Chapter 20 Study Plan Questions
When demand drives prices of an asset far beyond its intrinsic economic value, what has been created? A. A loan to value (LTV) B. A bubble C. Teaser rates D. Flipping E. Securitization
B. A bubble (A "bubble" is a term that is used when frenzied demand drives prices of an asset far beyond its intrinsic economic value. )
What is the goal of the Volcker Rule in Dodddash-Frank? A. Ending taxpayer bailouts of companies B. Prohibiting speculation by commercial banks C. Instilling tougher regulation of credit rating agencies D. Scrutinizing derivatives markets E. Protecting consumers
B. Prohibiting speculation by commercial banks (Known as the "Volcker Rule," after former Fed chairman Paul Volcker, prohibiting commercial banks from speculative trading activity measure aims to stop banks from making risky trades that could undermine their financial stability and thereby put their customers at risk)
What is the task of the Bureau of Consumer Financial Protection within the Federal Reserve? A. Ending taxpayer bailouts of companies B. Protecting consumers C. Monitoring for systemic risk D. Scrutinizing derivatives markets E. Adding tougher regulation of credit rating agencies
B. Protecting consumers (The new Bureau of Consumer Financial Protection within the Federal Reserve is tasked with making sure consumers get clear and accurate information about financial services and protecting them from "hidden fees, abusive terms, and deceptive practices," according to the bill's sponsors.)
DidItMyself Tools is interested in entering the Chinese market for selling its products. Which type of bank would be most helpful to DidItMyself as it embarks on its first international operation? A. Commercial bank B. Regional investment bank C. Boutique investment bank D. Thrift banks E. Private bank
B. Regional investment bank (Regional investment banks often provide the same scope of services as the global banks, only with a particular geographic focus. For example, several banks specialize in the Japanese market, several specialize in China, and so on.)
Who decides monetary policy in the United States? A. Regional investment banks B. The Federal Open Market Committee (FOMC) C. Federal Deposit Insurance Corporation (FDIC) D. Congress E. The automated clearing house system (ACH)
B. The Federal Open Market Committee (FOMC) (Monetary policy is decided by the Federal Open Market Committee (FOMC), which includes the Fed's board of governors, the president of the New York City Fed, and 4 of the other 11 regional presidents.)
What will the Dodddash-Frank bill do to ensure transparency in markets, hedge funds, and other financial products? A. Support the Bureau of Consumer Financial Protection B. Use clearer scrutiny of the derivatives market C. End taxpayer bailouts of companies D. Toughen regulation on credit rating agencies E. Prohibit speculative trading
B. Use clearer scrutiny of the derivatives market (This huge and largely unregulated market played a key role in the crisis. Dodd-Frank aims to provide more transparency and accountability in the markets for derivatives, hedge funds, and other financial products.)
Susan went for a 1-hour massage session. After the massage was over, she paid $50 for the massage. This represents which function of money? A. A standard of deferred payment B. A store of value C. A medium of exchange D. A unit of accounting E. A standard of dominance in the world market
C. A medium of exchange (Money serves as a medium of exchange, a tool for simplifying transactions between buyers and sellers. Money is anything generally accepted as a means of paying for goods and services.)
How does the Federal Reserve decrease the money supply? A. By lending money to consumers B. By buying treasuries C. By selling treasuries D. By reducing the federal funds rate E. By removing the reserve requirement
C. By selling treasuries (When the Fed buys Treasuries, this injects money into the economy, thereby increasing the money supply, which tends to then decrease the federal funds rate. The opposite effect happens when the Fed sells Treasuries: Selling pulls money out of the economy, decreasing the money supply and increasing the federal funds rate.)
Which of the following was established in 1970 to aid low- to middle-class homebuyers in attaining mortgages? A. Federal Reserve B. Automated clearing house (ACH) C. Freddie Mac D. Fannie Mae E. Federal Deposit Insurance Corporation
C. Freddie Mac (A major player in the secondary market is Freddie Mac, created in 1970 as the Federal Home Loan Mortgage Corporation. Like Fannie Mae, Freddie Mac is a quasi-independent corporation—and it also had to be rescued in 2008 after overloading with poor-quality mortgage debt.)
Which of the following offer a full menu of client services with an international reach? A. Regional investment banks B. Freddie Mac investment banks C. Global investment banks D. Boutique investment banks E. Open market operations banks
C. Global investment banks (Global investment banks are those with international reach and a full menu of client services. The largest of these, a group of about 10, comprise what is known informally as the "bulge bracket," because they dominate the industry.)
All The Best Financial recently developed an investment product where different types of debts, such as mortgages, are assembled together. All The Best's investment product exemplifies which of the following? A. Loan-to-value ratios B. Option ARM C. Securitization D. Subprime mortgage E. Adjustable rate mortgages
C. Securitization (In the secondary market, individual loans are often pooled together and transformed into investment products through the process of securitization, which allows investors to buy shares of a given pool.)
Which of the following is the banking system of the United States, overseeing and controlling many banks, and organizing the nation's source of capital by creating and fulfilling monetary policy? A. Fannie Mae B. JPMorgan Chase C. The Fed D. Bank of America E. Federal Deposit Insurance Corporation
C. The Fed (The Federal Reserve System is the central banking system of the United States, responsible for regulating banks and implementing monetary policy. The Fed is responsible for serving as the bank for the federal government, supervising and regulating many financial institutions, and managing the nation's money supply by designing and implementing monetary policy.)
Which of the following consists of money from checking accounts, savings accounts, mutual funds, and small-time deposits that will be available to a user at a later time? A. M2 B. M1 C. Time deposits D. Money stock E. Money supply
A. M2 (M2 is a broad measure of money supply consisting of M1 plus savings accounts, mutual funds, and small-time deposits. This is money that will be available soon for spending.)
_______ deal primarily with providing financial services to corporations in international matters. A. Merchant banks B. Investment banks C. Thrift banks D. Retail banks E. Private banks
A. Merchant banks (Merchant banks offer financial services to businesses, particularly in the area of international finance. Merchant banking is sometimes more narrowly defined as managing private equity investments, making it more akin to investment banking.)
Which of the following comprises all the money in the system, from money held by individuals to those utilized by large corporations? A. Money supply B. M1 C. Monetary policy D. Liquidity E. Time deposits
A. Money supply (Every economy has a certain amount of money in circulation at any given point in time, a quantity known as the money supply, also known as the money stock. The money supply can be measured in several ways. Economists focus on two aggregates known as M1 and M2.)
Which of the following is LEAST likely to use investment banks? A. Start-up firms B. Pension funds C. Corporations D. Financial institutions E. Governments
A. Start-up firms (Investment banks offer a variety of investing and advisory services to organizational customers, including corporations, other financial institutions, pension funds, and governments. Some also cater to wealthy individuals who meet a particular net worth threshold, but they don't provide services to the general public. Investment banks facilitate mergers, acquisitions, sales, and spin-offs of companies and underwrite initial public offerings.)
In 2006, David had a very low credit score, insufficient income, and no collateral to offer for a loan. Yet, when he applied, he was approved by YourMoney Bank for a loan to buy a house. Which of the following describes this loan? A. Subprime mortgage B. Loan-to-value ratio C. Mortgage-backed security D. Option ARM E. Adjustable rate mortgage
A. Subprime mortgage (Banks and mortgage companies helped pump up the bubble by lowering their standards for writing mortgages, in three key ways. First, in the old days, borrowers needed documented proof of sufficient income to make their loan payments, some assets to serve as collateral, and a history of responsible credit use. However, many people couldn't meet those standards, so lenders began writing more subprime mortgages, those in which the borrower didn't qualify for a regular "prime" mortgage.)
Which of the following was created to monitor systemic risks that might affect a significant portion of the economy? A. The Financial Stability Oversight Council B. The Dodd-Frank Act C. The Bureau of Consumer Financial Protection D. The Volcker Rule E. The Wall Street Reform and Consumer Protection Act of 2010
A. The Financial Stability Oversight Council (A key problem in the recent meltdown was the spread of risk from individual companies such as AIG to the rest of the financial sector and from there to the overall economy. Dodd-Frank created the Financial Stability Oversight Council to monitor for such systemic risks, those that affect a significant portion of the economy.)
Which of the following established the Federal Deposit Insurance Corporation? A. The Glass-Steagall Act of 1933 B. The Financial Service Modernization Act of 1999 C. The Federal Reserve Board D. The Federal Open Market Committee E. The automated clearing house system
A. The Glass-Steagall Act of 1933 (The Glass-Steagall Act of 1933 (which also established the FDIC) aimed to restore confidence in U.S. financial houses by restricting investment banks and commercial banks from crossing into each other's businesses and potentially abusing their fiduciary duties at the expense of customers. Another key objective of Glass-Steagall was to ensure that a catastrophic failure in one part of the financial services industry would not invade every other part.)
"The unregulated financial derivatives market created a shadow banking system that performed some of the same functions as the real banking systemlong dash—but without the checks and balances that keep a banking system from spinning out of control." Which of the following lessons BEST supports this comment? A. In every battle between economic theory and reality, reality wins. B. Leverage can be dangerous, and massive leverage can be deadly. C. Unregulated private contracts can have damaging public consequences. D. Transferring risk does not reduce or eliminate the risk—and sometimes it can even increase risk. E. Individual short-term incentives can overpower logic and collective long-term consequences.
C. Unregulated private contracts can have damaging public consequences. (The proper degree of economic regulation is an ongoing debate, but few rational people would argue that if private business dealings (such as credit default swaps) carry significant public risks, then regulators should at least pay attention.)
A(n) ______ offers variable interest rates mortgages to consumers by creating attractive introductory rates which later rise dramatically. A. subprime mortgage B. loan-to-value package C. adjustable rate mortgage D. discount rate E. mortgage-backed security
C. adjustable rate mortgage (Adjustable rate mortgages feature variable interest rates over the life of the loan. They entice borrowers with very low rates to start with, which allow for lower monthly payments for a certain amount of time before the real rates kick in.)
What is the rate that member banks charge each other when borrowing money? A. Discount rate B. Prime rate C. Subprime rate D. Federal funds rate E. Discount window rate
D. Federal funds rate (Much of the Fed's influence is exerted through the federal funds rate, which is the rate that member banks charge each other to borrow money overnight from the funds they keep in their Federal Reserve accounts.)
Which of the following is responsible for providing services such as underwriting, facilitating sales, providing risk management advice, and offering foreign currency exchange trading? A. Commercial bank B. Retail bank C. Fannie Mae D. Investment bank E. Freddie Mac
D. Investment bank (Investment banks are firms that offer a variety of services related to initial public stock offerings, mergers and acquisitions, and other investment matters.)
Investment banks with a particular geographic focus are known as what? A. Commercial B. Boutique C. Global D. Regional E. Depository institutions
D. Regional (Regional investment banks often provide the same scope of services as the global banks, only with a particular geographic focus.)
M&M Bank is chartered in Maryland and offers the following services to consumers: checking and savings accounts, debit and credit cards, and loans for homes and cars. M&M Bank can be classified as which of the following? A. Global investment bank B. National bank C. Private bank D. State bank E. Boutique investment bank
D. State bank (state banks are chartered by individual state banking regulators. M&M is chartered in Maryland, hence a state bank.)
______ was established in 2010 in order to restructure and improve the finance industry by better monitoring systematic risk, safeguarding consumers, and more effectively examining market fluctuations. A. The Bureau of Consumer Financial Protection B. The Volcker Rule C. The Glass-Steagall Act D. The Dodd-Frank Act E. The FDIC
D. The Dodd-Frank Act (In the years following the meltdown, Congress and various regulatory agencies put a high priority on instituting changes designed to prevent another calamity of this magnitude. The Dodd-Frank Act is legislation passed in 2010 aimed at reforming the banking industry and offering consumers greater protection.)
Which of the following are also called savings and loan associations? A. Investment banks B. Private banks C. Retail banks D. Thrift banks E. Merchant banks
D. Thrift banks (Thrift banks, also called "thrifts" or "savings and loan associations," offer deposit accounts and focus on offering home mortgage loans.)
Adding to the housing bubble, lenders increased which of the following to determine how much of a loan a borrower could receive based on the home's value? A. Mortgage-backed securities B. Adjustable rate mortgages C. Option ARM D. Loan-to-value ratios E. Subprime mortgages
D. Loan-to-value ratios (Banks used to have a maximum loan-to-value (LTV) ratio of 75 percent to 80 percent. That was the most they would lend, and borrowers had to come up with the rest in cash as a down payment. However, as the bubble was growing, many new loans were written with LTVs of 90 percent, 95 percent, 100 percent—even 125 percent. In other words, some borrowers were loaned more money than their houses were worth.)
ABC Toys is interested in acquiring World Toys, both of which are located in the United States. Which type of bank should ABC use for help with this acquisition? A. Commercial bank B. Thrift banks C. The Fed D. Private bank E. Boutique investment bank
E. Boutique investment bank (Boutique investment banks specialize in particular industries or specific services such as mergers and acquisitions.)
NFP Financial is a not-for-profit, member-owned cooperative that offers deposit accounts and lending services to customers and small businesses. Which of the following best describes NFP? A. Thrift banks B. Boutique investment bank C. Regional investment bank D. Private bank E. Credit union
E. Credit union (Credit unions are not-for-profit, member-owned cooperatives that offer deposit accounts and lending services to consumers and small businesses. Thrifts and credit unions do not refer to themselves as banks, but the broad definition of banking distinguishes them from investment banks.)
Which of the following help lenders review the solvency of borrowers? A. Credit unions B. Thrift banks C. Finance companies D. Independent mortgage companies E. Credit-rating agencies
E. Credit-rating agencies (Credit-rating agencies offer opinions about the creditworthiness of borrowers and of specific investments, such as corporate bonds. Before any bank or finance company will give you a loan, it will check your credit rating to judge the level of risk you represent as a borrower.
What are the two key properties that offer the practical value of money? A. A unit of accounting and a standard of deferred payment B. A unit of accounting and trust C. Store of value and a standard of deferred payment D. Store of value and medium of exchange E. Liquidity and trust
E. Liquidity and trust (The practical value of money stems from two key properties: liquidity and trust. Money is the most liquid asset because it can be exchanged easily and more or less instantly for something else of value. If you have a $20 bill to hand to the pizza delivery person, what exactly are you using as payment? A paper rectangle with a bit of ink splashed on it? The only reason the pizza seller will relinquish your dinner is because the seller trusts that the bill you're handing over in exchange represents $20 worth of real economic value.)
______ is money that is spendable now and ______ augments money that could be spendable fairly soon. A.The money supply; M1 B. Liquidity; M1 C. M2; M1 D. A time deposit; the money supply E. M1; M2
E. M1; M2 (The money supply can be measured in several ways. Economists focus on two aggregates known as "M1" and "M2." M1 consists of cash held by the public and money deposited in a variety of checking accounts. In simple terms, M1 is money that is spendable now, and M2 adds money that could be spendable fairly soon.)
Which of the following is NOT a function of money? A. Money serves as a unit of accounting. B. Money represents a store of value. C. Money is a standard of deferred payment. D. Money is a medium of exchange. E. Money serves to assign dominance in the world market.
E. Money serves to assign dominance in the world market. (Money performs four financial functions. First, it serves as a medium of exchange, a tool for simplifying transactions between buyers and sellers. Second, it serves as a unit of accounting—a measure of value, in other words—so that buyers and sellers don't have to negotiate the relative worth of dissimilar items with every transaction. Third, money serves as a temporary store of value—a way of accumulating wealth until it is needed. Fourth, money serves as a standard of deferred payment, meaning it can be used to represent debt obligations. Money does not represent world dominance.)
Which of the following is the best type of institution to use to set up a scholarship fund or other type of philanthropic giving? A.Merchant bank B.Commercial bank C. Credit union D.vInvestment bank E. Private bank
E. Private bank (Private banking refers to a range of banking services for high-net-worth (that is, wealthy) individuals and families, such as managing real estate and other investments, setting up trust funds, and planning philanthropic giving.)
A ________ is an extreme deficiency of assets within an area of the economy during which businesses are not able to obtain enough funding to meet their operating requirements. A. bubble B. foreclosure C. securitization D. credit freeze E. liquidity crisis
E. liquidity crisis (A liquidity crisis is a severe shortage of liquidity throughout a sector of the economy or the entire economy, during which companies can't get enough cash to meet their operating needs.)
