.
- The segmented markets theory suggests that short-term interest rates are expected to rise.
- The expectations theory suggests that short-term interest rates are expected to rise.
- The liquidity premium theory suggests that short-term interest rates are expected to rise.
3. Which of the following patterns of term structure occur most frequently?
a. Ascending yield curve
b. Descending yield curve
c. Flat yield curve
d. Humped yield curve
4. Common stocks (or corporate stocks):
- Represent an IOU on the part of the issuing firm
- Entitle the holder to contractual payments
- Were a poor investment over the period 1982‑1996
- Allows the holder to share in the earnings of the firm
5. Financial intermediaries:
- Channel funds from savers to borrowers
- Greatly enhance economic efficiency
- Have been an source of many financial innovations
- Have done all of the above
6. Which of the following cannot be described as indirect finance?
- You take out a mortgage from your bank.
- An insurance company lends money to General Motors Corporation.
- You borrow $1000 from your best friend.
- You buy shares in a mutual fund.
7. Which of the following is a depository institution?
a. Life insurance Company
b. Credit union
c. Pension fund
d. Finance company
8. Which of the following is traded in a money market?
a. U.S. Treasury bonds
b. Mortgages
c. Common stocks
d. Federal funds
9. The primary liabilities of a savings and loan association are:
a. Bonds.
b. Mortgages.
c. Deposits.
d. Commercial paper.
10. Financial intermediaries promote efficiency and thereby increase people’s wealth:
- By reducing the transaction cost of linking together lender and borrowers.
- To the extent that they help solve problems created by adverse selection and moral hazard.
- By providing additional jobs.
- Because of only (a) and (b) of the above.
11. When an investment bank purchases a new issue of securities in the hopes of making a profits, it is said to ________ the issue.
- Pawn
- Back stock
- Syndicate
- Underwrite
12. Which of the following is a use for commercial bank funds?
- Loans
- Securities
- Reserves
- All of the above
13. On the commercial bank balance sheet, which of the following is an asset
- Capital accounts
- Deposits with Federal Reserve
- transactions deposits
- All of the above
14. If a bank has total assets of $100 million and capital accounts of $8 million, then:
- Its total liabilities are $92 million
- Its total liabilities are $108 million
- It has an equity multiplier of 10
- None of the above are true
15. A bank can increase its leverage by increasing its ratio of:
- Earnings/total assets
- Total assets/equity capital
- Earnings/equity capital
- Equity capital/total assets
16. When you deposit a $100 check in your bank account at the First National Bank of Chicago and you withdraw $50 in cash, then:
- The liabilities of First National Bank rise by $100.
- The reserves of First National Bank rise by $100.
- The assets of the First National Bank rise by $100.
- The liabilities of the First National Bank rise by $50.
17. Commercial banks obtain funds by:
- Issuing demand deposits
- Borrowing from other banks
- Issuing ownership claims (equity)
- All of the above
18. A bank failure is more likely to occur when:
- A bank holds more
- A bank suffers large deposit outflows.
- A bank holds more excess reserves.
- A bank has more bank capital.
19. ---------------measures how efficiently a bank uses its assets:
- Return on assets
- Return on equity
- Bank capital
- Bank Profitability
20. -----------refers to the risk assessment and loss reimbursement guarantee by the individual risk experts of the relevant field:
- Underwriting process
- Research process
- Insurance process
- None of the given options
21. The euro is the name for:
- A currency deposited outside its country of origin.
- A bond sold internationally outside of the country in whose currency the bond is denominated.
- A common European currency.
- A type of sandwich.
22. Banks can operate in other countries by:
- Offering same services as in home country
- Opening a foreign branch
- Creating an international Banking Facility
- All of the given options.
23. The theory of efficient markets:
- Allows for higher than average returns if the investor takes higher than average risk
- Says insider information makes markets less efficient
- Rules out high returns due to chance
- Assumes people have equal luck
24. If information in a financial market is asymmetric, this means:
- Borrowers and lenders have perfect information
- Borrowers would have more information than lenders
- Borrowers and lenders have the same information
- Lenders lack any information
25. Khushali Bank is:
- A Finance company
- A Securities firm
- A Government sponsored enterprise
- An insurance company
1. Currency includes the following forms of assets:
- Paper money and coins.
- Paper money, coins, and checks.
- Paper money and checks.
- Paper money and savings deposits.
2. The conversion of a barter economy to one that uses money increases efficiency by reducing:
- The need to exchange goods.
- The need to specialize.
- The need to employ team production.
- Transaction costs.
3. Of money's three functions, the one that distinguishes money (as measured by M1) from other assets is its function as a:
- Store of value.
- Unit of account.
- Standard of deferred payment.
- Medium of exchange.
4. The narrowest definition of money that the Federal Reserve System reports is:
- M0.
- M1.
- M2.
- M3.
5. Higher the risk,
- Higher will be the compensation,
- Lower the compensation,
- There will be no compensation,
- All of the given options.
6. the financial system makes it easier to trade,
- Facilitate payments,
- Channel funds from savers to borrowers,
- Enable risk sharing,
- All of the given options.
7. Given the price level Pt, the inflation rate is calculated as:
- (Pt – Pt-1)/Pt
- Pt – Pt-1
- (Pt – Pt-1)/Pt-1
- Pt/Pt-1
8. The GDP deflator is calculated as:
- Real GDP – Nominal GDP
- Nominal GDP/Real GDP
- Nominal GDP – Real GDP
- Real GDP/Nominal GDP
9. Present value is equal to:
- 1/FV
- FV/ i
- FV/ (1+i) n
- None of the given options.
10. Financial institutions play an important role to,
- Reduce transaction,
- Reduce information,
- Curb information,
- All of the given options.
1. Which of the following correctly states the relationship regarding banks' balance sheets?
- Total Bank Liabilities = Total Bank capital + Total Bank Assets.
- Total Bank Assets = Total Bank Liabilities + Total Bank Capital.
- Total Bank Assets = Total Bank Liabilities – Total Bank Capital.
- Total Bank Assets = Total Bank Capital – Total Bank Liabilities.
2. A bank's reserves do not include:
- Currency in the bank.
- The bank's deposits at the Federal Reserve.
- Currency in ATM machines.
3. Eurodollars are:
- Dollar-denominated deposits in foreign banks.
- Euro denominated deposits in U.S. Banks
- The currency of the European Economic Union.
- Dollars that are specially printed for use in the European Union countries to minimize counterfeiting.
4. One of the unique problems that banks face is:
- They hold illiquid assets to meet liquid liabilities.
- They hold liquid assets to meet illiquid liabilities.
- They hold liquid assets to meet liquid liabilities.
- Both banks' assets and liabilities are illiquid.
5. Central banks perform each of the following EXCEPT:
- Issue currency.
- Operate a payments system.
- Controls the availability of money and credit.
- Manages fiscal policy.
6. The specific goals of central banks include each of the following EXCEPT:
- High and stable real growth.
- Low and stable inflation.
- High levels of imports.
- Low and stable unemployment rates.
7. Small and medium enterprise (SME) Bank is:
a. A Finance company
b. A Securities firm
c. A Government sponsored enterprise
d. An insurance company
8. ---------------is classified as a liability for a commercial bank
a. Reserves
b. Commercial loans
c. Demand deposits
d. Deposits with the Federal Reserve
http://vustudents.ning.com/
9. ------------------is a primary policy tool of the Central Bank:
a. Inflation rate
b. Open market operations
c. interest rate
d. money supply
10. -----------is a component of the liability side of the commercial bank’s balance sheet:
a. Deposits
b. Loans
c. Securities
d. All of the given options
1- A lender is promised a $100 payment (including interest) one year from today. If the lender has an 8% opportunity cost of money, he should be willing to accept what amount today?
- $100.00
- $108.20
- $92.59
- $96.40
2- The higher the Future Value (FV) of the payment, the higher will be the:
A. Discount rate
B. Present value
C. Liquidity
D. Cost of borrowing
3- The procedure of finding out the Present Value (PV) is known as:
A. Discounting
B. Compounding
C. Time value of money
D. Bond pricing
4 ---------------- tells us after how much time period the amount of money will become double.
A. Real interest rate
B. Nominal interest rate
C. Rule of 72
D. Time value of money
5- The interest rate used in the present value calculation is often referred to as:
A. Discount rate
B. Inflation rate
C. Nominal rate
D. None of the given option
6- The procedure of finding out the Future Value (FV) is known as:
A. Discounting
B. Compounding
C. Time value of money
D. Bond pricing
7- The price of a bond is the ---------------- of its payments.
A. Present Value
B. Future Value
C. Coupon rate
D. Principal amount
8- The ---------------is defined as the probability weighted average of the squared deviations of the possible outcomes from their expected value.
A. Standard deviation
B. Variance
C. Mean
D. Median
9- The difference between real and nominal interest rate is
A. The cost of borrowing
B. The effect of inflation
C. The price of bonds
D. None of the given option
10- The Future Value (FV) of $1000 in 5 years at 5% interest rate will be:
A. $1000.00
B. $1276.28
C. $999.99
D. $1500.52
1- Which of the following appears as a liability in the balance sheet of the central bank?
A. Currency
B. The government’s deposit account
C. The deposit accounts of the commercial banks
D. All of the given options
2- The transaction in which central bank buys or sells foreign currency reserves is known as:
A. Foreign exchange intervention
B. Open market operation
C. Discount loans
D. Reserve requirement
3- Which of the following equations depicts equation of exchange?
A. MV= VY
B. MV=PY
C. MP=VY
D. V=PY
4- ---------------is determined by the central bank and the behavior of the banking system:
A. Money demand
B. Money supply
C. Aggregate demand
D. Aggregate supply
5- If the alternative assets become more risky then the demand for money:
A. Goes up
B. Goes down
C. Remains unchanged
D. None of the given options
6- The interest rate at which aggregate demand equals potential output is known as:
A. Discount rate
B. Short run real interest rate
C. Long run real interest rate
D. Inflation rate
7- An increase in the long run real interest rate shifts the monetary policy reaction curve to the:
A. Right
B. Left
C. No change
D. None of the given options
8- An increase in oil prices causes the short run aggregate supply curve to shift:
A. Upward
B. Downward
C. No change
D. All of the given options
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9- An increase in potential output shifts the long run aggregate supply curve to the:
A. Left
B. Right
C. No change
D. None of the given options
10- --------------policy works slowly and almost impossible to implement effectively:
A. Monetary policy
B. Fiscal policy
C. Trade policy
Foreign exchange policy
6. If there is a decrease in the expected future interest rate, what will be its affect on bond?
a) Bond will Less attractive
b) Bond will More attractive
c) Bond will Less expensive
d) Bond will More expensive
7. There is no guarantee that a bond issuer will make the promised payments is known as:
a) Default risk
b) Inflation risk
c) Interest rate risk
d) Systematic risk
8. A plot of the term structure with YTM on Y-axis and time to maturity on
X-axis is called:
a) Demand curve
b) Supply curve
c) Yield curve
d) Leffer curve
9. If bond’s rating is lower, what will be its price?
a) Higher
b) Lower
c) Equal to
d) No change
10. Bond A is for 1 Year and Bond B is for 5 years maturity period which one of the statements is true for Bond A and Bond B.
a) Yields on A is Less volatile than the yield on B
b) Yields on A is Higher than the yield on B
c) Yields on A is Lower than the yield on B
d) Yields on A is More volatile than the yield on B
Which of the following ratings denote the lowest expectations of credit risk?
· A
· AA
· AAA
· BBB
Which of the following patterns of term structure occur most frequently?
- Ascending yield curve
- Descending yield curve
- Flat yield curve
- Humped yield curve
Common stocks (or corporate stocks):
- Represent an IOU on the part of the issuing firm
- Entitle the holder to contractual payments
- Were poor investments over the period 1982‑1996
- Allows the holder to share in the earnings of the firm
Financial intermediaries:
- Channel funds from savers to borrowers
- Greatly enhance economic efficiency
- Have been an source of many financial innovations
- Have done all of the above
Which statement shows the major difference between stocks and bonds?
· Bonds pay their owners dividends while stocks pay interest
· Bonds pay their owners interest while stocks pay dividends
· The interest on a bond depends on the earnings of the corporation and is not guaranteed while dividends on stock are legally required
· Bonds represent ownership while stock represents debt
----------------------agencies assess the default risk of different issuers:
- Insurance
- Bond issuing
- Credit rating
- None of the given options
http://vustudents.ning.com/
The ---------------are an assessment of the creditworthiness of the corporate issuer.
· Bond yield
· Bond ratings
· Bond risk
· Bond rate
The KSE 100 Index contains a representative sample of common stock that trade on the
·
·
·
·
According to the liquidity premium theory of the term structure, when the yield curve has its usual slope, the market expects:
· Short-term interest rates to rise sharply.
· Short-term interest rates to stay near their current levels.
· Short-term interest rates to drop sharply.
· None of the above
When the yield curve slopes down,
- The expectations theory suggests that short-term interest rates are expected to fall.
- The segmented markets theory suggests that short-term interest rates are expected to rise.
- The expectations theory suggests that short-term interest rates are expected to rise.
- The liquidity premium theory suggests that short-term interest rates are expected to rise.
1. Which of the following correctly states the relationship regarding banks' balance sheets?
- Total Bank Liabilities = Total Bank capital + Total Bank Assets.
- Total Bank Assets = Total Bank Liabilities + Total Bank Capital.
- Total Bank Assets = Total Bank Liabilities – Total Bank Capital.
- Total Bank Assets = Total Bank Capital – Total Bank Liabilities.
2. A bank's reserves do not include:
- Currency in the bank.
- The bank's deposits at the Federal Reserve.
- Currency in ATM machines.
3. Eurodollars are:
- Dollar-denominated deposits in foreign banks.
- Euro denominated deposits in U.S. Banks
- The currency of the European Economic Union.
- Dollars that are specially printed for use in the European Union countries to minimize counterfeiting.
4. One of the unique problems that banks face is:
- They hold illiquid assets to meet liquid liabilities.
- They hold liquid assets to meet illiquid liabilities.
- They hold liquid assets to meet liquid liabilities.
- Both banks' assets and liabilities are illiquid.
5. Central banks perform each of the following EXCEPT:
- Issue currency.
- Operate a payments system.
- Controls the availability of money and credit.
- Manages fiscal policy.
6. The specific goals of central banks include each of the following EXCEPT:
- High and stable real growth.
- Low and stable inflation.
- High levels of imports.
- Low and stable unemployment rates.
7. Small and medium enterprise (SME) Bank is:
- A Finance company
- A Securities firm
- A Government sponsored enterprise
- An insurance company
8. ---------------is classified as a liability for a commercial bank:
A. Reserves
B. Commercial loans
C. Demand deposits
D. Deposits with the Federal Reserve
9. ------------------is a primary policy tool of the Central Bank:
A. Inflation rate
B. Open market operations
C. interest rate
D. money supply
10. -----------is a component of the liability side of the commercial bank’s balance sheet:
- Deposits
- Loans
- Securities
- All of the given options
MONEY & BANKING (MGT411)
SPRING SEMESTER 2009
1- A lender is promised a $100 payment (including interest) one year from today. If the
lender has an 8% opportunity cost of money, he should be willing to accept what amount
today?
A. $100.00
B. $108.20
C. $92.59
D. $96.40
Money and Banking (MGT411) Quiz 01
Virtual
2- The higher the Future Value (FV) of the payment, the higher will be the:
A. Discount rate
B. Present value
C. Liquidity
D. Cost of borrowing
3- The procedure of finding out the Present Value (PV) is known as:
A. Discounting
B. Compounding
C. Time value of money
D. Bond pricing
4 ---------------- tells us after how much time period the amount of money will become
double.
A. Real interest rate
B. Nominal interest rate
C. Rule of 72
D. Time value of money
5- The interest rate used in the present value calculation is often referred to as:
A. Discount rate
B. Inflation rate
C. Nominal rate
D. None of the given option
6- The procedure of finding out the Future Value (FV) is known as:
A. Discounting
B. Compounding
C. Time value of money
D. Bond pricing
7- The price of a bond is the ---------------- of its payments.
A. Present Value
B. Future Value
C. Coupon rate
D. Principal amount
Money and Banking (MGT411) Quiz 01
Virtual
8- The ---------------is defined as the probability weighted average of the squared
deviations of the possible outcomes from their expected value.
A. Standard deviation
B. Variance
C. Mean
D. Median
9- The difference between real and nominal interest rate is
A. The cost of borrowing
B. The effect of inflation
C. The price of bonds
D. None of the given option
10- The Future Value (FV) of $1000 in 5 years at 5% interest rate will be:
A. $1000.00
B. $1276.28
C. $999.99
D. $1500.52
11- Stock exchange is an example of:
A. Financial instrument
B. Financial institution
C. Financial market
D. Bank
12- Which of the following is NOT an example of financial institutions?
A. Banks
B. Securities firms
C. Stock exchanges
D. Insurance companies
13. Which of the following are used to monitor and stabilize the economy?
A. Governments
B. Commercial Banks
C. Central Banks
D. Financial institutions
Money and Banking (MGT411) Quiz 01
Virtual
14. Financial instruments are evolved just as much as _____________.
A. Currency
B. Stocks
C. Bonds
D. Commodity
15. Previously financial markets are located in which of the following?
A. Coffee houses or Taverns
B. Stock exchanges
C. Bazaar
D. Coffee houses and Stock exchanges
16. We need __________ to carry out day to day transactions
A. Money
B. Bonds
C. Stocks
D. Loans
17- Among the following which one is less liquid asset?
A. Checking account
B. Car
C. Share
D. Debit card
18- Which of the following is the final mode of payment?
A. Money
B. ATM
C. Cheque
D. Yet to discover
19- Debit card works in the same way as which one of the following?
A. Cheque
B. Credit card
C. Store value card
D. Pay order
Money and Banking (MGT411) Quiz 01
Virtual
20- Banks use to handle transactions among themselves, through which one of the
following?
A. Debit card
B. Electronic transfers
C. Credit card
D. Store value card
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