Econ 3229 Part 3 - Ch 8,9,10,11, 12

Adverse selection is a problem associated with equity and debt contracts arising from A) the lenderʹs relative lack of information about the borrowerʹs potential returns and risks of his investment activities. B) the lenderʹs inability to legally require sufficient collateral to cover a 100% loss if the borrower defaults. C) the borrowerʹs lack of incentive to seek a loan for highly risky investments. D) the lenderʹs inability to restrict the borrower from changing his behavior once given a loan.

A) the lenderʹs relative lack of information about the borrowerʹs potential returns and risks of his investment activities. (Ch. 8)

When housing prices began to decline after their peak in 2006, many subprime borrowers found that their mortgages were "underwater." This meant that A) the value of the house fell below the amount of the mortgage. B) the basement flooded since they could not afford to fix the leaky plumbing. C) the roof leaked during a rainstorm. D) the amount that they owed on their mortgage was less than the value of their house.

A) the value of the house fell below the amount of the mortgage. (Ch. 12)

Banksʹ asset portfolios include state and local government securities because A) their interest payments are tax deductible for federal income taxes. B) banks consider them helpful in attracting accounts of Federal employees. C) the Federal Reserve requires member banks to buy securities from state and local governments located within their respective Federal Reserve districts. D) there is no default-risk with state and local government securities.

A) their interest payments are tax deductible for federal income taxes (Ch. 9)

In September 2008, the Reserve Primary Fund, a money market mutual fund, found itself in the situation know as "breaking the buck." This means that A) they could no longer afford to redeem shares at the par value of $1. B) they required shareholders to contribute a dollar more in fees each month. C) shareholders were able to redeem shares for more than a $1. D) shares earned more than a dollar in interest.

A) they could no longer afford to redeem shares at the par value of $1. (Ch. 12)

Bank capital is equal to ________ minus ________. A) total assets; total liabilities B) total liabilities; total assets C) total assets; total reserves D) total liabilities; total borrowings

A) total assets; total liabilities (Ch. 9)

The Volcker Rule addresses the off-balance-sheet problem involving A) trading risks. B) selling loans. C) loan guarantees. D) interest rate risks.

A) trading risks. (Ch. 12)

The largest percentage of banksʹ holdings of securities consist of A) Treasury and government agency securities. B) tax-exempt municipal securities. C) state and local government securities. D) corporate securities.

A) treasury and government agency and securities (Ch. 9)

One financial intermediary in our financial structure that helps to reduce the moral hazard from arising from the principal-agent problem is the A) venture capital firm. B) money market mutual fund. C) pawn broker. D) savings and loan association.

A) venture capital firm (Ch. 8)

) Factors that led to worsening financial market conditions in East Asia in 1997-1998 include A) weak supervision by bank regulators. B) a rise in interest rates abroad. C) unanticipated increases in the price level. D) increased uncertainty from political shocks.

A) weak supervision by bank regulators. (Ch. 12)

Factors that led to worsening financial market conditions in East Asia in 1997-1998 include A) weak supervision by bank regulators. B) a rise in interest rates abroad. C) unanticipated increases in the price level. D) increased uncertainty from political shocks

A) weak supervision by bank regulators. (Ch. 12)

At the time of the South Korean financial crisis, the government allowed many chaebol owned finance companies to convert to merchant banks. Finance companies ________ allowed to borrow abroad and merchant banks ________. A) were not; could borrow abroad B) were not; could not borrow abroad C) were; could borrow abroad D) were; could not borrow abroad

A) were not; could borrow abroad (Ch. 12)

The problem of adverse selection helps to explain A) why firms are more likely to obtain funds from banks and other financial intermediaries, rather than from securities markets. B) why collateral is an important feature of consumer, but not business, debt contracts. C) why direct finance is more important than indirect finance as a source of business finance. D) why lenders refuse loans to individuals with high net worth.

A) why firms are more likely to obtain funds from banks and other financial intermediaries, rather than from securities markets (Ch. 8)

If a bank has $10 million of checkable deposits, a required reserve ratio of 10 percent, and it holds $2 million in reserves, then it will not have enough reserves to support a deposit outflow of A) $1.2 million. B) $1.1 million. C) $1 million. D) $900,000.

A)$1.2 million (Ch. 9)

If a bank has $200,000 of checkable deposits, a required reserve ratio of 20 percent, and it holds $80,000 in reserves, then the maximum deposit outflow it can sustain without altering its balance sheet is A) $50,000. B) $40,000. C) $30,000. D) $25,000.

A) $50,000 (Ch. 9)

In the 1950s the interest rate on three-month Treasury bills fluctuated between 1 percent and 3.5 percent; in the 1980s it fluctuated between ________ percent and ________ percent. A) 5; 15 B) 4; 11.5 C) 4; 18 D) 5; 10

A) 5; 15 (Ch. 11)

A ________ pays out cash flows from subprime mortgage-backed securities in different tranches, with the highest-rated tranch paying out first, while lower ones paid out less if there were losses on the mortgage-backed securities. A) Collateralized debt obligation (CDO) B) Adjustable-rate mortgage C) Negotiable CD D) Discount bond

A) Collateralized debt obligation (CDO) (Ch. 12)

Although the subprime mortgage market problem began in the United States, the first indication of the seriousness of the crisis began in A) Europe. B) Australia. C) China. D) South America.

A) Europe. (Ch. 12)

A venture capital firm protects its equity investment from moral hazard through which of the following means? A) It places people on the board of directors to better monitor the borrowing firmʹs activities. B) It writes contracts that prohibit the sale of an equity investment to the venture capital firm. C) It prohibits the borrowing firm from replacing its management. D) It requires a 50% stake in the company.

A) It places people on the board of directors to better monitor the borrowing firmʹs activities (Ch. 8)

Which investment bank filed for bankruptcy on September 15, 2008 making it the largest bankruptcy filing in U.S. history? A) Lehman Brothers B) Merrill Lynch C) Bear Stearns D) Goldman Sachs

A) Lehman Brothers (Ch. 12)

With regard to external sources of financing for nonfinancial businesses in the United States, which of the following are accurate statements? A) Marketable securities account for a larger share of external business financing in the United States than in most other countries. B) Since 1970, most of the newly issued corporate bonds and commercial paper have been sold directly to American households. C) Direct finance accounts for more than 50 percent of the external financing of American businesses. D) Smaller businesses almost always raise funds by issuing marketable securities.

A) Marketable securities account for a larger share of external business financing in the United States than in most other countries (Ch. 8)

) In recent years, a number of developing and transition countries have experienced financial crises, the most dramatic of which was the A) Mexican crisis of 1994-1995. B) Mexican crisis of 1988-1989. C) Argentina crisis of 1995-1996. D) Brazilian crisis of 1996-1997

A) Mexican crisis of 1994-1995. (Ch. 12)

In 1977, he pioneered the concept of selling new public issues of junk bonds for companies that had not yet achieved investment-grade status. A) Michael Milken B) Roger Milliken C) Ivan Boskey D) Carl Ichan

A) Michael Milken (Ch. 11)

To eliminate the abuses of the state-chartered banks, the ________ created a new banking system of federally chartered banks, supervised by the ________. A) National Bank Act of 1863; Office of the Comptroller of the Currency B) Federal Reserve Act of 1863; Office of the Comptroller of the Currency C) National Bank Act of 1863; Office of Thrift Supervision D) Federal Reserve Act of 1863; Office of Thrift Supervision

A) National Bank Act of 1863; Office of the Comptroller of the Currency (Ch. 11)

________ is a process of bundling together smaller loans (like mortgages) into standard debt securities. A) Securitization B) Origination C) Debt deflation D) Distribution

A) Securitization (Ch. 12)

Which of the following is not one of the eight basic puzzles about financial structure? A) Stocks are the most important source of finance for American businesses. B) Issuing marketable securities is not the primary way businesses finance their operations. C) Indirect finance, which involves the activities of financial intermediaries, is many times more important than direct finance, in which businesses raise funds directly from lenders in financial markets. D) Banks are the most important source of external funds to finance businesses.

A) Stocks are the most important source of finance for American businesses (Ch. 8)

A bank failure occurs whenever A) a bank cannot satisfy its obligations to pay its depositors and have enough reserves to meet its reserve requirements. B) a bank suffers a large deposit outflow. C) a bank has to call in a large volume of loans. D) a bank is not allowed to borrow from the Fed.

A) a bank cannot satisfy its obligations to pay its depositors and have enough reserves to meet its reserve requirements. (Ch. 9)

A serious consequence of a financial crisis is A) a contraction in economic activity B) an increase in asset prices C) financial engineering D) financial globalization

A) a contraction in economic activity (Ch. 12)

A serious consequence of a financial crisis is A) a contraction in economic activity. B) an increase in asset prices. C) financial engineering. D) financial globalization

A) a contraction in economic activity. (Ch. 12)

When financial intermediaries deleverage, firms cannot fund investment opportunities resulting in A) a contraction of economic activity. B) an economic boom. C) an increased opportunity for growth. D) a call for government regulation

A) a contraction of economic activity. (Ch. 12)

Deposit insurance has not worked well in countries with A) a weak institutional environment. B) strong supervision and regulation. C) a tradition of the rule of law. D) few opportunities for corruption.

A) a weak institutional environment. (Ch. 10)

The problem created by asymmetric information before the transaction occurs is called ________, while the problem created after the transaction occurs is called ________. A) adverse selection; moral hazard B) moral hazard; adverse selection C) costly state verification; free-riding D) free-riding; costly state verification

A) adverse selection; moral hazard (Ch. 8)

At the time of the South Korean financial crisis, the merchant banks were A) almost virtually unregulated. B) subject to heavy government regulation. C) engaged in long-term lending to the corporate sector. D) restricted to long-term foreign borrowing

A) almost virtually unregulated. (Ch. 12)

The government safety net creates ________ problem because risk -loving entrepreneurs might find banking an attractive industry. A) an adverse selection B) a moral hazard C) a lemons D) a revenue

A) an adverse selection (Ch. 10)

Debt deflation occurs when A) an economic downturn causes the price level to fall and a deterioration in firms' net worth because of the increased burden of indebtedness. B) rising interest rates worsen adverse selection and moral hazard problems. C) lenders reduce their lending due to declining stock prices (equity deflation) that lowers the value of collateral. D) corporations pay back their loans before the scheduled maturity date.

A) an economic downturn causes the price level to fall and a deterioration in firms' net worth because of the increased burden of indebtedness. (Ch. 12)

Debt deflation occurs when A) an economic downturn causes the price level to fall and a deterioration in firmsʹ net worth because of the increased burden of indebtedness. B) rising interest rates worsen adverse selection and moral hazard problems. C) lenders reduce their lending due to declining stock prices (equity deflation) that lowers the value of collateral. D) corporations pay back their loans before the scheduled maturity date.

A) an economic downturn causes the price level to fall and a deterioration in firmsʹ net worth because of the increased burden of indebtedness. (Ch. 12)

Debt contracts A) are agreements by the borrowers to pay the lenders fixed dollar amounts at periodic intervals. B) have a higher cost of state verification than equity contracts.. C) are used less frequently to raise capital than are equity contracts. D) never result in a loss for the lender

A) are agreements by the borrowers to pay the lenders fixed dollar amounts at periodic intervals (Ch. 8)

Equity contracts A) are claims to a share in the profits and assets of a business. B) have the advantage over debt contracts of a lower costly state verification. C) are used much more frequently to raise capital than are debt contracts. D) are not subject to the moral hazard problem.

A) are claims to a share in the profits and asserts of a business (Ch. 8)

The existence of deposit insurance can increase the likelihood that depositors will need deposit protection, as banks with deposit insurance A) are likely to take on greater risks than they otherwise would. B) are likely to be too conservative, reducing the probability of turning a profit. C) are likely to regard deposits as an unattractive source of funds due to depositorsʹ demands for safety. D) are placed at a competitive disadvantage in acquiring funds.

A) are likely to take on greater risks than they otherwise would. (Ch. 10)

Bank managers look on reserve requirements A) as a tax on deposits. B) as a subsidy on deposits. C) as a subsidy on loans. D) as a tax on loans.

A) as a tax on deposits. (Ch. 11)

A possible sequence for the three stages of a financial crisis in an advanced economy might be ________ leads to ________ leads to ________. A) asset price declines; banking crises; unanticipated decline in price level B) unanticipated decline in price level; banking crises; increase in interest rates C) banking crises; increase in interest rates; unanticipated decline in price level D) banking crises; increase in uncertainty; increase in interest rates

A) asset price declines; banking crises; unanticipated decline in price level (Ch. 12)

A credit boom can lead to a(n) ________ such as we saw in the tech stock market in the late 1990s. A) asset-price bubble B) liability war C) decline in lending D) decrease in moral hazard

A) asset-price bubble (Ch. 12)

When asset prices rise above their fundamental economic values, a(n) __________ occurs. A) asset-price bubble B) liability war C) decline in lending D) decrease in moral hazaard

A) asset-price bubble (Ch. 12)

A system of deposit insurance A) attracts risk-taking entrepreneurs into the banking industry. B) encourages bank managers to decrease risk. C) increases the incentives of depositors to monitor the riskiness of their bankʹs asset portfolio. D) increases the likelihood of bank runs.

A) attracts risk-taking entrepreneurs into the banking industry. (Ch. 10)

American businesses get their external funds primarily from A) bank loans. B) bonds and commercial paper issues. C) stock issues. D) other loans.

A) bank loans (Ch. 8)

Depositors lack of information about the quality of bank assets can lead to ________. A) bank panics B) bank booms C) sequencing D) asset transformation

A) bank panics (Ch. 10)

If uncertainty about banks' health causes depositors to begin to withdraw their funds from banks, the country experiences a(n) A) banking panic. B) financial recovery. C) reduction of the adverse selection and moral hazard problems. D) increase in information available to investors.

A) banking panic (Ch. 12)

Which of the following statements most accurately describes the task of bank asset management? A) Banks seek the highest returns possible subject to minimizing risk and making adequate provisions for liquidity. B) Banks seek to have the highest liquidity possible subject to earning a positive rate of return on their operations. C) Banks seek to prevent bank failure at all cost; since a failed bank earns no profit, liquidity needs supersede the desire for profits. D) Banks seek to acquire funds in the least costly way.

A) banks seek the highest returns possible subject to minimizing risk and making adequate provisions for liquidity (Ch. 9)

Although restrictive covenants can potentially reduce moral hazard, a problem with restrictive covenants is that A) borrowers may find loopholes that make the covenants ineffective. B) they are inexpensive to monitor and enforce. C) too many resources may be devoted to monitoring and enforcing them, as debtholders duplicate othersʹ monitoring and enforcement efforts. D) they reduce the value of the debt contract.

A) borrowers may find loopholes that make the covenants ineffective. (Ch. 8)

Regulations that reduce competition between banks include A) branching restrictions. B) bank reserve requirements. C) the dual system of granting bank charters. D) interest-rate ceilings.

A) branching restrictions. (Ch. 10)

Banks are required to file ________ usually quarterly that list information on the bankʹs assets and liabilities, income and dividends, and so forth. A) call reports B) balance reports C) regulatory sheets D) examiner updates

A) call reports (Ch. 10)

Holding all else constant, when a bank receives the funds for a deposited check, A) cash items in the process of collection fall by the amount of the check. B) bank assets increase by the amount of the check. C) bank liabilities decrease by the amount of the check. D) bank reserves increase by the amount of required reserves.

A) cash items in the process of collection fall by the amount of the check (Ch. 9)

The government institution that has responsibility for the amount of money and credit supplied in the economy as a whole is the A) central bank. B) commercial bank. C) bank of settlement. D) monetary fund.

A) central bank (Ch. 11)

Which of the following statements are true? A) Checkable deposits are payable on demand. B) Checkable deposits do not include NOW accounts. C) Checkable deposits are the primary source of bank funds. D) Demand deposits are checkable deposits that pay interest.

A) checkable deposits are payable on demand (Ch. 9)

Property that is pledged to the lender in the event that a borrower cannot make his or her debt payment is called A) collateral. B) points. C) interest. D) good faith money.

A) collateral (Ch. 8)

Equity contracts account for a small fraction of external funds raised by American businesses because A) costly state verification makes the equity contract less desirable than the debt contract. B) of the reduced scope for moral hazard problems under equity contracts, as compared to debt contracts. C) equity contracts do not permit borrowing firms to raise additional funds by issuing debt. D) there is no moral hazard problem when using a debt contract

A) costly state verification makes the equity contract less desirable than the debt contract (Ch. 8)

When financial institutions go on a lending spree and expand their lending at a rapid pace they are participating in a A) credit boom B) credit bust C) deleveraging D) market race

A) credit boom (Ch. 12)

The economy recovers quickly from most recessions, but the increase in adverse selection and moral hazard problems in the credit markets caused by ________ led to the severe economic contraction known as The Great Depression. A) debt deflation B) illiquidity C) an improvement in banks' balance sheets D) increases in bond prices

A) debt deflation (Ch. 12)

A substantial decrease in the aggregate price level that reduces firms' net worth may stall a recovery from a recession. This process is called A) debt deflation. B) moral hazard. C) insolvency. D) illiquidity

A) debt deflation. (Ch. 12)

A substantial decrease in the aggregate price level that reduces firmsʹ net worth may stall a recovery from a recession. This process is called A) debt deflation. B) moral hazard. C) insolvency. D) illiquidity.

A) debt deflation. (Ch. 12)

One factor contributing to the decline in cost advantages that banks once had is the A) decline in the importance of checkable deposits from over 60 percent of banksʹ liabilities to under 15 percent today. B) decline in the importance of savings deposits from over 60 percent of banksʹ liabilities to under 15 percent today. C) decline in the importance of checkable deposits from over 40 percent of banksʹ liabilities to under 15 percent today. D) decline in the importance of savings deposits from over 40 percent of banksʹ liabilities to under 20 percent today.

A) decline in the importance of checkable deposits from over 60 percent of banksʹ liabilities to under 15 percent today. (Ch. 11)

When the value of loans begins to drop, the net worth of financial institutions falls causing them to cut back on lending in a process called A) deleveraging B) releveraging C) capitulation D) deflation

A) deleveraging (Ch. 12)

If a bank has excess reserves greater than the amount of a deposit outflow, the outflow will result in equal reductions in A) deposits and reserves. B) deposits and loans. C) capital and reserves. D) capital and loans.

A) deposits and reserves (Ch. 9)

The two key factors that trigger speculative attacks on emerging market currencies are A) deterioration in bank balance sheets and severe fiscal imbalances. B) deterioration in bank balance sheets and low interest rates abroad. C) low interest rates abroad and severe fiscal imbalances. D) low interest rates abroad and rising asset prices

A) deterioration in bank balance sheets and severe fiscal imbalances. (Ch. 12)

Which of the following are reported as liabilities on a bankʹs balance sheet? A) Discount loans B) Reserves C) U.S. Treasury securities D) Loans

A) discount loans (Ch. 9)

Competition between banks A) encourages greater risk taking. B) encourages conservative bank management. C) increases bank profitability. D) eliminates the need for government regulation.

A) encourages greater risk taking. (Ch. 10)

Financial intermediaries develop ________ in things such as computer technology which allows them to lower transactions costs. A) expertise B) diversification C) regulations D) equity

A) expertise (Ch. 8)

That only large, well-established corporations have access to securities markets A) explains why indirect finance is such an important source of external funds for businesses. B) can be explained by the problem of moral hazard. C) can be explained by government regulations that prohibit small firms from acquiring funds in securities markets. D) explains why newer and smaller corporations rely so heavily on the new issues market for funds.

A) explains why indirect finance is such an important source of external funds for businesses (Ch. 8)

A major disruption in financial markets characterized by sharp declines in asset prices and firm failures is called a A) financial crisis B) fiscal imbalance C) free-rider problem D) "lemons" problem

A) financial crisis (Ch. 12)

________ is the process of researching and developing profitable new products and services by financial institutions. A) Financial engineering B) Financial manipulation C) Customer manipulation D) Customer engineering

A) financial engineering (Ch. 11)

Factors likely to cause a financial crisis in emerging market countries include A) fiscal imbalances. B) decreases in foreign interest rates. C) a foreign exchange crisis. D) too strong oversight of the financial industry

A) fiscal imbalances. (Ch. 12)

The ________ problem helps to explain why the private production and sale of information cannot eliminate ________. A) free-rider; adverse selection B) free-rider; moral hazard C) principal-agent; adverse selection D) principal-agent; moral hazard

A) free-ride; adverse selection (Ch. 8)

Money market mutual funds A) function as interest-earning checking accounts. B) are legally deposits. C) are subject to reserve requirements. D) have an interest-rate ceiling.

A) function as interest-earning checking accounts. (Ch. 11)

Since 1974, commercial banksʹ importance as a source of funds for nonfinancial borrowers A) has shrunk dramatically, from around 40 percent of total credit advanced to below 30 percent by 2005. B) has shrunk dramatically, from around 70 percent of total credit advanced to below 50 percent by 2005. C) has expanded dramatically, from around 50 percent of total credit advanced to above 70 percent by 2005. D) has expanded dramatically, from around 30 percent of total credit advanced to above 50 percent by 2005.

A) has shrunk dramatically, from around 40 percent of total credit advanced to below 30 percent by 2005 (Ch. 11)

Analysis of adverse selection indicates that financial intermediaries, especially banks, A) have advantages in overcoming the free-rider problem, helping to explain why indirect finance is a more important source of business finance than is direct finance. B) despite their success in overcoming free-rider problems, nevertheless play a minor role in moving funds to corporations. C) provide better-known and larger corporations a higher percentage of their external funds than they do to newer and smaller corporations which rely to a greater extent on the new issues market for funds. D) must buy securities from corporations to diversify the risk that results from holding non-tradable loans.

A) have advantages in overcoming the free-rider problem, helping to explain why indirect finance is a more important source of business finance than is direct finance (Ch. 8)

Sweep accounts A) have made reserve requirements nonbonding for many banks. B) sweep funds out of deposit accounts into long-term securities. C) enable banks to avoid paying interest to corporate customers. D) reduce banksʹ assets.

A) have made reserve requirements nonbonding for many banks. (Ch. 11)

Most U.S. financial crises have started during periods of ________ either after the start of a recession or a stock market crash. A) high uncertainty B) low interest rates C) low asset prices D) high financial regulation

A) high uncertainty (Ch. 12)

A sharp depreciation of the domestic currency after a currency crisis leads to A) higher inflation. B) lower import prices. C) lower interest rates. D) decrease in the value of foreign currency-denominated liabilities higher inflation

A) higher inflation (Ch. 12)

Agency problems in the subprime mortgage market included all of the following EXCEPT A) homeowners could refinance their houses with larger loans when their homes appreciated in value. B) mortgage originators had little incentives to make sure that the mortgagee is a good credit risk. C) underwriters of mortgage-backed securities had weak incentives to make sure that the holders of the securities would be paid back. D) the evaluators of securities, the credit rating agencies, were subject to conflicts of interest.

A) homeowners could refinance their houses with larger loans when their homes appreciated in value. (Ch. 12)

Agency problems in the subprime mortgage market included all of the following except A) homeowners could refinance their houses with larger loans when their homes appreciated in value. B) mortgage originators had little incentives to make sure that the mortgage is a good credit risk. C) underwriters of mortgage-backed securities had weak incentives to make sure that the holders of the securities would be paid back. D) the evaluators of securities, the credit rating agencies, were subject to conflicts of interest.

A) homeowners could refinance their houses with larger loans when their homes appreciated in value. (Ch. 12)

A debt contract is incentive compatible A) if the borrower has the incentive to behave in the way that the lender expects and desires, since doing otherwise jeopardizes the borrowerʹs net worth in the business. B) if the borrowerʹs net worth is sufficiently low so that the lenderʹs risk of moral hazard is significantly reduced. C) if the debt contract is treated like an equity. D) if the lender has the incentive to behave in the way that the borrower expects and desires.

A) if the borrower has the incentive to behave in the way that the lender expects and desires, since doing otherwise jeopardizes the borrowerʹs net worth in the business. (Ch. 8)

Which of the following has not resulted from more active liability management on the part of banks? A) Increased bank holdings of cash items B) Aggressive targeting of goals for asset growth by banks C) Increased use of negotiable CDs to raise funds D) An increased proportion of bank assets held in loans

A) increase bank holding of cash items (Ch. 9)

When a new depositor opens a checking account at the First National Bank, the bankʹs assets ________ and its liabilities ________. A) increase; increase B) increase; decrease C) decrease; increase D) decrease; decrease

A) increase; increase

The economic hardship resulting from a financial crises is severe, however, there are also social consequences such as A) increased crime. B) difficulty getting a loan. C) currency devaluations. D) loss of output increased crime

A) increased crime. (Ch. 12)

Modern liability management has resulted in A) increased sales of certificates of deposits to raise funds. B) increase importance of deposits as a source of funds. C) reduced borrowing by banks in the overnight loan market. D) failure by banks to coordinate management of assets and liabilities.

A) increased sales of certificates of deposits to raise funds (Ch. 9)

A 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) decreases; adverse selection D) increases; adverse selection

A) increases; moral hazard (Ch. 10)

Disintermediation resulted from A) interest rate ceilings combine with inflation-driven increases in interest rates. B) elimination of Regulation Q (the regulation imposing interest rate ceilings on bank deposits). C) increases in federal income taxes. D) reserve requirements.

A) interest rate ceilings combine with inflation-driven increases in interest rates. (Ch. 11)

Severe fiscal imbalances can directly trigger a currency crisis since A) investors fear that the government may not be able to pay back the debt and so begin to sell domestic currency. B) the government may stop printing money. C) the government may have to cut back on spending. D) the currency must surely increase in value

A) investors fear that the government may not be able to pay back the debt and so begin to sell domestic currency. (Ch. 12)

A bank is insolvent when A) its liabilities exceed its assets. B) its assets exceed its liabilities. C) its capital exceeds its liabilities. D) its assets increase in value.

A) its liabilities exceed its assets (Ch. 9)

So-called fallen angels differ from junk bonds in that A) junk bonds refer to newly issued bonds with low credit ratings, whereas fallen angels refer to previously bonds that have had their credit ratings fall below Baa. B) junk bonds refer to previously bonds that have had their credit ratings fall below Baa, whereas fallen angels refer to newly issued bonds with low credit ratings. C) junk bonds have ratings below Baa, whereas fallen angels have ratings below C. D) fallen angels have ratings below Baa, whereas junk bonds have ratings below C.

A) junk bonds refer to newly issued bonds with low credit ratings, whereas fallen angels refer to previously bonds that have had their credit ratings fall below Baa. (Ch. 11)

Banks engage in regulatory arbitrage by A) keeping high-risk assets on their books while removing low-risk assets with the same capital requirement. B) keeping low-risk assets on their books while removing high-risk assets with the same capital requirement. C) hiding risky assets from regulators. D) buying risky assets from arbitrageurs.

A) keeping high-risk assets on their books while removing low-risk assets with the same capital requirement. (Ch. 10)

Government regulations designed to reduce the moral hazard problem include A) laws that force firms to adhere to standard accounting principles. B) light sentences for those who commit the fraud of hiding and stealing profits. C) state verification subsidies. D) state licensing restrictions.

A) laws that force firms to adhere to standard accounting principles (Ch. 8)

Regulators attempt to reduce the riskiness of banksʹ asset portfolios by A) limiting the amount of loans in particular categories or to individual borrowers. B) encouraging banks to hold risky assets such as common stocks. C) establishing a minimum interest rate floor that banks can earn on certain assets. D) requiring collateral for all loans.

A) limiting the amount of loans in particular categories or to individual borrowers. (Ch. 10)

Examples of off-balance-sheet activities include A) loan sales. B) extending loans to depositors. C) borrowing from other banks. D) selling negotiable CDs.

A) loan sales (Ch. 9)

A firm issuing credit cards earns income from A) loans it makes to credit card holders. B) subsidies from the local governments. C) payments made to it by manufacturers of the products sold in stores on credit card purchases. D) sales of the card in foreign countries.

A) loans it makes to credit card holders. (Ch. 11)

Which of the following are primary concerns of the bank manager? A) Maintaining sufficient reserves to minimize the cost to the bank of deposit outflows B) Extending loans to borrowers who will pay low interest rates, but who are poor credit risks C) Acquiring funds at a relatively high cost, so that profitable lending opportunities can be realized D) Maintaining high levels of capital and thus maximizing the returns to the owners.

A) maintaining sufficient reserves to minimizes the cost to the bank of deposit outflows (Ch. 9)

Financial crises generally develop along two basic paths: A) mismanagement of financial liberalization/globalization and severe fiscal imbalances. B) stock market declines and severe fiscal imbalances. C) mismanagement of financial liberalization/globalization and stock market declines. D) stock market declines and unanticipated declines in the value of the domestic currency

A) mismanagement of financial liberalization/globalization and severe fiscal imbalances. (Ch. 12)

For restrictive covenants to help reduce the moral hazard problem they must be ________ by the lender. A) monitored and enforced B) written in all capitals C) easily changed D) impossible to remove

A) monitored and enforced (Ch. 8)

When one party to a transaction has incentives to engage in activities detrimental to the other party, there exists a problem of A) moral hazard. B) split incentives. C) ex ante shirking. D) pre-contractual opportunism.

A) moral hazard. (Ch. 10)

In emerging market countries, the deterioration in bank's balance sheets has more ________ effects on lending and economic activity than in advanced countries. A) negative B) positive C) affirming D) advancing

A) negative (Ch. 12)

Commercial and farm mortgages, in which property is pledged as collateral, account for A) one-quarter of borrowing by nonfinancial businesses. B) one-half of borrowing by nonfinancial businesses. C) one-twentieth of borrowing by nonfinancial businesses. D) two-thirds of borrowing by nonfinancial businesses.

A) one-quarter of borrowing by nonfinancial businesses (Ch. 8)

The Second Bank of the United States was denied a new charter by A) President Andrew Jackson. B) Vice President John Calhoun. C) President Benjamin Harrison. D) President John Q. Adams

A) president Andrew Jackson (Ch. 11)

The originate-to-distribute business model has a serious ________ problem since the mortgage broker has little incentive to make sure that the mortgagee is a good credit risk. A) principal-agent B) debt deflation C) democratization of credit D) collateralized debt

A) principal-agent (Ch. 12)

Moral hazard in equity contracts is known as the ________ problem because the manager of the firm has fewer incentives to maximize profits than the stockholders might ideally prefer. A) principal-agent B) adverse selection C) free-rider D) debt deflation

A) principal-agent (Ch. 8)

Traders working for banks are subject to the A) principal-agent problem. B) free-rider problem. C) double-jeopardy problem. D) exchange-risk problem.

A) principal-agent problem (Ch. 9)

The mismanagement of financial liberalization in emerging market countries can be understood as a severe A) principal/agent problem. B) asymmetric information problem. C) lemons problem. D) free-rider problem

A) principal/agent problem. (Ch. 12)

Credit cards date back to A) prior to the second World War. B) just after the second World War. C) the early 1950s. D) the late 1950s.

A) prior to the second World War. (Ch. 11)

Financial innovations occur because of financial institutions search for ________. A) profits B) fame C) stability D) recognition

A) profits (Ch. 11)

Moral hazard is an important concern of insurance arrangements because the existence of insurance A) provides increased incentives for risk taking. B) is a hindrance to efficient risk taking. C) causes the private cost of the insured activity to increase. D) creates an adverse selection problem but no moral hazard problem.

A) provides increased incentives for risk taking. (Ch. 10)

Overseeing who operates banks and how they are operated is called ________. A) prudential supervision B) hazard insurance C) regulatory interference D) loan loss reserves

A) prudential supervision (Ch. 10)

Consumer protection legislation includes legislation to A) reduce discrimination in credit markets. B) require banks to make loans to everyone who applies. C) reduce the amount of interest that bankʹs can charge on loans. D) require banks to make periodic reports to the Better Business Bureau.

A) reduce discrimination in credit markets. (Ch. 10)

A $5 million deposit outflow from a bank has the immediate effect of A) reducing deposits and reserves by $5 million. B) reducing deposits and loans by $5 million. C) reducing deposits and securities by $5 million. D) reducing deposits and capital by $5 million.

A) reducing deposits and reserves by $5 million (Ch. 9)

Acquiring information on a bankʹs activities in order to determine a bankʹs risk is difficult for depositors and is another argument for government ________. A) regulation B) ownership C) recall D) forbearance

A) regulation (Ch. 10)

In emerging market countries, many firms have debt denominated in foreign currency like the dollar or yen. A depreciation of the domestic currency A) results in increases in the firm's indebtedness in domestic currency terms, even though the value of their assets remains unchanged. B) results in an increase in the value of the firm's assets. C) means that the firm does not owe as much on their foreign debt. D) strengthens their balance sheet in terms of the domestic currency.

A) results in increases in the firm's indebtedness in domestic currency terms, even though the value of their assets remains unchanged. (Ch. 12)

Net profit after taxes per dollar of assets is a basic measure of bank profitability called A) return on assets. B) return on capital. C) return on equity. D) return on investment.

A) return on assets (Ch. 9)

Factors that led to worsening conditions in Mexicoʹs 1994-1995 financial markets, but did not lead to worsening financial market conditions in East Asia in 1997-1998 include A) rise in interest rates abroad. B) bankersʹ lack of expertise in screening and monitoring borrowers. C) deterioration of banksʹ balance sheets because of increasing loan losses. D) stock market decline.

A) rise in interest rates abroad. (Ch. 12)

Factors that led to worsening conditions in Mexico's 1994-1995 financial markets, but did not lead to worsening financial market conditions in East Asia in 1997-1998 include A) rise in interest rates abroad. B) bankers' lack of expertise in screening and monitoring borrowers. C) deterioration of banks' balance sheets because of increasing loan losses. D) stock market decline

A) rise in interest rates abroad. (Ch. 12)

The chartering process is similar to ________ potential borrowers and the restriction of risk assets by regulators is similar to ________ in private financial markets. A) screening; restrictive covenants B) screening; branching restrictions C) identifying; branching restrictions D) identifying; credit rationing

A) screening; restrictive covenants (Ch. 10)

The process of transforming otherwise illiquid financial assets into marketable capital market instruments is know as A) securitization. B) internationalization. C) arbitrage. D) program trading.

A) securitization. (Ch. 11)

Mortgage brokers often did not make a strong effort to evaluate whether the borrower could pay off the loan. This created a A) severe adverse selection problem. B) decline in mortgage applications. C) call to deregulate the industry. D) decrease in the demand for houses.

A) severe adverse selection problem. (Ch. 12)

Factors likely to cause a financial crisis in emerging market countries include A) severe fiscal imbalances. B) decreases in foreign interest rates. C) a foreign exchange crisis. D) too strong oversight of the financial industry

A) severe fiscal imbalances. (Ch. 12)

The increased integration of financial markets across countries and the need to make the playing field equal for banks from different countries led to the Basel agreement in June 1988 to A) standardize bank capital requirements internationally. B) reduce, across the board, bank capital requirements in all countries. C) sever the link between risk and capital requirements. D) eliminate bank capital requirements.

A) standardize bank capital requirements internationally. B) reduce, across the board, bank capital requirements in all countries. (Ch. 10)

Adverse selection and moral hazard problems increased in magnitude during the early years of the Great Depression as A) stock prices declined to 10% of their level in 1929. B) banks recovered slowly. C) the aggregate price level rose. D) banks saw more lending opportunities.

A) stock prices declined to 10% of their level in 1929. (Ch. 12)

When banks calculate the losses the institution would incur if an unusual combination of bad events happened, the bank is using the ________ approach. A) stress-test B) value-at-risk C) trading-loss D) maximum value

A) stress-test (Ch. 9)

Banks responded to disintermediation by A) supporting the elimination of interest rate regulations, enabling them to better compete for funds. B) opposing the elimination of interest rate regulations, as this would increase their cost of funds. C) demanding that interest rate regulations be imposed on money market mutual funds. D) supporting the elimination of interest rate regulations, as this would reduce their cost of funds.

A) supporting the elimination of interest rate regulations, enabling them to better compete for funds. (Ch. 11)

In this type of arrangement, any balances above a certain amount in a corporationʹs checking account at the end of the business day are ʺremovedʺ and invested in overnight securities that pay the corporation interest. This innovation is referred to as a A) sweep account. B) share draft account. C) removed-repo account. D) stockman account.

A) sweep account. (Ch. 11)

Although the FDIC was created to prevent bank failures, its existence encourages banks to A) take too much risk. B) hold too much capital. C) open too many branches. D) buy too much stock.

A) take too much risk. (Ch. 10)

The federal agencies that examine banks include A) the Federal Reserve System. B) the Internal Revenue Service. C) the SEC. D) the U.S. Treasury.

A) the Federal Reserve System. (Ch. 10)

As a result of the global financial crisis several of the large, free-standing investment banking firms chose to become bank holding companies. This means that they will now be regulated by A) the Federal Reserve. B) the FDIC. C) the state banking authorities. D) the Treasury.

A) the Federal Reserve. (Ch. 12)

When $1 million is deposited at a bank, the required reserve ratio is 20 percent, and the bank chooses not to make any loans but to hold excess reserves instead, then, in the bankʹs final balance sheet, A) the assets at the bank increase by $1 million. B) the liabilities of the bank decrease by $1 million. C) reserves increase by $200,000. D) liabilities increase by $200,000.

A) the assets at the bank increase by $1 million (Ch. 9)

Probably the most significant factor explaining the drastic drop in the number of bank failures since the Great Depression has been A) the creation of the FDIC. B) rapid economic growth since 1941. C) the employment of new procedures by the Federal Reserve. D) better bank management.

A) the creation of the FDIC (Ch. 11)

A key finding of the economic analysis of financial structure is that A) the existence of the free-rider problem for traded securities helps to explain why banks play a predominant role in financing the activities of businesses. B) while free-rider problems limit the extent to which securities markets finance some business activities, nevertheless the majority of funds going to businesses are channeled through securities markets. C) given the great extent to which securities markets are regulated, free-rider problems are not of significant economic consequence in these markets. D) economists do not have a very good explanation for why securities markets are so heavily regulated.

A) the existence of the free-rider problem for traded securities helps to explain why banks play a predominant role in financing the activities of businesses. (Ch. 8)

If a bank has $100,000 of checkable deposits, a required reserve ratio of 20 percent, and it holds $40,000 in reserves, then the maximum deposit outflow it can sustain without altering its balance sheet is A) $30,000. B) $25,000. C) $20,000. D) $10,000.

B) $25,000 (Ch. 9)

If a borrower takes out a $200 million loan in a repo agreement and is asked to post $220 million of mortgage-backed securities as collateral, the "haircut" is A) 5%. B) 10%. C) 20%. D) 50%.

B) 10%. (Ch. 12)

Of the sources of external funds for nonfinancial businesses in the United States, stocks account for approximately ________ of the total. A) 2% B) 11% C) 20% D) 40%

B) 11% (Ch. 8)

One factor contributing to the decline in income advantages that banks once had is the increased competition from the commercial paper market which has grown from ________ percent of commercial and industrial bank loans to over ________ percent today. A) 10; 20 B) 5; 13 C) 10; 40 D) 5; 40

B) 5; 13 (Ch. 11)

The Basel Accord requires banks to hold as capital an amount that is at least ________ of their risk-weighted assets. A) 10% B) 8% C) 5% D) 3%

B) 8% (Ch. 10)

The modern commercial banking system began in America when the A) Bank of United States was chartered in New York in 1801. B) Bank of North America was chartered in Philadelphia in 1782. C) Bank of United States was chartered in Philadelphia in 1801. D) Bank of North America was chartered in New York in 1782.

B) Bank of North America was chartered in Philadelphia in 1782. (Ch. 11)

If the anatomy of a financial crisis is thought of as a sequence of events, which of the following events would be least likely to be the initiating cause of the financial crisis? A) Increase in interest rates B) Bank panic C) Stock market decline D) Increase in uncertainty

B) Bank panic (Ch. 12)

State banks that are not members of the Federal Reserve System are most likely to be examined by the A) Federal Reserve System. B) FDIC. C) FHLBS. D) Comptroller of the Currency.

B) FDIC (Ch. 11)

Which of the following is not one of the eight basic puzzles about financial structure? A) The financial system is among the most heavily regulated sectors of the economy. B) Issuing marketable securities is the primary way businesses finance their operations. C) Indirect finance, which involves the activities of financial intermediaries, is many times more important than direct finance, in which businesses raise funds directly from lenders in financial markets. D) Banks are the most important source of external funds to finance businesses.

B) Issuing marketable securities is the primary way businesses finance their operations (Ch. 8)

Which of the following statements concerning external sources of financing for nonfinancial businesses in the United States are true? A) Stocks are a far more important source of finance than are bonds. B) Stocks and bonds, combined, supply less than one-half of the external funds. C) Financial intermediaries such as banks are the least important source of external funds for businesses. D) Since 1970, more than half of the new issues of stock have been sold to American households.

B) Stocks and bonds, combined, supply less than one-half of the external funds (Ch. 8)

Which of the following statements concerning bank regulation in the United States are true? A) The Office of the Comptroller of the Currency has the primary responsibility for state banks that are members of the Federal Reserve System. B) The Federal Reserve and the state banking authorities jointly have responsibility for the 1000 state banks that are members of the Federal Reserve System. C) The Office of the Comptroller of the Currency has sole regulatory responsibility over bank holding companies. D) The state banking authorities have sole regulatory responsibility for all state banks.

B) The Federal Reserve and the state banking authorities jointly have responsibility for the 1000 state banks that are members of the Federal Reserve System. (Ch. 11)

Most major financial crises in the United States have begun with A) a sharp decline in interest rates. B) a sharp stock market decline. C) a sharp decline in bond values. D) a strong improvement in banksʹ balance sheets

B) a sharp stock market decline. (Ch. 12)

Both ________ and ________ were financial innovations that occurred because of interest rate risk volatility. A) adjustable-rate mortgages; commercial paper B) adjustable-rate mortgages; financial derivatives C) sweep accounts; financial derivatives D) sweep accounts; commercial paper

B) adjustable-rate mortgages; financial derivatives (Ch. 11)

Regular bank examinations and restrictions on asset holdings 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) moral hazard B) adverse selection C) ex post shirking D) post-contractual opportunism.

B) adverse selection (Ch. 10)

If bad credit risks are the ones who most actively seek loans and, therefore, receive them from financial intermediaries, then financial intermediaries face the problem of A) moral hazard. B) adverse selection. C) free-riding. D) costly state verification

B) adverse selection (Ch. 8)

When bad drivers line up to purchase collision insurance, automobile insurers are subject to the A) moral hazard problem. B) adverse selection problem. C) assigned risk problem. D) ill queue problem.

B) adverse selection problem (Ch. 10)

The chartering process is especially designed to deal with the ________ problem, and regular bank examinations help to reduce the ________ problem. A) adverse selection; adverse selection B) adverse selection; moral hazard C) moral hazard; adverse selection D) moral hazard; moral hazard

B) adverse selection; moral hazard (Ch. 10)

The chaebols encouraged the Korean government to open up Korean financial markets to foreign capital. The Korean government responded by A) allowing unlimited short-term foreign borrowing but maintained quantity restrictions on long-term foreign borrowing by financial institutions. B) allowing unlimited short-term and long-term foreign borrowing by financial institutions. C) maintaining quantity restrictions on short-term foreign borrowing but allowing unlimited long-term foreign borrowing by financial institutions. D) not allowing any foreign borrowing by financial institutions.

B) allowing unlimited short-term and long-term foreign borrowing by financial institutions. (Ch. 12)

That most used cars are sold by intermediaries (i.e., used car dealers) provides evidence that these intermediaries A) have been afforded special government treatment, since used car dealers do not provide information that is valued by consumers of used cars. B) are able to prevent potential competitors from free-riding off the information that they provide. C) have failed to solve adverse selection problems in this market because ʺlemonsʺ continue to be traded. D) have solved the moral hazard problem by providing valuable information to their customers.

B) are able to prevent potential competitors from free-riding off the information that they provide (Ch 8)

A borrower who takes out a loan usually has better information about the potential returns and risk of the investment projects he plans to undertake than does the lender. This inequality of information is called A) moral hazard. B) asymmetric information. C) noncollateralized risk. D) adverse selection.

B) asymmetric information (Ch. 8)

Currency circulated by banks that could be redeemed for gold was called ________. A) junk bonds B) banknotes C) gold bills D) state money

B) banknotes (Ch. 11)

Since 1980 A) bank profitability has declined. B) banks have offset the decline in profits from traditional activities with increased income from off-balance-sheet activities. C) banks have offset the decline in profits from off-balance-sheet activities with increased income from traditional activities. D) bank profits have grown rapidly due to deregulation.

B) banks have offset the decline in profits from traditional activities with increased income from off-balance-sheet activities. (Ch. 11)

Financial innovation has caused A) banks to suffer declines in their cost advantages in acquiring funds, although it has not caused a decline in income advantages. B) banks to suffer a simultaneous decline of cost and income advantages. C) banks to suffer declines in their income advantages in acquiring funds, although it has not caused a decline in cost advantages. D) banks to achieve competitive advantages in both costs and income.

B) banks to suffer a simultaneous decline of cost and income advantages. (Ch. 11)

Banks that actively manage liabilities will most likely meet a reserve shortfall by A) calling in loans. B) borrowing federal funds. C) selling municipal bonds. D) seeking new deposits.

B) borrowing federal funds (Ch. 9)

Asset transformation can be described as A) borrowing long and lending short. B) borrowing short and lending long. C) borrowing and lending only for the short term. D) borrowing and lending for the long term.

B) borrowing short and lending long (Ch. 9)

A bank will want to hold more excess reserves (everything else equal) when A) it expects to have deposit inflows in the near future. B) brokerage commissions on selling bonds increase. C) the cost of selling loans falls. D) the discount rate decreases.

B) brokerage commissions on selling bonds increase (Ch. 9)

A bank with insufficient reserves can increase its reserves by A) lending federal funds. B) calling in loans. C) buying short-term Treasury securities. D) buying municipal bonds.

B) calling in loans (Ch. 9)

A lesson of the Enron collapse is that government regulation A) always fails. B) can reduce but not eliminate asymmetric information. C) increases the problem of asymmetric information. D) should be reduced.

B) can reduce but not eliminate

Prior to 1980, the Fed set an interest rate ________ that is a maximum limit on the interest rate that could be paid on time deposits. A) floor B) ceiling C) wall D) window

B) ceiling (Ch. 11)

Which of the following are reported as liabilities on a bankʹs balance sheet? A) Reserves B) Checkable deposits C) Loans D) Deposits with other banks

B) checkable deposits (Ch. 9)

Which of the following statements is false? A) Checkable deposits are usually the lowest cost source of bank funds. B) Checkable deposits are the primary source of bank funds. C) Checkable deposits are payable on demand. D) Checkable deposits include NOW accounts.

B) checkable deposits are the primary source of bank funds (Ch. 9)

If you default on your auto loan, your car will be repossessed because it has been pledged as ________ for the loan. A) interest B) collateral C) dividend D) commodity

B) collateral (Ch. 8)

Net worth can perform a similar role to ________. A) diversification B) collateral C) intermediation D) economies of scale

B) collateral (Ch. 8)

The predominant form of household debt is A) consumer installment debt. B) collateralized debt. C) unsecured debt. D) unrestricted debt.

B) collateralized debt (Ch. 8)

The principal-agent problem that exists for bank trading activities can be reduced through A) creation of internal controls that combine trading activities with bookkeeping. B) creation of internal controls that separate trading activities from bookkeeping. C) elimination of regulation of banking. D) elimination of internal controls.

B) creation of internal controls that separate trading activities from bookkeeping. (Ch. 9)

As information technology improves, the lending role of financial institutions such as banks should ________. A) increase somewhat B) decrease C) stay the same D) increase significantly

B) decrease (Ch. 8)

In emerging economies such as Argentina, government fiscal imbalances may cause fears of A) debt deflation. B) default on government debt. C) stock price declines. D) lower interest rates.

B) default on government debt. (Ch. 12)

The main motive behind the forces that have shaped the development of the current regulatory system has been the A) desire to prevent monopolistic practices. B) desire to ensure a sound banking system. C) desire to create an interstate banking system. D) desire to foster a highly competitive banking system.

B) desire to ensure a sound banking system. (Ch. 10)

Bank loans from the Federal Reserve are called ________ and represent a ________ of funds. A) discount loans; use B) discount loans; source C) fed funds; use D) fed funds; source

B) discount loans; source (Ch. 9)

The reduction in transactions costs per dollar of investment as the size of transactions increases is A) discounting. B) economies of scale. C) economies of trade. D) diversification.

B) economies of scale (Ch. 8)

The Glass-Steagall Act, before its repeal in 1999, prohibited commercial banks from A) issuing equity to finance bank expansion. B) engaging in underwriting and dealing of corporate securities. C) selling new issues of government securities. D) purchasing any debt securities.

B) engaging in underwriting and dealing of corporate securities (Ch. 11)

On of the purposes of Glass Steagall Act of 1933 was to A) prohibit interstate branching of state banks. B) establish a separation of investment and commercial banking. C) allow commercial banks to purchase common stock. D) remove a separation of investment and commercial banking.

B) establish a separation of investment and commercial banking. (Ch. 12)

The National Bank Act of 1863, and subsequent amendments to it, A) created a banking system of state-chartered banks. B) established the Office of the Comptroller of the Currency. C) broadened the regulatory powers of the Federal Reserve. D) created insurance on deposit accounts.

B) established the Office of the Comptroller of the Currency (Ch. 11)

Financial instruments whose payoffs are linked to previously issued securities are called ________. A) grandfathered bonds B) financial derivatives C) hedge securities D) reversible bonds

B) financial derivatives (Ch. 11)

Through correspondent banking, large banks provide services to small banks, including A) loan guarantees. B) foreign exchange transactions. C) issuing stock. D) debt reduction.

B) foreign exchange transactions (Ch. 9)

Thrift institutionsʹ importance as a source of funds for borrowers A) has shrunk from around 40 percent of total credit advanced in the late 1970s to below 30 percent by 2005. B) has shrunk from over 20 percent of total credit advanced in the late 1970s to below 6 percent by 2005. C) has expanded dramatically, from around 15 percent of total credit advanced in the late 1970s to above 25 percent by 2005. D) has expanded dramatically, from around 15 percent of total credit advanced in the late 1970s to above 30 percent by 2005.

B) has shrunk from over 20 percent of total credit advanced in the late 1970s to below 6 percent by 2005. (Ch. 11)

The rapid growth of the commercial paper market since 1970 is due to A) the fact that commercial paper has no default risk. B) improved information technology making it easier to screen credit risks. C) government regulation. D) FDIC insurance for commercial paper.

B) improved information technology making it easier to screen credit risks. (Ch. 11)

The decline in traditional banking internationally can be attributed to A) increased regulation. B) improved information technology. C) increasing monopoly power of banks over depositors. D) increased protection from competition.

B) improved information technology. (Ch. 11)

The growth of the subprime mortgage market led to A)a decline in the housing industry because of higher default risk. B) increased demand for houses and helped fuel the boom in housing prices. C) a decrease in home ownership as investors chose other assets over housing. D) decreased demand for houses as the less credit-worthy borrowers could not obtain residential mortgages.

B) increased demand for houses and helped fuel the boom in housing prices. (Ch. 12)

The sequence of events in a U.S. financial crisis is ________ leading to ________ leading to ________. A) debt deflation; increased interest rates; a bank panic B) increased interest rates; a bank panic; debt deflation C) a stock market decline; debt deflation; decreased economic activity D) a bank panic; debt deflation; a stock market decline

B) increased interest rates; a bank panic; debt deflation (Ch. 12)

Rising interest-rate risk A) increased the cost of financial innovation. B) increased the demand for financial innovation. C) reduced the cost of financial innovation. D) reduced the demand for financial innovation.

B) increased the demand for financial innovation. (Ch. 11)

An important factor leading up to the Mexican financial crisis of 1994-1995 was A) the failure of the Mexican oil monopoly. B) increasing loan losses at Mexican banks. C) the ratification of the North American Free Trade Agreement. D) the failure to ratify the North American Free Trade Agreement

B) increasing loan losses at Mexican banks. (Ch. 12)

In addition to having a direct effect on increasing adverse selection problems, increases in interest rates also promote financial crises by ________ firmsʹ and householdsʹ interest payments, thereby ________ their cash flow. A) increasing; increasing B) increasing; decreasing C) decreasing; decreasing D) decreasing; increasing

B) increasing; decreasing (Ch. 12)

When you deposit a $50 bill in the Security Pacific National Bank, A) its liabilities decrease by $50. B) its assets increase by $50. C) its reserves decrease by $50. D) its cash items in the process of collection increase by $50.

B) its assets increase by $50 (Ch. 9)

Bank capital is listed on the ________ side of the bankʹs balance sheet because it represents a ________ of funds. A) liability; use B) liability; source C) asset; use D) asset; source

B) liability; source (Ch. 9)

All of the following might create problems from financial liberalization in emerging countries except A) ineffective screening of borrowers. B) limits on risk-taking. C) lax government supervision of banks. D) lenders failure to monitor borrowers.

B) limits on risk-taking. (Ch. 12)

Banks will be examined at least once a year and given a CAMELS rating by examiners. The L stands for ________. A) liabilities B) liquidity C) loans D) leverage

B) liquidity (Ch. 10)

Bankersʹ concerns regarding the optimal mix of excess reserves, secondary reserves, borrowings from the Fed, and borrowings from other banks to deal with deposit outflows is an example of A) liability management. B) liquidity management. C) managing interest rate risk. D) managing credit risk.

B) liquidity management (Ch. 9)

One way of describing the solution that high net worth provides to the moral hazard problem is to say that it A) collateralizes the debt contract. B) makes the debt contract incentive compatible. C) state verifies the debt contract. D) removes all of the risk in the debt contract.

B) makes the debt contract incentive compatible (Ch 8)

With the creation of the Federal Deposit Insurance Corporation, A) member banks of the Federal Reserve System were given the option to purchase FDIC insurance for their depositors, while non-member commercial banks were required to buy deposit insurance. B) member banks of the Federal Reserve System were required to purchase FDIC insurance for their depositors, while non-member commercial banks could choose to buy deposit insurance. C) both member and non-member banks of the Federal Reserve System were required to purchase FDIC insurance for their depositors. D) both member and non-member banks of the Federal Reserve System could choose, but were not required, to purchase FDIC insurance for their depositors.

B) member banks of the Federal Reserve System were required to purchase FDIC insurance for their depositors, while non-member commercial banks could choose to buy deposit insurance. (Ch. 11)

Solutions to the moral hazard problem include A) low net worth. B) monitoring and enforcement of restrictive covenants. C) greater reliance on equity contracts and less on debt contracts. D) greater reliance on debt contracts than financial intermediaries.

B) monitoring and enforcement of restrictive covenants (Ch. 8)

Because information is scarce A) helps explain why equity contracts are used so much more frequently to raise capital than are debt contracts. B) monitoring managers gives rise to costly state verification. C) government regulations, such as standard accounting principles, have no impact on problems such as moral hazard. D) developing nations do not rely heavily on banks for business financing.

B) monitoring managers give rise to costly state verification (Ch. 8)

A problem for equity contracts is a particular type of ________ called the ________ problem. A) adverse selection; principal-agent B) moral hazard; principal-agent C) adverse selection; free-rider D) moral hazard; free-rider

B) moral hazard; principal-agent (Ch. 8)

A well-capitalized bank has ________ to lose if it fails and thus is ________ likely to pursue risky activities. A) more; more B) more; less C) less; more D) less; less

B) more; less (Ch. 10)

The free-rider problem occurs because A) people who pay for information use it freely. B) people who do not pay for information use it. C) information can never be sold at any price. D) it is never profitable to produce information.

B) people who do not pay for information use it (Ch. 8)

Banks hold excess and secondary reserves to A) reduce the interest-rate risk problem. B) provide for deposit outflows. C) satisfy margin requirements. D) achieve higher earnings than they can with loans.

B) provide for deposit outflows (Ch. 9)

Banks have attempted to maintain adequate profit levels by A) making fewer riskier loans, such as commercial real estate loans. B) pursuing new off-balance-sheet activities. C) increasing reserve deposits at the Fed. D) decreasing capital accounts..

B) pursuing new off-balance-sheet activities. (Ch. 11)

Conditions that likely contributed to a credit crunch in 1990-92 include: A) a decrease in the equity multiplier caused by loan losses due to falling real estate prices. B) regulated hikes in bank capital requirements. C) falling interest rates that raised interest rate risk, causing banks to choose to hold more capital. D) increases in reserve requirements.

B) regulated hikes in bank capital requirements (Ch. 9)

The fraction of checkable deposits that banks are required by regulation to hold are A) excess reserves. B) required reserves. C) vault cash. D) total reserves.

B) required reserves (Ch. 9)

Which of the following are reported as assets on a bankʹs balance sheet? A) Borrowings B) Reserves C) Savings deposits D) Bank capital

B) reserves (Ch. 9)

Which of the following bank assets is the most liquid? A) Consumer loans B) Reserves C) Cash items in process of collection D) U.S. government securities

B) reserves (Ch. 9)

Banks acquire the funds that they use to purchase income-earning assets from such sources as A) cash items in the process of collection B) savings accounts. C) reserves. D) deposits at other banks.

B) savings accounts (Ch. 9)

Collateralized debt is also know as A) unsecured debt. B) secured debt. C) unrestricted debt. D) promissory debt.

B) secured debt (Ch. 8)

Depositors have a strong incentive to show up first to withdraw their funds during a bank crisis because banks operate on a A) last-in, first-out constraint. B) sequential service constraint. C) double-coincidence of wants constraint. D) everyone-shares-equally constraint.

B) sequential service constraint. (Ch. 10)

In general, banks make profits by selling ________ liabilities and buying ________ assets. A) long-term; shorter-term B) short-term; longer-term C) illiquid; liquid D) risky; risk-free

B) short-term; longer-term (Ch. 9)

Because the ________ costs of bank failure are greater than bankʹs ________ costs, banks may hold assets that are too risky. A) social; social B) social; private C) private; social D) private; private

B) social; private (Ch. 10)

Of the following sources of external finance for American nonfinancial businesses, the least important is A) loans from banks. B) stocks. C) bonds and commercial paper. D) loans from other financial intermediaries.

B) stocks (Ch. 8)

Because of securitization, a new class of residential mortgages offered to borrowers with less-than-stellar credit records developed. These mortgages are known as A) risk-enhanced mortgages B) subprime mortgages C) bundled mortgages D) adjustable-rate mortgages

B) subprime mortgages (Ch. 12)

Sweep accounts which were created to avoid reserve requirements became possible because of a change in ________. A) demand conditions B) supply conditions C) government rules D) bank mergers

B) supply conditions (Ch. 11)

The primary difference between the "payoff" and the "purchase and assumption" methods of handling failed banks is A) that the FDIC guarantees all deposits when it uses the "payoff" method. B) that the FDIC guarantees all deposits when it uses the "purchase and assumption" method. C) that the FDIC is more likely to use the "payoff" method when the bank is large and it fears that depositor losses may spur business bankruptcies and other bank failures. D) that the FDIC is more likely to use the purchase and assumption method for small institutions because it will be easier to find a purchaser for them compared to large institutions.

B) that the FDIC guarantees all deposits when it uses the "purchase and assumption" method. (Ch. 12)

The primary difference between the ʺpayoffʺ and the ʺpurchase and assumptionʺ methods of handling failed banks is A) that the FDIC guarantees all deposits, not just those under the $100,000 limit, when it uses the ʺpayoffʺ method. B) that the FDIC guarantees all deposits, not just those under the $100,000 limit, when it uses the ʺpurchase and assumptionʺ method. C) that the FDIC is more likely to use the ʺpayoffʺ method when the bank is large and it fears that depositor losses may spur business bankruptcies and other bank failures. D) that the FDIC is more likely to use the purchase and assumption method for small institutions because it will be easier to find a purchaser for them compared to large institutions.

B) that the FDIC guarantees all deposits, not just those under the $100,000 limit, when it uses the ʺpurchase and assumptionʺ method. (Ch. 10)

The Act that required separation of commercial and investment banking was A) the Federal Reserve Act. B) the Glass-Steagall Act. C) the Bank Holding Company Act. D) the Monetary Control Act.

B) the Glass-Steagall Act. (Ch. 10)

The most important developments that have reduced banksʹ cost advantages in the past thirty years include: A) the growth of the junk bond market. B) the competition from money market mutual funds. C) the growth of securitization. D) the growth in the commercial paper market.

B) the competition from money market mutual funds. (Ch. 11)

The most significant change in the economic environment that changed the demand for financial products since 1970 has been A) the aging of the baby-boomer generation. B) the dramatic increase in the volatility of interest rates. C) the dramatic increase in competition from foreign banks. D) the deregulation of financial institutions.

B) the dramatic increase in the volatility of interest rates (Ch. 11)

The most important developments that have reduced banksʹ income advantages in the past thirty years include: A) the increase in off-balance sheet activities. B) the growth of the junk bond market. C) the elimination of Regulation Q ceilings. D) the competition from money market mutual funds.

B) the growth of the junk bond market. (Ch. 11)

For a given return on assets, the lower is bank capital, A) the lower is the return for the owners of the bank. B) the higher is the return for the owners of the bank. C) the lower is the credit risk for the owners of the bank. D) the lower the possibility of bank failure.

B) the higher is the return for the owners of the bank. (Ch. 9)

When $1 million is deposited at a bank, the required reserve ratio is 20 percent, and the bank chooses not to hold any excess reserves but makes loans instead, then, in the bankʹs final balance sheet, A) the assets at the bank increase by $800,000. B) the liabilities of the bank increase by $1,000,000. C) the liabilities of the bank increase by $800,000. D) reserves increase by $160,000.

B) the liabilities of the bank increase by $1,000,000 (Ch. 9)

The entry of AT&T and GM into the credit card business is an indication of A) governmentʹs efforts to deregulate the provision of financial services. B) the rising profitability of credit card operations. C) the reduction in costs of credit card operations since 1990. D) the sale of unprofitable operations by Bank of America and Citicorp.

B) the rising profitability of credit card operations. (Ch. 11)

Credit card debt is A) secured debt. B) unsecured debt. C) restricted debt. D) unrestricted debt.

B) unsecured debt (Ch. 8)

Banks develop statistical models to calculate their maximum loss over a given time period. This approach is known as the A) stress-testing approach. B) value-at-risk approach. C) trading-loss approach. D) doomsday approach.

B) value-at-risk approach (Ch. 9)

A feature of debt markets in emerging-market countries is that debt contracts are typically A) long term B) very short term. C) intermediate term. D) perpetual

B) very short term (Ch. 12)

A major controversy involving the banking industry in its early years was A) whether banks should both accept deposits and make loans or whether these functions should be separated into different institutions. B) whether the federal government or the states should charter banks. C) what percent of deposits banks should hold as fractional reserves. D) whether banks should be allowed to issue their own bank notes.

B) whether the federal government or the states should charter banks. (Ch. 11)

Federal deposit insurance covers deposits up to $100,000, but as part of a doctrine called ʺtoo-big-to-failʺ the FDIC sometimes ends up covering all deposits to avoid disrupting the financial system. When the FDIC does this, it uses the A) ʺpayoffʺ method. B) ʺpurchase and assumptionʺ method. C) ʺinequityʺ method. D) ʺBaselʺ method.

B) ʺpurchase and assumptionʺ method. (Ch. 10)

In recent years the interest paid on checkable and time deposits has accounted for around ________ of total bank operating expenses, while the costs involved in servicing accounts have been approximately ________ of operating expenses. A) 45 percent; 55 percent B) 55 percent; 4 percent C) 25 percent; 50 percent D) 50 percent; 30 percent

C) 25%; 50% (Ch. 9)

Of the sources of external funds for nonfinancial businesses in the United States, corporate bonds and commercial paper account for approximately ________ of the total. A) 5% B) 10% C) 32% D) 50%

C) 32% (Ch. 8)

To be considered well capitalized, a bankʹs leverage ratio must exceed ________. A) 10% B) 8% C) 5% D) 3%

C) 5% (Ch. 10)

Of the sources of external funds for nonfinancial businesses in the United States, loans from banks and other financial intermediaries account for approximately ________ of the total. A) 6% B) 40% C) 56% D) 60%

C) 56% (Ch. 8)

Which of the following statements are true? A) A bankʹs assets are its sources of funds. B) A bankʹs liabilities are its uses of funds. C) A bankʹs balance sheet shows that total assets equal total liabilities plus equity capital. D) A bankʹs balance sheet indicates whether or not the bank is profitable.

C) A bankʹs balance sheet shows that total assets equal total liabilities plus equity capital (Ch. 9)

Which of the following is not one of the eight basic puzzles about financial structure? A) The financial system is among the most heavily regulated sectors of the economy. B) Only large, well-established corporations have access to securities markets to finance their activities. C) Direct finance, in which businesses raise funds directly from lenders in financial markets, is many times more important than indirect finance, which involves the activities of financial intermediaries. D) Debt contracts are typically extremely complicated legal documents that place substantial restrictions on the behavior of the borrower.

C) Direct finance, in which businesses raise funds directly from lenders in financial markets, is many times more important than indirect finance, which involves the activities of financial intermediaries. (Ch. 8)

The legislation that separated investment banking from commercial banking until its repeal in 1999 is known as the: A) National Bank Act of 1863. B) Federal Reserve Act of 1913. C) Glass-Steagall Act. D) McFadden Act.

C) Glass-Steagall Act. (Ch. 11)

Which of the following statements concerning external sources of financing for nonfinancial businesses in the United States are true? A) Issuing marketable securities is the primary way that they finance their activities. B) Bonds are the least important source of external funds to finance their activities. C) Stocks are a relatively unimportant source of finance for their activities. D) Selling bonds directly to the American household is a major source of funding for American businesses.

C) Stocks are a relatively unimportant source of finance for their activities (Ch. 8)

If the anatomy of a financial crisis is thought of as a sequence of events, which of the following events would be least likely to be the initiating cause of the financial crisis? A) Increase in interest rates B) Stock market decline C) Unanticipated decline in price level D) Increase in uncertainty

C) Unanticipated decline in price level (Ch. 12)

A debit card differs from a credit card in that A) a debit card is a loan while for a credit card purchase, payment is made immediately. B) a debit card is a long-term loan while a credit card is a short-term loan. C) a credit card is a loan while for a debit card purchase, payment is made immediately. D) a credit card is a long-term loan while a debit card is a short-term loan.

C) a credit card is a loan while for a debit card purchase, payment is made immediately. (Ch. 11)

An instrument developed to help investors and institutions hedge interest-rate risk is A) a put option. B) a call option. C) a financial derivative. D) a mortgage-backed security.

C) a financial derivative. (Ch. 11)

The agreement to provide a standardized commodity to a buyer on a specific date at a specific future price is A) a put option. B) a call option. C) a futures contract. D) a mortgage-backed security.

C) a futures contract. (Ch. 11)

Although the National Bank Act of 1863 was designed to eliminate state -chartered banks by imposing a prohibitive tax on banknotes, these banks have been able to stay in business by A) issuing credit cards. B) ignoring the regulations. C) acquiring funds through deposits. D) branching into other states.

C) acquiring funds through deposits (Ch. 11)

The presence of ________ in financial markets leads to adverse selection and moral hazard problems that interfere with the efficient functioning of financial markets. A) noncollateralized risk B) free-riding C) asymmetric information D) costly state verification

C) asymmetric information (Ch. 8)

Adjustable rate mortgages A) protect households against higher mortgage payments when interest rates rise. B) keep financial institutionsʹ earnings high even when interest rates are falling. C) benefit homeowners when interest rates are falling. D) generally have higher initial interest rates than on conventional fixed-rate mortgages.

C) benefit homeowners when interest rates are falling. (Ch. 11)

In general, banks would prefer to meet deposit outflows by ________ rather than ________. A) selling loans; selling securities B) selling loans; borrowing from the Fed C) borrowing from the Fed; selling loans D) ʺcalling inʺ loans; selling securities

C) borrowing from the Fed; selling loans (Ch. 9)

________ may antagonize customers and thus can be a very costly way of acquiring funds to meet an unexpected deposit outflow. A) Selling securities B) Selling loans C) Calling in loans D) Selling negotiable CDs

C) calling in loans (Ch. 9)

The leverage ratio is the ratio of a bankʹs A) assets divided by its liabilities. B) income divided by its assets. C) capital divided by its total assets. D) capital divided by its total liabilities.

C) capital divided by its total assets. (Ch. 10)

Which of the following is not one of the eight basic puzzles about financial structure? A) Only large, well-established corporations have access to securities markets to finance their activities. B) Indirect finance, which involves the activities of financial intermediaries, is many times more important than direct finance, in which businesses raise funds directly from lenders in financial markets. C) Collateral is a prevalent feature of debt contracts for households, but not business since they have many alternative sources for funds. D) Banks are the most important source of external funds to finance businesses.

C) collateral is a prevalent feature of debt contracts for households, but not business since they have many alternatives sources for funds (Ch. 8)

During the boom years of the 1920s, bank failures were quite A) uncommon, averaging less than 30 per year. B) uncommon, averaging less than 100 per year. C) common, averaging about 600 per year. D) common, averaging about 1000 per year.

C) common, averaging about 600 per year. (Ch. 10)

Automated teller machines A) are more costly to use than human tellers, so banks discourage their use by charging more for use of ATMs. B) cost about the same to use as human tellers in banks, so banks discourage their use by charging more for use of ATMs. C) cost less than human tellers, so banks may encourage their use by charging less for using ATMs. D) cost nothing to use, so banks provide their services free of charge.

C) cost less than human tellers, so banks may encourage their use by charging less for using ATMs. (Ch. 11)

The fact that banks operate on a ʺsequential service constraintʺ means that A) all depositors share equally in the bankʹs funds during a crisis. B) depositors arriving last are just as likely to receive their funds as those arriving first. C) depositors arriving first have the best chance of withdrawing their funds. D) banks randomly select the depositors who will receive all of their funds.

C) depositors arriving first have the best chance of withdrawing their funds. (Ch. 10)

The process in which people take their money out of financial institutions seeking higher interest rates is called A) capital mobility. B) loophole mining. C) disintermediation. D) deposit jumping.

C) disintermediation. (Ch. 11)

The amount of assets per dollar of equity capital is called the A) asset ratio. B) equity ratio. C) equity multiplier. D) asset multiplier.

C) equity multiplier (Ch. 9)

The current supervisory practice toward risk management A) focuses on the quality of a bankʹs balance sheet. B) determines whether capital requirements have been met. C) evaluates the soundness of a bankʹs risk-management process. D) focuses on eliminating all risk.

C) evaluates the soundness of a bankʹs risk-management process. (Ch. 10)

Banks that suffered significant losses in the 1980s made the mistake of A) holding too many liquid assets. B) minimizing default risk. C) failing to diversify their loan portfolio. D) holding only safe securities.

C) failing to diversify their loan portfolio (Ch. 9)

Today the United States has a dual banking system in which banks supervised by the ________ and by the ________ operate side by side. A) federal government; municipalities B) state governments; municipalities C) federal government; states D) municipalities; states

C) federal government; states (Ch. 11)

Argentina's financial crisis was due to A) poor supervision of the banking system. B) a lending boom prior to the crisis. C) fiscal imbalances. D) lack of expertise in screening and monitoring borrowers at banking institutions

C) fiscal imbalances.

Argentinaʹs financial crisis was due to A) poor supervision of the banking system. B) a lending boom prior to the crisis. C) fiscal imbalances. D) lack of expertise in screening and monitoring borrowers at banking institutions.

C) fiscal imbalances. (Ch. 12)

Which of the following is not a benefit to an individual purchasing a mutual fund? A) reduced risk B) lower transactions costs C) free-riding D) diversification

C) free-riding (Ch. 8)

Off-balance-sheet activities A) generate fee income with no increase in risk. B) increase bank risk but do not increase income. C) generate fee income but increase a bankʹs risk. D) generate fee income and reduce risk.

C) generate fee income but increase a bankʹs risk. (Ch. 10)

Loophole mining refers to financial innovation designed to A) hide transactions from the IRS. B) conceal transactions from the SEC. C) get around regulations. D) conceal transactions from the Treasury Department.

C) get around regulations. (Ch. 11)

Because of their ________ liquidity, ________ U.S. government securities are called secondary reserves. A) low; short-term B) low; long-term C) high; short-term D) high; long-term

C) high; short-term (Ch. 9)

The most important source of the changes in supply conditions that stimulate financial innovation has been the A) deregulation of financial institutions. B) dramatic increase in the volatility of interest rates. C) improvement in computer and telecommunications technology. D) dramatic increase in competition from foreign banks.

C) improvement in computer and telecommunications technology. (Ch. 11)

Off-balance sheet activities involving guarantees of securities and back-up credit lines A) have no impact on the risk a bank faces. B) greatly reduce the risk a bank faces. C) increase the risk a bank faces. D) slightly reduce the risk a bank faces.

C) increase the risk a bank faces (Ch. 9)

As the costs associated with deposit outflows ________, the banks willingness to hold excess reserves will ________. A) decrease; increase B) increase; decrease C) increase; increase D) decrease; not be affected

C) increase; increase (Ch. 9)

) Factors that led to worsening conditions in Mexicoʹs 1994-1995 financial markets include A) failure of the Mexican oil monopoly. B) the ratification of the North American Free Trade Agreement. C) increased uncertainty from political shocks. D) decline in interest rates

C) increased uncertainty from political shocks. (Ch. 12)

Factors that led to worsening conditions in Mexico's 1994-1995 financial markets include A) failure of the Mexican oil monopoly. B) the ratification of the North American Free Trade Agreement. C) increased uncertainty from political shocks. D) decline in interest rates

C) increased uncertainty from political shocks. (Ch.12)

Uncertainty about interest-rate movements and returns is called ________. A) market potential B) interest-rate irregularities C) interest-rate risk D) financial creativity

C) interest-rate risk (Ch. 11)

Holding large amounts of bank capital helps prevent bank failures because A) it means that the bank has a higher income. B) it makes loans easier to sell. C) it can be used to absorb the losses resulting from a deposit outflow. D) it makes it easier to call in loans.

C) it can be used to absorb the losses resulting from a deposit outflow (Ch. 9)

The U.S. banking system is considered to be 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 state and federal governments. D) it was established before the Civil War, requiring separate regulatory bodies for the North and South.

C) it is regulated by both state and federal governments. (Ch. 11)

When you deposit $50 in currency at Old National Bank, A) its assets increase by less than $50 because of reserve requirements. B) its reserves increase by less than $50 because of reserve requirements. C) its liabilities increase by $50. D) its liabilities decrease by $50.

C) its liabilities increase by $50 (Ch. 9)

Because of the adverse selection problem, A) good credit risks are more likely to seek loans causing lenders to make a disproportionate amount of loans to good credit risks. B) lenders may refuse loans to individuals with high net worth, because of their greater proclivity to ʺskip town.ʺ C) lenders are reluctant to make loans that are not secured by collateral. D) lenders will write debt contracts that restrict certain activities of borrowers.

C) lenders are reluctant to make loans that are not secured by collateral. (Ch. 8)

Banks earn profits by selling ________ with attractive combinations of liquidity, risk, and return, and using the proceeds to buy ________ with a different set of characteristics. A) loans; deposits B) securities; deposits C) liabilities; assets D) assets; liabilities

C) liabilities; assets (Ch. 9)

Bankʹs make their profits primarily by issuing ________. A) equity B) negotiable CDs C) loans D) NOW accounts

C) loans (Ch. 9)

The most important category of assets on a bankʹs balance sheet is A) discount loans. B) securities. C) loans. D) cash items in the process of collection.

C) loans (Ch. 9)

High net worth helps to diminish the problem of moral hazard problem by A) requiring the state to verify the debt contract. B) collateralizing the debt contract. C) making the debt contract incentive compatible. D) giving the debt contract characteristics of equity contracts.

C) making the debt contract incentive compatible (Ch. 8)

Financial crises in advanced economies might start from a A) debt deflation. B) currency crisis. C) mismanagement of financial innovations. D) currency mismatch

C) mismanagement of financial innovations. (Ch. 12)

As "haircuts" increased during 2007-2009, financial institutions found that to borrow the same loan amount now required ________ collateral. A) less B) no C) more D) default-free

C) more (Ch. 12)

One suggested method of reducing excessive risk-taking by SIFIs is to require them to hold ________ capital when credit is expanding rapidly and ________ capital when credit is contracting. A) less; more B) more; no C) more; less D) less; no

C) more; less (Ch. 12)

The Federal Reserve Act of 1913 required that A) state banks be subject to the same regulations as national banks. B) national banks establish branches in the cities containing Federal Reserve banks. C) national banks join the Federal Reserve System. D) state banks could not join the Federal Reserve System.

C) national banks join the Federal Reserve System (Ch. 11)

The Federal Reserve Act required all ________ banks to become members of the Federal Reserve System, while ________ banks could choose to become members of the system. A) state; national B) state; municipal C) national; state D) national; municipal

C) national; state (Ch. 11)

Which of the following are transaction deposits? A) Savings accounts B) Small-denomination time deposits C) Negotiable order of withdraw accounts D) Certificates of deposit

C) negotiable order of withdraw accounts (Ch. 9)

Which of the following is not a nontransaction deposit? A) Savings accounts B) Small-denomination time deposits C) Negotiable order of withdrawal accounts D) Certificate of deposit

C) negotiable order of withdrawal accounts (Ch. 9)

Large-denomination CDs are ________, so that like a bond they can be resold in a ________ market before they mature. A) nonnegotiable; secondary B) nonnegotiable; primary C) negotiable; secondary D) negotiable; primary

C) negotiable; secondary (Ch. 9)

Because ________ are less liquid for the depositor than ________, they earn higher interest rates. A) money market deposit accounts; time deposits B) checkable deposits; passbook savings C) passbook savings; checkable deposits D) passbook savings; time deposits

C) passbook savings; checkable deposits (Ch. 9)

One purpose of regulation of financial markets is to A) limit the profits of financial institutions. B) increase competition among financial institutions. C) promote the provision of information to shareholders, depositors and the public. D) guarantee that the maximum rates of interest are paid on deposits.

C) promote the provision of information to shareholders, depositors and the public (Ch. 8)

The current structure of financial markets can be best understood as the result of attempts by financial market participants to A) adapt to continually changing government regulations. B) deal with the great number of small firms in the United States. C) reduce transaction costs. D) cartelize the provision of financial services.

C) reduce transaction costs (Ch. 8)

New computer technology has A) increased the cost of financial innovation. B) increased the demand for financial innovation. C) reduced the cost of financial innovation. D) reduced the demand for financial innovation.

C) reduced the cost of financial innovation. (Ch. 11)

According to Edward Kane, because the banking industry is one of the most ________ industries in America, it is an industry in which ________ is especially likely to occur. A) competitive; loophole mining B) competitive; innovation C) regulated; loophole mining D) regulated; innovation

C) regulated; loophole mining (Ch. 11)

The practice of keeping high-risk assets on a bankʹs books while removing low-risk assets with the same capital requirement is know as A) competition in laxity. B) depositor supervision. C) regulatory arbitrage. D) a dual banking system.

C) regulatory arbitrage. (Ch. 10)

A clause in a debt contract requiring that the borrower purchase insurance against loss of the asset financed with the loan is called a A) collateral-insurance clause. B) prescription covenant. C) restrictive covenant. D) proscription covenant.

C) restrictive covenant (Ch. 8)

A clause in a mortgage loan contract requiring the borrower to purchase homeownerʹs insurance is an example of a A) proscriptive covenant. B) prescriptive covenant. C) restrictive covenant. D) constraint-imposed covenant.

C) restrictive covenant (Ch. 8)

Net profit after taxes per dollar of equity capital is a basic measure of bank profitability called A) return on assets. B) return on capital. C) return on equity. D) return on investment.

C) return on equity (Ch. 9)

In the United States, the government agency requiring that firms that sell securities in public markets adhere to standard accounting principles and disclose information about their sales, assets, and earnings is the A) Federal Communications Commission. B) Federal Trade Commission. C) Securities and Exchange Commission. D) Federal Reserve System.

C) securities and exchange commission (Ch. 8)

If, after a deposit outflow, a bank has a reserve deficiency of $ 3 million, it can meet its reserve requirements by A) reducing deposits by $3 million. B) increasing loans by $3 million. C) selling $3 million of securities. D) repaying its discount loans from the Fed.

C) selling $3 million of securities (Ch. 9)

Secondary reserves include A) deposits at Federal Reserve Banks. B) deposits at other large banks. C) short-term Treasury securities. D) state and local government securities.

C) short-term Treasury securities (Ch. 9)

If a bank needs to raise the amount of capital relative to assets, a bank manager might choose to A) buy back bank stock. B) pay higher dividends. C) shrink the size of the bank. D) sell securities the bank owns and put the funds into the reserve account

C) shrink the size of the bank (Ch. 9)

The share of checkable deposits in total bank liabilities has A) expanded moderately over time. B) expanded dramatically over time. C) shrunk over time. D) remained virtually unchanged since 1960.

C) shrunk over time (Ch. 9)

When banks involved in trading activities attempt to outguess markets, they are A) forecasting. B) diversifying. C) speculating. D) engaging in riskless arbitrage.

C) speculating (Ch. 9)

Which regulatory body charters national banks? A) The Federal Reserve B) The FDIC C) The Comptroller of the Currency D) The U.S. Treasury

C) the Comptroller of the Currency (Ch. 11)

The belief that bank failures were regularly caused by fraud or the lack of sufficient bank capital explains, in part, the passage of A) the National Bank Charter Amendments of 1918. B) the Garn-St. Germain Act of 1982. C) the National Bank Act of 1863. D) Federal Reserve Act of 1913.

C) the National Bank Act of 1863 (Ch. 11)

Government regulations require publicly traded firms to provide information, reducing A) transactions costs. B) the need for diversification. C) the adverse selection problem. D) economies of scale.

C) the adverse selection problem (Ch. 8)

Factors that lead to worsening conditions in financial markets include: A) declining interest rates. B) unanticipated increases in the price level. C) the deterioration in banksʹ balance sheets. D) increases in bond prices.

C) the deterioration in banksʹ balance sheets. (Ch. 12)

The driving force behind the securitization of mortgages and automobile loans has been A) the rising regulatory constraints on substitute financial instruments. B) the desire of mortgage and auto lenders to exit this field of lending. C) the improvement in computer technology. D) the relaxation of regulatory restrictions on credit card operations.

C) the improvement in computer technology. (Ch. 11)

When a $10 check written on the First National Bank of Chicago is deposited in an account at Citibank, then A) the liabilities of the First National Bank increase by $10. B) the reserves of the First National Bank increase by $ 10. C) the liabilities of Citibank increase by $10. D) the assets of Citibank fall by $10.

C) the liabilities of Citibank increase by $10 (Ch. 9)

The recent Enron and Tyco scandals are an example of A) the free-rider problem. B) the adverse selection problem. C) the principal-agent problem. D) the ʺlemons problem.ʺ

C) the principal-agent problem (Ch. 8)

When you deposit $50 in your account at First National Bank and a $100 check you have written on this account is cashed at Chemical Bank, then A) the assets of First National rise by $50. B) the assets of Chemical Bank rise by $50. C) the reserves at First National fall by $50. D) the liabilities at Chemical Bank rise by $50.

C) the reserves at First National Fall by the $50 (Ch. 9)

In the absence of regulation, banks would probably hold A) too much capital, reducing the efficiency of the payments system. B) too much capital, reducing the profitability of banks. C) too little capital. D) too much capital, making it more difficult to obtain loans.

C) too little capital (Ch. 9)

Which of the following is not a source of borrowings for a bank? A) Federal funds B) Eurodollars C) Transaction deposits D) Discount loans

C) transaction deposits (Ch. 9)

The too-big-to-fail policy A) reduces moral hazard problems. B) puts large banks at a competitive disadvantage in attracting large deposits. C) treats large depositors of small banks inequitably when compared to depositors of large banks. D) allows small banks to take on more risk than large banks.

C) treats large depositors of small banks inequitably when compared to depositors of large banks. (Ch. 10)

Bank reserves include A) deposits at the Fed and short-term treasury securities. B) vault cash and short-term Treasury securities. C) vault cash and deposits at the Fed. D) deposits at other banks and deposits at the Fed.

C) vault cash and deposits at the Fed (Ch. 9)

The declining cost of computer technology has made ________ a reality. A) brick and mortar banking B) commercial banking C) virtual banking D) investment banking

C) virtual banking (Ch. 11)

In May 1991, the FDIC announced that it would sell the governmentʹs final 26% stake in Continental Illinois, ending government ownership of the bank that it had rescued in 1984. The FDIC took control of the bank, rather than liquidate it, because it believed that Continental Illinois A) was a good investment opportunity for the government. B) could be the Chicago branch of a new governmentally-owned interstate banking system. C) was too big to fail. D) would become the center of the new midwest region central bank system.

C) was too big to fail. (Ch. 10)

With the creation of the Federal Deposit Insurance Corporation, member banks of the Federal Reserve System ________ to purchase FDIC insurance for their depositors, while non-member commercial banks ________ to buy deposit insurance. A) could choose; were required B) could choose; were given the option C) were required, could choose D) were required; were required

C) were required; could choose (Ch. 11)

The concept of adverse selection helps to explain all of the following except A) why firms are more likely to obtain funds from banks and other financial intermediaries, rather than from the securities markets. B) why indirect finance is more important than direct finance as a source of business finance. C) why direct finance is more important than indirect finance as a source of business finance. D) why the financial system is so heavily regulated.

C) why direct finance is more important than indirect finance as a source of business finance (Ch. 8)

The concept of adverse selection helps to explain A) why collateral is not a common feature of many debt contracts. B) why large, well-established corporations find it so difficult to borrow funds in securities markets. C) why financial markets are among the most heavily regulated sectors of the economy. D) why stocks are the most important source of external financing for businesses.

C) why financial markets are among the most heavily regulated sectors of the economy (Ch. 8)

The principal-agent problem A) occurs when managers have more incentive to maximize profits than the stockholders-owners do. B) in financial markets helps to explain why equity is a relatively important source of finance for American business. C) would not arise if the owners of the firm had complete information about the activities of the managers. D) explains why direct finance is more important than indirect finance as a source of business finance.

C) would not arise if the owners of the firm had complete information about the activities of the managers (Ch. 8)

Under the Basel Accord, assets and off-balance sheet activities were sorted according to ________ categories with each category assigned a different weight to reflect the amount of ________. A) 2; adverse selection B) 2; credit risk C) 4; adverse selection D) 4; credit risk

D) 4; credit risk (Ch. 10)

As a source of funds for nonfinancial businesses, stocks are relatively more important in A) the United States. B) Germany. C) Japan. D) Canada.

D) Canada (Ch. 8)

Which bank regulatory agency has the sole regulatory authority over bank holding companies? A) The FDIC B) The Comptroller of the Currency C) The FHLBS D) The Federal Reserve System

D) The Federal Reserve System (Ch. 11)

A bank failure is less likely to occur when A) a bank holds less U.S. government securities. B) a bank suffers large deposit outflows. C) a bank holds fewer excess reserves. D) a bank has more bank capital.

D) a bank has more bank capital. (Ch. 10)

A bank panic can lead to a severe contraction in economic activity due to A) a decline in international trade. B) the losses of bank shareholders. C) the losses of bank depositors. D) a decline in lending for productive investment.

D) a decline in lending for productive investment. (Ch. 12)

The key factor leading to the financial crises in Mexico and the East Asian countries was A) a sharp decline in interest rates. B) severe fiscal imbalances. C) a sharp increase in the stock market. D) a deterioration in banks' balance sheets because of increasing loan losses.

D) a deterioration in banks' balance sheets because of increasing loan losses. (Ch. 12)

A reason why rogue traders have bankrupt their banks is due to A) the separation of trading activities from the bookkeepers. B) stringent supervision of trading activities by bank management. C) accounting errors. D) a failure to maintain proper internal controls.

D) a failure to maintain proper internal controls (Ch. 9)

The analysis of how asymmetric information problems affect economic behavior is called ________ theory. A) uneven B) parallel C) principal D) agency

D) agency (Ch. 8)

Because managers (________) have less incentive to maximize profits than the stockholders-owners (________) do, stockholders find it costly to monitor managers; thus, they are reluctant to purchase equities. A) principals; agents B) principals; principals C) agents; agents D) agents; principals

D) agents; principals (Ch. 8)

The ʺlemons problemʺ exists because of A) transactions costs. B) economies of scale. C) rational expectations. D) asymmetric information.

D) asymmetric information

In a bank panic the source of contagion is the A) free-rider problem. B) too-big-to-fail problem. C) transactions cost problem. D) asymmetric information problem

D) asymmetric information problem (Ch. 12)

In a bank panic, the source of contagion is the A) free-rider problem. B) too-big-to-fail problem. C) transactions cost problem. D) asymmetric information problem.

D) asymmetric information problem. (Ch. 12)

Which of the following statements is false? A) A bankʹs assets are its uses of funds. B) A bank issues liabilities to acquire funds. C) The bankʹs assets provide the bank with income. D) Bank capital is recorded as an asset on the bank balance sheet.

D) bank capital is recorded as an asset on the bank balance sheet (Ch. 9)

Because of the ʺlemons problemʺ the price a buyer of a used car pays is A) equal to the price of a lemon. B) less than the price of a lemon. C) equal to the price of a peach. D) between the price of a lemon and a peach.

D) between the price of a lemon and a peach (Ch. 8)

The result of the too-big-to-fail policy is that ________ banks will take on ________ risks, making bank failures more likely. A) small; fewer B) small; greater C) big; fewer D) big; greater

D) big; greater (Ch. 10)

Of the following, which would be the first choice for a bank facing a reserve deficiency. A) call in loans. B) borrow from the Fed. C) sell securities. D) borrow from other banks.

D) borrow from other banks (Ch. 9)

Which of the following are not reported as assets on a bankʹs balance sheet? A) Cash items in the process of collection B) Deposits with other banks C) U.S. Treasury securities D) Checkable deposits

D) checkable deposits (Ch. 9)

Because of asymmetric information, the failure of one bank can lead to runs on other banks. This is the A) too-big-to-fail effect. B) moral hazard problem. C) adverse selection problem. D) contagion effect.

D) contagion effect. (Ch. 10)

A disadvantage of virtual banks (clicks) is that A) their hours are more limited than physical banks. B) they are less convenient than physical banks. C) they are more costly to operate than physical banks. D) customers worry about the security of on-line transactions.

D) customers worry about the security of on-line transactions. (Ch. 11)

The regulatory system that has evolved in the United States whereby banks are regulated at the state level, the national level, or both, is known as a A) bilateral regulatory system. B) tiered regulatory system. C) two-tiered regulatory system. D) dual banking system.

D) dual banking system (Ch. 11)

Regulation of the financial system A) occurs only in the United States. B) protects the jobs of employees of financial institutions. C) protects the wealth of owners of financial institutions. D) ensures the stability of the financial system.

D) ensures the stability of the financial systems (Ch. 8)

Nonfinancial businesses in Germany, Japan, and Canada raise most of their funds A) by issuing stock. B) by issuing bonds. C) from nonbank loans. D) from bank loans.

D) from bank loans (Ch. 8)

Because banks engage in regulatory arbitrage, the Basel Accord on risk-based capital requirements may result in A) reduced risk taking by banks. B) reduced supervision of banks by regulators. C) increased fraudulent behavior by banks. D) increased risk taking by banks.

D) increased risk taking by banks. (Ch. 10)

Newly-issued high-yield bonds rated below investment grade by the bond-rating agencies are frequently referred to as A) municipal bonds. B) Yankee bonds. C) ʺfallen angels.ʺ D) junk bonds.

D) junk bonds. (Ch. 11)

When Jane Brown writes a $100 check to her nephew (who lives in another state), Ms. Brownʹs bank ________ assets of $100 and ________ liabilities of $100. A) gains; gains B) gains; loses C) loses; gains D) loses; loses

D) loses; loses (Ch. 9)

The experience of disintermediation in the banking industry illustrates that A) more regulation of financial markets may avoid such problems in the future. B) banks are unable to remain competitive with other financial intermediaries. C) consumers no longer desire the services that banks provide. D) markets invent alternatives to costly regulations.

D) markets invent alternatives to costly regulations. (Ch. 11)

Since depositors, like any lender, only receive fixed payments while the bank keeps any surplus profits, they face the ________ problem that banks may take on too ________ risk. A) adverse selection; little B) adverse selection; much C) moral hazard; little D) moral hazard; much

D) moral hazard; much (Ch. 10)

Because checking accounts are ________ liquid for the depositor than passbook savings, they earn ________ interest rates. A) less; higher B) less; lower C) more; higher D) more; lower

D) more; lower (Ch. 9)

Which of the following is not an example of a backup line of credit? A) loan commitments B) overdraft privileges C) standby letters of credit D) mortgages

D) mortgages

Which of the following would a bank not hold as insurance against the highest cost of deposit outflow-bank failure? A) excess reserves B) secondary reserves C) bank capital D) mortgages

D) mortgages (Ch. 9)

Before the South Korean financial crisis, sales by the top five chaebols (family-owned conglomerates) were A) nearly 25% of GDP. B) about 10% of GDP. C) almost 90% of GDP. D) nearly 50% of GDP

D) nearly 50% of GDP (Ch. 12)

Which of the following is not one of the eight basic puzzles about financial structure? A) Debt contracts are typically extremely complicated legal documents that place substantial restrictions on the behavior of the borrower. B) Indirect finance, which involves the activities of financial intermediaries, is many times more important than direct finance, in which businesses raise funds directly from lenders in financial markets. C) Collateral is a prevalent feature of debt contracts for both households and business. D) New security issues are the most important source of external funds to finance businesses.

D) new security issues are the most important source of external funds to finance businesses (Ch. 8)

Bank customers perceive Internet banks as being A) more secure than physical bank branches. B) a better method for the purchase of long-term savings products. C) better at keeping customer information private. D) prone to many more technical problems.

D) prone to many more technical problems. (Ch. 11)

If the FDIC decides that a bank is too big to fail, it will use the ________ method, effectively ensuring that ________ depositors will suffer losses. A) payoff; large B) payoff; no C) purchase and assumption; large D) purchase and assumption; no

D) purchase and assumption; no (Ch. 10)

If the FDIC decides that a bank is too big to fail, it will use the ________ method, effectively ensuring that ________ depositors will suffer losses. A) payoff; large B) payoff; no C) purchase and assumption; large D) purchase and assumption; no

D) purchase and assumption; no (Ch. 12)

The goals of bank asset management include A) maximizing risk. B) minimizing liquidity C) lending at high interest rates regardless of risk. D) purchasing securities with high returns and low risk.

D) purchasing securities with high returns and low risk (Ch. 9)

A financial crisis occurs when an increase in asymmetric information from a disruption in the financial system A) causes severe adverse selection and moral hazard problems that make financial markets incapable of channeling funds efficiently. B) allows for a more efficient use of funds. C) increases economic activity. D) reduces uncertainty in the economy and increases market efficiency

D) reduces uncertainty in the economy and increases market efficiency (Ch. 12)

A ________ is a provision that restricts or specifies certain activities that a borrower can engage in. A) residual claimant B) risk hedge C) restrictive barrier D) restrictive covenant

D) restrictive barrier (Ch. 8)

________ is creating a marketable capital market instrument by bundling a portfolio of mortgage or auto loans. A) diversification. B) arbitrage. C) computerization. D) securitization.

D) securitization (Ch. 11)

Which of the following would not be a way to increase the return on equity? A) Buy back bank stock B) Pay higher dividends C) Acquire new funds by selling negotiable CDs and increase assets with them D) Sell more bank stock

D) sell more bank stock (Ch. 9)

All of the following are examples of off-balance sheet activities that generate fee income for banks except A) foreign exchange trades. B) guaranteeing debt securities. C) back-up lines of credit. D) selling negotiable CDs.

D) selling negotiable CDs (Ch. 9)

The contagion effect refers to the fact that A) deposit insurance has eliminated the problem of bank failures. B) bank runs involve only sound banks. C) bank runs involve only insolvent banks. D) the failure of one bank can hasten the failure of other banks.

D) the failure of one bank can hasten the failure of other banks. (Ch. 10)

The cost of holding reserves to a bank equals A) the interest paid on deposits times the amount of reserves. B) the interest paid on deposits times the amount of deposits. C) the interest earned on loans times the amount of loans. D) the interest earned on loans times the amount on reserves.

D) the interest earned on loans times the amount on reserves. (Ch. 11)

Because ________ are less liquid for the depositor than ________, they earn higher interest rates. A) passbook savings; time deposits B) money market deposit accounts; time deposits C) money market deposit accounts; passbook savings D) time deposits; passbook savings

D) time deposits; passbook savings (Ch. 9)