Money and Banking Exam 2

In order to reduce the ________ problem in loan markets, bankers collect information from prospective borrowers to screen out the bad credit risks from the good ones. A) adverse lending B) adverse selection C) moral hazard D) moral suasion

B) adverse selection

Collateral requirements lessen the consequences of ________ because the collateral reduces the lender's losses in the case of a loan default and it reduces ________ because the borrower has more to lose from a default. A) adverse selection; diversification B) adverse selection; moral hazard C) moral hazard; adverse selection D) diversification; moral hazard

B) adverse selection; moral hazard

The primary reason for the recent reduction in the number of banks is A) restrictions on interstate branching. B) bank consolidation. C) re-regulation of banking. D) bank failures.

B) bank consolidation

First National Bank Assets Liabilities Rate-sensitive $20 million $50 million Fixed-rate $80 million $50 million If interest rates rise by 5 percentage points, say, from 10 to 15%, bank profits (measured using gap analysis) will A) decline by $2.5 million. B) decline by $1.5 million. C) increase by $1.5 million. D) decline by $0.5 million.

B) decline by $1.5 million.

Banks may borrow from or lend to another bank in the Federal Funds market. A loan of excess reserves from one bank to another bank is recorded as a(n) ________ for the borrowing bank and a(n) ________ for the lending bank. A) liability; liability B) liability; asset C) asset; asset D) asset; liability

B) liability; asset

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

C) Bank capital is recorded as an asset on the bank balance sheet.

To prevent bank runs and the consequent bank failures, the United States established the ________ in 1934 to provide deposit insurance. A) SEC B) ATM C) FDIC D) Federal Reserve

C) FDIC

In recent decades, especially since 1980 A) banks have decreased risk taking to offset the decline in profits. B) banks have offset the decline in profits from off-balance-sheet activities with increased income from traditional activities. C) banks have offset the decline in profits from traditional activities with increased income from off-balance-sheet activities. D) bank profits have grown rapidly due to deregulation.

C) banks have offset the decline in profits from traditional activities with increased income from off-balance-sheet activities

If a bank needs to acquire funds quickly to meet an unexpected deposit outflow, the bank could A) increase loans. B) buy corporate bonds. C) borrow from another bank in the federal funds market. D) buy U.S. Treasury bills.

C) borrow from another bank in the federal funds market.

In general, banks would prefer to acquire funds quickly by ________ rather than ________. A) "calling in" loans; selling securities B) reducing loans; selling securities C) borrowing from the Fed; reducing loans D) reducing loans; borrowing from the Fed

C) borrowing from the Fed; reducing loans

Mutual savings banks are owned by A) partners. B) shareholders. C) depositors. D) foreign investors.

C) depositors

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

C) provides increased incentives for risk taking

Adjustable rate mortgages A) benefit homeowners when interest rates rise. B) allow borrowers to avoid paying interest on portions of their mortgage loans. C) reduce the interest-rate risk for financial institutions. D) generally have higher initial interest rates than conventional fixed-rate mortgages.

C) reduce the interest-rate risk for financial institutions

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

D) purchasing securities with high returns and low risk

Long-term customer relationships ________ the cost of information collection and make it easier to ________ credit risks. A) increase; increase B) reduce; increase C) increase; screen D) reduce; screen

D) reduce; screen

Which of the following are reported as assets on a bank's balance sheet? A) borrowings B) bank capital C) savings deposits D) reserves

D) reserves

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

D) securitization

A bank failure is less likely to occur when

A bank suffers large deposit outflows

________ are the only depository institutions that are tax-exempt. A) Credit unions B) Mutual savings banks C) Savings and loans D) Commercial banks

A) Credit Unions

Which of the following are bank assets? A) a customer's checking account B) a negotiable CD C) a discount loan D) the building owned by the bank

D) the building owned by the bank

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

D) the higher is the return for the owners of the bank.

The spectacular growth in international banking can be explained by A) the 1988 Basel Agreement. B) the collapse of the Bretton Woods system. C) the creation of the World Trade Organization. D) the rapid growth in international trade.

D) the rapid growth in international trade

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

D) vault cash and deposits at the Fed.

The consumer financial bureau is part of the

Federal Reserve

With the population about 40% of that in the U.S., Japan has

Fewer than 200 banks

Bank ________ is/are listed on the liability side of the bank's balance sheet. A) capital B) cash items C) securities D) reserves

A) capital

When a lender refuses to make a loan, although borrowers are willing to pay the stated interest rate or even a higher rate, the bank is said to engage in A) credit rationing. B) coercive bargaining. C) strategic holding out. D) collusive behavior.

A) credit rationing

Eurodollars are A) dollar-dominated deposits held in banks outside the United States. B) dollar-dominated deposits held in U.S. banks by Europeans. C) deposits held by U.S. banks in Europe. D) deposits held by U.S. banks in foreign countries.

A) dollar-dominated deposits held in banks outside the United States

Depository institutions does not include A) insurance companies. B) commercial banks. C) mutual savings banks. D) credit unions.

A) insurance companies

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

A) the dramatic increase in the volatility of interest rates

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

A) the liabilities of Citibank increase by $10.

The spectacular growth in international banking can be explained by

A) the rapid growth in international trade.

Mutual savings banks are primarily regulated by A) the states in which they are located. B) the FDIC. C) the Federal Reserve. D) the National Credit Union Administration.

A) the states in which they are located

Increased size of financial institutions resulting from financial consolidation increases the ________ problem, because there are now more large institutions whose failure would expose the financial system to systemic risk. A) too-big-to-fail B) transactions costs C) economies of scale D) asset transformation

A) too-big-to-fail

Bank capital is equal to ________ minus ________.

A) total assets; total liabilities

In retaliation for "unfair" trade practices, Congress imposes a 30% tariff on Japanese DVD recorders, but at the same time, U.S. demand for Japanese goods increase, then, in the long run, __________, everything else held constant

The Japanese yen could appreciate, depreciate, or remain constant relative to the U.S. dollar

One factor contributing to the rapid growth of the commercial paper market since 1970 is

The fact the commercial paper has no default risk

According to the purchasing power parity, if one country's price level rises relative to another's by a certain percentage then the other country's currency

Appreciates by the same percentage

As the banking system in the United States evolves, it is expected that

the number and importance of large banks will increase.

Both ____ and ____ were financial innovations that occurred because of interest rate volatility

adjustable-rate mortgages; financial derivatives

All else the same, if a bank's liabilities are more sensitive to interest rate fluctuations than are its assets, then ________ in interest rates will ________ bank profits.

an increase; reduce

In an agreement to exchange dollars for euros in three months at a price of $0.90 per euro, the price is the

forward exchange rate

U.S. banks have most of their branches in

Latin America, the Far East, the Caribbean, and London.

Although the FDIC was created to prevent bank failures, its existence encourages banks to

take too much risk.

An advantage to American banks from operating foreign branches is that Eurodollar deposits in their foreign branches are A) insured by the FDIC. B) not subject to reserve requirements and regulations C) all demand deposits that pay no interest. D) subject to extensive regulatory supervision.

B) not subject to reserve requirements and regulations

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) reduce the bank's assets by making fewer loans. C) sell securities the bank owns and put the funds into the reserve account. D) pay higher dividends.

B) reduce the bank's assets by making fewer loans.

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

B) required reserves

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

B)an adverse selection

If a bank's ratio of assets to capital is 25 and it's return on assets is -5%, what is its return on equity? A) -30% B) -5% C) -0.2% D) -125%

D) -125%

Assuming that the average duration of its assets is five years, while the average duration of its liabilities is three years, then a 5 percentage point increase in interest rates will cause the net worth of First National to decline by ________ of the total original asset value. A) 5 percent B) 25 percent C) 15 percent D) 10 percent

D) 10 percent

________ of a foreign bank operates in the U.S. but cannot accept deposits from domestic residents. A) A universal corporation B) A McFadden corporation C) A Basel branch D) An agency

D) an agency

Nationwide banking might reduce bank failures due to A) elimination of community banks. B) reduced competition. C) reduced lending to small businesses. D) diversification of loan portfolios across state lines.

D) diversification of loan portfolios across state lines

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

D) improvement in information technology

If, after a deposit outflow, a bank needs an additional $3 million to meet its reserve requirements, the bank can

D) increase loans by 3 million

One of the concerns of increased bank consolidation is the reduction in community banks which could result in A) loss of cultural identity. B) more bank regulation. C) higher interest rates. D) less lending to small businesses.

D) less lending to small businesses

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

D) loans.

When Americans or foreigners expect the return on dollar assets to be high relative to the return on ________ assets, there is a ________ demand for dollar assets, everything else held constant.

Higher;lower

________ in the expected future domestic exchange rate causes the demand for domestic assets to increase and the domestic currency to ________, everything else held constant.

Increase;increase

Risk is related to the uncertainty about interest rate movements is called

Interest rate risk

What happened to real interest rates during the early 1930s?

Moral hazard

Everything else held constant, when a country's currency appreciates, the country's goods abroad become ________ expensive and foreign goods in that country become _______ Expensive

More;less

Bank capital has both benefits and costs for the bank owners. Higher bank capital ________ the likelihood of bankruptcy, but higher bank capital ________ the return on equity for a given return on assets.

reduces; reduces