FNAN 320 Exam 2

6. What is the best description of the relationship between the price of bonds and the quantity of bonds supplied, all else equal? A.Inverse B. Direct C. Negative D. Exponential

B. Direct

19. Which of the following would be considered an asset on a bank's balance sheet? a. A consumer loan b. Demand deposits c. Loans from other banks d. Savings accounts

a. A consumer loan

Liquidity is the term that has which of these meanings? a. A measure of the ease with which one asset can be converted into another asset, usually money b. A measure of the ease with which one can use money to purchase goods c. A measure of the ease with which one can borrow money d. A measure of the ease in which one can get out of debt to become a lender

a. A measure of the ease with which one asset can be converted into another asset, usually money

1. The securities that the Federal Reserve holds on its balance sheet include a. US Treasury securities, federal agency debt, and privately issued mortgage-backed securities b. privately issued stocks, US Treasury securities, and federal agency debt c. municipal bonds, privately issued stocks, and US Treasury securities d. US Treasury securities, municipal bonds, and federal agency debt

a. US Treasury securities, federal agency debt, and privately issued mortgage-backed securities

5. Why is it easier for the Fed to manage the level of bank reserves using the term auction facility (TAF) as opposed to using discount window lending? a. Banks do not need to overcome the stigma of requesting a loan when using the TAF. b. Banks receive TAF proceeds on a 3-day delay, rather than on the day they are requested. c. Banks that use seasonal credit are more likely to use the term auction facility. d. Banks receive TAF proceeds after a lengthy verification process.

b. Banks receive TAF proceeds on a 3-day delay, rather than on the day they are requested.

7. Which of these describes an example of asymmetric information in the bond market? a. Bond issuers have longer-term goals than bond buyers. b. Bond issuers have better insight about their future profitability than bond buyers. c. Bond issuers and bond buyers have different experiences in the bond market. d. Bond issuers are more conservative about the future than bond buyers.

b. Bond issuers have better insight about their future profitability than bond buyers.

11. The principal of a school hires Daniel to teach eighth grade students. One goal the principal has is to prepare the students to do well on standardized tests, as he will be judged based on the results of those tests. Daniel prefers to teach in a more creative way, so the students learn a lot, but perform poorly on their standardized tests. This is an example of what problem? a. Adverse selection b. Moral hazard c. Free-riding d. Adverse hazard

b. Moral hazard

4. What would be expected in a market for used cars, assuming asymmetric information and buyers who have little way to determine good used cars from poor used cars? a. The average price for used cars would go down and drive the clunker used cars out of the market. b. The average price for used cars would go down and drive the better used cars out of the market. c. There would be little to no impact on the market for used cars. d. The asymmetric information would lead to a fair and efficient market.

b. The average price for used cars would go down and drive the better used cars out of the market.

14. Holly goes to her bank to take out a loan, and the bank agrees to the loan on the condition that Holly maintain a balance of $1,000 in her savings account with the bank. This is an example of a bank using a a. deductible as a way to mitigate the problem of moral hazard. b. compensating balance as a way to mitigate the problem of moral hazard. c. compensating balance as a way to mitigate the problem of adverse selection. d. restrictive covenant as a way to mitigate the problem of moral hazard.

b. compensating balance as a way to mitigate the problem of moral hazard.

7. Banks that have some financial difficulty and borrow from the Federal Reserve in what is known as secondary credit will pay an interest rate equal to the a. discount rate. b. discount rate plus a penalty. c. federal funds rate. d. federal funds rate plus a penalty.

b. discount rate plus a penalty.

1. Which of these statements is true of the board of governors of the Fed? a. The board of governors is appointed by the chair and serves a four-year term b. The board of governors consists of six members plus the chair; the term length for members is fourteen years c. The board of governors consists of six members; the term length is four years d. The board of governors is elected once every eight years by the citizens of the United States

b. The board of governors consists of six members plus the chair; the term length for members is fourteen years

1. The board of governors of the Federal Reserve has three primary responsibilities, which are a. oversight of the printing of money, commercial bank regulation, and the operations of the Fed b. the operations of the Fed, commercial bank regulation, and monetary policy c. monetary policy, fiscal policy, and the operations of the Fed d. maintenance of the gold standard, the operations of the Fed, and monetary policy

b. the operations of the Fed, commercial bank regulation, and monetary policy

12. Which of these statements best describes why the required reserve ratio is no longer relevant in most cases today? a. Sweep accounts eliminated the need for the required reserve ratio. b. Changes in the required reserve ratio can affect the size of the money multiplier. c. About 70% of banks already have reserves that exceed their level of required reserves. d. The required reserve ratio rarely had a positive effect in most situations.

c. About 70% of banks already have reserves that exceed their level of required reserves.

1. The Fed is composed of a. Five branches with clear responsibilities b. Six branches with overlapping responsibilities c. Three branches with overlapping responsibilities d. Twelve branches with clear responsibilities

c. Three branches with overlapping responsibilities

15. Petra has an automobile accident and finds that as a result her auto insurance premium will increase by 25%. This is an example of an adjustable premium that insurance companies often use as a mechanism to combat a. short-sightedness. b. adverse selection. c. free-riders. d. moral hazard.

d. moral hazard.

8. In order to overcome the stigma that might come from borrowing from the Federal Reserve following the 2007 financial crisis, the Federal Reserve first created a. the discount window. b. quantitative easing. c. the Federal Open Market Committee (FOMC). d. the term auction facility (TAF).

d. the term auction facility (TAF).

9. Which of these could be a reason for a decrease in the demand for loanable funds? a. Lower expected household income b. A deterioration in business confidence c. An increase in expectations about future inflation d. A decrease in expectations about future inflation

d. A decrease in expectations about future inflation

1. Changes in the federal funds rate influence the economy's growth rate through all of the following except by a. Making it more or less attractive to save b. Making it more or less expensive to borrow c. Making investment spending more or less attractive d. Altering the real interest rate when inflation is changing quickly

d. Altering the real interest rate when inflation is changing quickly

1. The relationship between the economy-wide price level and the level of real GDP illustrated by the aggregate demand curve is a. neutral. b. positive. c. direct. d. inverse.

d. inverse.

. According to Keynes, when the price level rises, it causes the interest rate to do what? It causes the level of business spending to do what? a. It causes an increase in the interest rate, due to a greater consumer demand for money to spend; business spending decreases. b. It causes an increase in the interest rate, due to greater consumer demand for money to spend; business spending goes up as well. c. It causes a decrease in the interest rate, as people adjust to higher prices and purchase less; business spending decreases as well. d. It causes a decrease in the interest rate, as people adjust to higher prices and purchase less; business spending goes up.

a. It causes an increase in the interest rate, due to a greater consumer demand for money to spend; business spending decreases.

20. Deductibles are one way insurance companies protect themselves from careless drivers. a. True b. False

a. True

8. Several factors can cause the SRAS curve to shift; these factors include a change in the cost of inputs, a change in taxes, and even a change in seller expectations. a. True b. False

a. True

9. When the actual level of output is less than the potential level of output, there is an output gap, sometimes called a recessionary gap. a. True b. False

a. True

2. When the parties to a transaction have different levels of knowledge about each other and/or the nature and implications of the transaction, it is said that there exists __________ information. a. asymmetric b. symmetric c. adverse d. ad hoc

a. asymmetric

8. An example of asymmetric information in financial markets is that, in equity markets, directors __________ than shareholders. a. have a better sense of future profitability b. have a different rate of time preference c. are less optimistic about the future d. are less certain about the future

a. have a better sense of future profitability

2. When the Federal Reserve buys US Treasury securities on the open market, it is attempting to a. lower interest rates. b. raise interest rates. c. reduce inflation. d. slow economic growth.

a. lower interest rates.

1. The interest rate that the FOMC currently chooses to control is the a. Federal funds rate b. 30-year Treasury bond rate c. Discount rate d. Prime rate

a. Federal funds rate

7. The quantity of loanable funds supplied is directly related to interest rates because as interest rates increase a. the opportunity cost of household consumption increases, causing households to bring more of their after-tax income to the pool of loanable funds. b. the opportunity cost to firms of funding projects with cash increases, causing firms to bring less of their cash to the pool of loanable funds. c. the opportunity cost of government borrowing increases, causing government to run budget surpluses instead of deficits and therefore bring more cash to the pool of loanable funds. d. in the United States, savers in the rest of the world will be more inclined to save in their domestic market, thereby bringing less of their saving to the US pool of loanable funds.

a. the opportunity cost of household consumption increases, causing households to bring more of their after-tax income to the pool of loanable funds.

Which of these would cause a decrease in aggregate demand? a. A decrease in imports b. An increase in imports c. An increase in net exports d. An increase in exports

b. An increase in imports

8. Which of the following could cause an increase in the supply of loanable funds? a. An increase in government deficits b. A more optimistic outlook on the future by business c. Expansionary monetary policy being followed by the Federal Reserve d. Expectations of future inflation

c. Expansionary monetary policy being followed by the Federal Reserve

2. The Pigou effect is one of the reasons that the aggregate demand curve slopes downward. According to this argument, when the price level a. goes down, interest rates will fall resulting in an increase in the total level of spending. b. goes down, peoples' savings are able to purchase more stuff so the total level of spending increases. c. goes down, peoples' savings are able to purchase more stuff, but spending tends to stay steady, while savings increase. d. in the United States goes down, US goods and services become relatively cheaper compared to things produced overseas, so the total level of spending on US goods and services increases.

b. goes down, peoples' savings are able to purchase more stuff so the total level of spending increases.

10. Originally, Keynes conceived of the aggregate supply curve as consisting of two distinct segments. In this conception, below the full-employment level of output the aggregate supply curve is __________, and once the economy reaches the full-employment level of output it becomes __________. a. upward sloping; vertical b. horizontal; vertical c. upward sloping; horizontal d. downward sloping; vertical

b. horizontal; vertical

9. One emergency lending procedure put into place in 2008 was the creation of the Term Securities Lending Facility. This entity was set up to a. lend up to $50 billion of Treasury securities to primary securities dealers for a fee. b. lend up to $200 billion of Treasury securities to primary securities dealers for a fee. c. lend funding to the Money Market Investor Funding Facility d. lend funding to any commercial bank that needed it.

b. lend up to $200 billion of Treasury securities to primary securities dealers for a fee.

11. The purchase of direct debt and mortgage-backed securities by the Federal Reserve in November 2008 is referred to as a. qualitative easing. b. quantitative easing. c. a repurchase agreement. d. liquidity easing.

b. quantitative easing.

1. The federal funds rate is the interest rate a. The Fed charges banks who borrow from it b. Banks charge each other for overnight loans on excess reserves held at the Fed c. The US Treasury charges banks that need emergency funds d. The FDIC charges banks that need to borrow from it to meet depositor demands

b. Banks charge each other for overnight loans on excess reserves held at the Fed

10. An increase in the price of bonds will cause a decrease in the demand for bonds. a. True b. False

b. False

1. The Chairman of the Board of Governors a. Serves a four-year term that cannot be renewed b. Is appointed by the US President, selected from the Board of Governors c. Serves the same four-year term as the US President d. Serves an eight-year term

b. Is appointed by the US President, selected from the Board of Governors

1. The three branches of the Federal Reserve System include each of the following, except which one? a. The Board of Governors b. The Federal Deposit Insurance Corporation c. The Federal Open Market Committee d. The 12 regional Federal Reserve Banks

b. The Federal Deposit Insurance Corporation

1. Which of the following is (are) not a permanent voting member on the FOMC? a. The seven Governors of the Fed b. The Secretary of the Treasury c. The President of the Federal Reserve Bank of New York d. The Chair of the Board of Governors

b. The Secretary of the Treasury

15. Inflation is a benefit in the short run to a. no one. b. borrowers .c. lenders. d. both borrowers and lenders.

b. borrowers

Bond prices and interest rates are a. directly related. b. inversely related. c. unrelated. d. exponentially related.

b. inversely related.

17. Which of these groups of people is most hurt by inflation? a. Borrowers and the wealthy b. The very wealthy c. Lenders and working class people d. Working class people

c. Lenders and working class people

1. The Governors of the Federal Reserve System are appointed by the a. Member banks from their home district b. Board of Directors of the Reserve Bank from their home districts c. President of the United States d. Chairman of the Federal Reserve System

c. President of the United States

The rational expectations approach postulates what two aggregate supply curves? a. An upward-sloping short-run aggregate supply curve and a horizontal long-run supply curve at the maximum price level b. An upward-sloping short-run aggregate supply curve and a vertical long-run supply curve at zero unemployment rate level of GDP c. An upward-sloping short-run aggregate supply curve and a vertical long-run supply curve at the full-employment level of GDP. d. A vertical short-run aggregate supply curve at the full-employment level of GDP and an upward-sloping long-run supply curve

c. An upward-sloping short-run aggregate supply curve and a vertical long-run supply curve at the full-employment level of GDP.

Which of these statements is most true of the function of banks? a. Banks are a safe way to save, and savers earn high interest. b. Banks lend money and help with the problem of symmetric information. c. Banks play a key role in creating money, and they help with the problem of adverse selection. d. Banks lend money and help with the problem of free-riders.

c. Banks play a key role in creating money, and they help with the problem of adverse selection.

Aggregate demand is equal to a. C + I + G + (X + M). b. C + G + (X - M). c. C + I + G + (X - M). d. S + I + G + (X - M).

c. C + I + G + (X - M).

. Which of the following qualifies as a liability to a bank? a. A business loan b. A mortgage c. Demand deposits d. A Treasury bond

c. Demand deposits

12. Keynes suggested that what kind of spending would be necessary to move the economy out of the Depression? a. Consumer spending b. Increased exports c. Government spending of some kind d. Consumer and government spending

c. Government spending of some kind

Which of these is the most often used and the most flexible monetary tool used by the Federal Reserve? a. Discount window lending b. Dynamic transactions c. Open market operations d. Quantitative easing

c. Open market operations

17. The business of banking solves the problem of a. moral hazard. b. a liquidity mismatch with savers desiring illiquidity and borrowers desiring liquid loans. c. a liquidity mismatch with savers desiring liquidity and borrowers desiring illiquid loans. d. adverse selection.

c. a liquidity mismatch with savers desiring liquidity and borrowers desiring illiquid loans.

The result of asymmetric information in a market is __________ selection. a. irrational b. diverse c. adverse d. careful

c. adverse

9. The bond rating system, in which companies like Moody's and Standard & Poor's provide ratings for a company's default risk, is one way to deal with a. symmetric information. b. adverse hazard. c. adverse selection. d. moral selection.

c. adverse selection.

11. Using a two-part aggregate supply curve, an increase in aggregate demand when the economy is at less than full employment would be expected to lead to __________ in real GDP and __________ in the price level. a. an increase; an increase b. an increase; a decrease c. an increase; no increase d. no change; an increase

c. an increase; no increase

6. A financially healthy bank borrowing overnight from the Federal Reserve is known as a. seasonal credit. b. secondary credit. c. primary credit. d. discount window borrowing.

c. primary credit.

3. The three reasons that the economy-wide price level and the level of real GDP move in opposite directions are a. the Pigou effect, the foreign trade effect, and the real savings effect. b. the foreign trade effect, Keynes's interest rate effect, and the price effect. c. the Pigou effect, Keynes's interest rate effect, and the foreign trade effect. d. the foreign trade effect, the government intervention effect, and the real savings effect.

c. the Pigou effect, Keynes's interest rate effect, and the foreign trade effect.

12. Cleo is hired as the CEO of Wolfstarter Company, a publicly owned corporation. After she is hired, she authorizes the purchase of a company limousine to chauffeur her around town, purchases a skybox at the stadium of the local NFL team, and provides herself with a company-paid membership at the local country club. This behavior could be an example of a. adverse selection. b. the free-rider problem. c. the principal-agent problem. d. undisclosed information.

c. the principal-agent problem.

16. Armand buys a 10-year, $10,000 bond that pays him $500 every year for 10 years and repays the face value in year 10. During the 10-year period, the rate of inflation holds steady at 3% per year. The real rate of return on Armand's investment is a. 5%. b. 3%. c. 2%. d. 0%.

c. 2%.

11. Suppose the market for loanable funds is currently in equilibrium. Which of the following factors will cause an increase in the interest rate? a. An increase in the household saving rate b. A decrease in government budget deficits c. An increase in business confidence d. An expansionary monetary policy

c. An increase in business confidence

1. The primary purpose of meetings of the FOMC is to a. Set the required reserve rate b. Set the discount rate c. Decide on how to influence financial conditions d. Set the prime rate

c. Decide on how to influence financial conditions

. Which of these is an example of asymmetric information in banking? a. Borrowers and lenders have different expectations about financial markets. b. Lenders know more about the capacity of borrowers to repay loans than borrowers. c. Borrowers' goals are short-term while lenders' goals are long-term. d. Borrowers know more about their capacity to repay loans than lenders.

d. Borrowers know more about their capacity to repay loans than lenders.

3. Rachel goes for a job interview and knows a lot about the job she is applying for. The woman who interviews her is filling in for another employee and knows very little about Rachel. We might say the woman conducting the interview is likely to have what kind of situation? a. The interviewer is in a situation of moral hazard, since Rachel may turn out to be a poor employee. b. The interviewer is facing adverse selection, since she knows nothing about Rachel. c. The interviewer has systemic information, since she can ask probing questions of Rachel. d. The interviewer has asymmetric information as she knows less about Rachel than Rachel knows of herself.

d. The interviewer has asymmetric information as she knows less about Rachel than Rachel knows of herself.

13. In Vance's homeowner's insurance policy, it states that he is required to pay out-of-pocket the first $5,000 for any homeowner's insurance claim that he submits before the insurance company will reimburse for any loss. This is an example of using a. a restrictive covenant to mitigate the problem of moral hazard. b. incentives to overcome the principal-agent problem. c. screening to overcome the adverse selection problem. d. a deductible to try to mitigate the problem of moral hazard.

d. a deductible to try to mitigate the problem of moral hazard.

10. The loan application process that banks require potential borrowers to go through is an attempt to deal with a. adverse hazard. b. moral selection. c. free-riders. d. adverse selection.

d. adverse selection.

10. When the Federal Reserve increases the required reserve ratio, the impact will be to a. increase the size of the spending multiplier. b. decrease the size of the spending multiplier. c. increase the size of the money multiplier. d. decrease the size of the money multiplier.

d. decrease the size of the money multiplier.

1. Which of these categories is the largest asset on the Federal Reserve's balance sheet—by far? a. Gold b. Gold and bitcoin c. Repurchase agreements d. Securities

d. Securities

1. The position of chair of the Federal Reserve is filled in what way? a. The chair of the Fed is elected by a vote of the members of Congress b. The chair of the Fed is elected by a congressional committee of economic experts c. The chair of the Fed is appointed by the president of the United States and confirmed by the House of Representatives and the Senate d. The chair of the Fed is appointed by the president of the United States and confirmed by the US Senate

d. The chair of the Fed is appointed by the president of the United States and confirmed by the US Senate

1. Which of these is currently true for the chair of the Federal Reserve? a. The chair position is a term of just two years and is nonrenewable b. The chair position requires a background in economics or finance; the four-year term is renewable c. The chair position requires a background in banking or finance; the two-year term is nonrenewable d. The chair position has no formal qualifications; the four-year term is renewable

d. The chair position has no formal qualifications; the four-year term is renewable

1. When the Federal Reserve was created in 1913, what were its two primary purposes? a. To regulate the financial sector of the US economy and maintain the gold standard b. To print money (real bills) and lend only to banks committed to investment in "real" economic activity c. To regulate the financial sector and be a "lender of last resort" to commercial banks d. To maintain the gold standard and be a "lender of last resort" to commercial banks

d. To maintain the gold standard and be a "lender of last resort" to commercial banks