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 U.S. Treasury bond yields 7 percent?
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. U.S. prices rise and U.S. productivity falls
*b. U.S. prices fall and the U.S. increases tariffs on imports
c. U.S. prices fall and the U.S. removes all import quotas
d. U.S. interest rates rise and the U.S. removes all tariffs on imported goods
In the short‑run model of exchange rate determination, if we consider the U.S.‑European exchange rate (euros per dollar), if the European Central Bank unexpectedly boosts interest rates, then this will cause the
a. euro to 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 U.S. interest rates rise
*c. real U.S. interest rates rise
d. real U.S. interest rates fall
A major reduction in the U.S. federal budget deficit, other things being equal, would most likely:
a. reduce the capital inflow and increase the U.S. trade deficit
b. reduce the trade deficit and attract increased foreign capital
c. raise interest rates and reduce the U.S. trade deficit (imports exceed exports)
*d. reduce the capital inflow and reduce the U.S. trade deficit (imports exceed exports)
The underlying axiom of the purchasing power parity theory is:
a. the principle of comparative 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/$. If inflation in the U.S. runs at 4 percent and inflation in Japan runs at 2 percent, next year we would expect the exchange rate to be roughly
a. 112 yen/$
*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 United States become more expensive.
b. American computers sold in Switzerland become more expensive.
c. Swiss army knives sold in the United States become cheaper.
d. American toothpaste sold in America becomes cheaper.
e. Both (a) and (d) of the above are true.
The theory of purchasing-power parity indicates that if the price level in the United States rises by 5% while the price level in Mexico rises by 6%, then
*a. the dollar appreciates by 1% relative to the peso.
b. the dollar depreciates by 1% relative to the peso.
c. the exchange rate between the dollar and the peso remains unchanged.
d. the dollar appreciates by 5% relative to the peso.
e. the dollar depreciates by 5% relative to the peso.
If, in retaliation for “unfair” trade practices, Congress imposes a quota on Japanese cars, but at the same time Japanese demand for American goods increases, then in the long 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 Mexico shifts the supply of dollars _______, the demand for dollars to the _________, and causes a(n) _______ in the peso relative to the dollar.
a. right; left; appreciation
*b. left; right; depreciation
c. right; left; depreciation
d. left; right; appreciation
When U.S. real interest rates rise, the
*a. expected returns for U.S. investments increases, and the dollar appreciates.
b. expected return for U.S. investments decreases, and the dollar appreciates.
c. expected return U.S. investments increases, and the dollar depreciates
d. expected return U.S. investments decreases, and the dollar depreciates.
If the interest rate on dollar deposits is 10 percent, and the dollar is expected to appreciate by seven percent over the coming year, then the expected return on the dollar deposit in terms of foreign currency is
a. 3%
*b. 17%
c. -3%
d. 10%
A lower domestic money supply causes the domestic currency to
a. depreciate more in the short run than in the long run.
b. depreciate more in the long run than in the short run.
*c. appreciate more in the short run than in the long run.
d. appreciate more in the long run than in the short run.
The gold standard was essentially a
*a. fixed exchange rate 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 commits to dollarization, then
*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 Europe replaced their currencies with the euro, all of the following were predicted to occur for participating nations except
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. U.S. government securities.
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 U.S. government securities.
*c. can be divided up into required reserves plus excess reserves.
d. equal both (a) and (c) of the above.
When a $1000 check written on Citibank is deposited in an account at the Bank of America, then
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 Arnold Schwarzenegger’s biggest bomb,
The Last Action Hero. On the asset side of the bank’s balance sheet, you would see a decline
in ________, and on the liability side of the balance sheet, you would notice a corresponding decrease in _________.
a. reserves, capital 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. historic emphasis of small, “unitary” banks has often been associated with
*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 New York
The Federal Reserve pays to the U.S. Treasury approximately what portion of its gross income?
a. 10 percent
b. 50 percent
c. 75 percent
*d. 90 percent
A major factor contributing to the political independence of the Federal Reserve is:
*a. the Fed is financially independent of congressional appropriations
b. members of the Board of governors are appointed by the president of the United States
c. members of the Board of Governors may serve only two terms
d. all of the above are contributing factors
The Federal Reserve System was created:
a. to conduct monetary policy for purposes of stabilizing the economy
b. primarily to hold large quantities of the ever expanding government debt
*c. to provide liquidity to the banking system in time of crisis
d. to supervise all national banks
The primary motivation behind the creation of the Federal Reserve System was the desire to
*a. lessen the occurrence of bank panics.
b. stabilize short-term interest rates.
c. eliminate state regulated banks.
d. finance World War I.
The regional Federal Reserve banks
a. establish the discount rate.
b. ration discount loans to banks.
c. clear checks.
*d. do all of the above.
While the regional Federal Reserve banks “establish” the discount rate, in truth, the discount rate is determined by
a. Congress.
b. the president of the United States.
*c. the Board of Governors.
d. the Federal Reserve Advisory Council.
A majority of the Federal Open Market Committee is comprised of
a. the 12 Federal Reserve Bank presidents.
b. the five voting Federal Reserve bank presidents.
*c. the seven members of the Board of Governors.
d. none of the above.
Monetary policy is determined by
a. the Board of Governors.
b. the Federal Reserve banks from each district.
*c. the Federal Open Market Committee.
d. the Federal Reserve Advisory Council.
Power within the Federal Reserve is essentially located in
a. New York.
*b. Washington, D.C.
c. Boston.
d. San Francisco.
While the Fed enjoys a relatively high degree of independence for a government agency, it feels political pressure from the president and Congress because
a. Fed members desire reappointment every 3 years.
b. the Fed must go to Congress each year for operating revenues.
*c. Congress could limit Fed power through legislation.
d. of all of the above.
e. of only (b) and (c) of the above.
Supporters of keeping the Federal Reserve independent from both the executive and legislative branches of government believe that a less independent Fed would
a. pursue overly expansionary monetary policies.
b. be more likely to pursue policies consistent with the political business cycle.
c. ignore short-run problems in favor of longer-run concerns.
*d. do only (a) and (b) of the above.
When Hometown Bank grants new loans in the amount of $10,000, this leads to an expansion of the money supply by:
*a. $10,000
b. $10,000 times the initial excess reserves in the banking system
c. $10,000 times the reciprocal of the reserve requirement
d. zero
Assume you win a lottery and receive a check for $1 million. Assuming the reserve requirement is 20 percent, then the impact of your depositing your check in your bank is to:
a. increase its reserves by $1 million
b. increases its required reserves by $200,000
c. increase its excess reserves by $800,000
*d. do all of the above
Given a 15 percent reserve requirement, Federal Reserve purchases of $1000 million of U.S. Treasury securities from dealers results in:
*a. an increase in reserves of $1000 million
b. an initial increase in the money supply of $6666.7 million
c. an initial increase in excess reserves of $150 million
d. an eventual increase in the money supply of $1 million
If banks in a given week expand loans by $300 million and sell off $200 million in Treasury bills to the public, the net effect on the money supply (M1) is to:
a. increase it by $300 million
b. increase it by $500 million
*c. increase it by $100 million
d. do none of the above
Banks create money when they:
a. reduce loans and sell securities
b. expand loans and sell securities
c. reduce loans and buy securities
*d. expand loans and buy securities
Which of the following directly increases the money supply?
a. the public withdraws cash from banks
b. the public deposits cash into banks
c. banks sell securities to dealers
*d. none of the above
The simple deposit expansion multiplier is equal to:
a. one minus the reserve requirement percentage
b. one time the reserve requirement percentage
*c. one divided by the reserve requirement percentage
d. none of the above
The demand for the monetary base is composed of demand by:
a. banks and the U.S. Treasury
b. banks and the Federal Reserve
*c. banks and the public
d. the Treasury and the Federal Reserve
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