Money and Banking Exam 2

44. A bank failure is less likely to occur when

A bank has more bank capital

19. When many depositors go to a bank at the same time to withdraw their money, there is said to be

A bank run

46. Which of the following statements is true?

A bank's balance sheet shows that total assets equal total liabilities plus equity capital

10. An index fund is

A mutual fund that mimics a stock index

13. Borrowers know more about their abilities to repay loans than the banks do. This is a situation of

Adverse selection

27. If bad credit risks are the ones who most actively seek loans then financial intermediaries face the problem of

Adverse selection

51. The problem created by asymmetric information before the transaction occurs is called _____, while the problem created after the transaction occurs is called _____.

Adverse selection; moral hazard

36. Debt deflation occurs when

An economic downturn causes the price level to fall and a deterioration in firms' net worth because of the increase burden of indebtedness

1. Debt deflation occurs when

An economic downturn causes the price level to fall and a deterioration in firms' net worth because of the increased burden of indebtedness

35. A possible sequence for the three stages of a financial crisis in an advanced economy might be _____ leads to _____ leads to _____.

Asset price declines; banking crises; unanticipated decline in price level

25. In a bank panic, the source of contagion is the

Asymmetric information problem

55. A system of deposit insurance

Attracts risk-taking entrepreneurs into the banking industry

47. American businesses get their external funds primarily from

Bank loans

15. Banks earn profits by

Borrowing from depositors at a lower interest rate, and lending those funds at a higher interest rate

26. In general, banks would prefer to acquire funds quickly by _____ rather than _____.

Borrowing from the Fed; reducing loans

6. Which of the following are reported as liabilities on a bank's balance sheet?

Checkable deposits

31. Property that is pledged to the lender in the event that a borrower cannot make his or her debt payment is called

Collateral

5. Sometimes one observes that the price of a company's stock falls after the announcement of favorable earnings. This phenomenon is

Consistent with the efficient markets hypothesis if the earnings were not as high as anticipated.

45. Bank loans from the Federal Reserve are called _____ and represent a _____ of funds.

Discount loans; source

12. The ____ is a place where banks can request loans from the Federal Reserve

Discount window

21. The market in which banks with excess reserves lend them to banks that desire additional reserves is known as the _____ market.

Federal reserves

53. A major disruption in financial markets characterized by sharp declines in asset prices and firm failures is called a

Financial crisis

17. A charter is a bank's application for

Going into business

58. Agency problems in the subprime mortgage market included all of the following except

Homeowners could refinance their houses with larger loans when their homes appreciated in value.

49. Direct finance involves the sale to ____ of marketable securities such as stocks and bonds.

Households

48. When a new depositor opens a checking account at the First National Bank, the bank's assets ____ and its liabilities ____.

Increase; increase

8. Which of the following types of information most likely allow the exploitation of a profit opportunity?

Insider information

24. The main idea of the government's supervision and regulation of banks is that it is willing to _____ banks that are solvent, _____ banks that are insolvent or badly run.

Insure deposits for or provide loans to; but will close

23. Securitization is the process by which a bank sells a loan (which it made previously) to

Investors

32. According to the efficient markets hypothesis, purchasing the reports of financial analysts

Is not likely to be an effective strategy for increasing financial returns

29. A bank is insolvent when

Its liabilities exceed its assets

41. Banks will be examined at least once a year and given a CAMELS rating by examiners. The L stands for

Liquidity

9. Banks make their profits primarily by issuing

Loans

22. The letter M, in the CAMALS rating system, which is used to assess the health of the banks, stands for _____.

Management

14. If a business firm takes out a loan from a bank, but does not use the funds as the bank intended, the problem is

Moral hazard

30. The free-rider problem occurs because

People who do not pay for information use it

3. The originate-to-distribute business model has a serious ____ problem since the mortgage broker has little incentive to make sure that the mortgage is a good credit risk.

Principal-agent

56. 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.

Principal-agent

57. Traders working for banks are subject to the

Principal-agent problem

50. Long-term customer relationships ____ the cost of information collection and make it easier to _____ credit risks.

Reduce; screen

4. 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

38. A $5 million deposit outflow from a bank has the immediate effect of

Reducing deposits and reserves by $5 million

54. Acquiring information on a bank's activities in order to determine a bank's risk is difficult for depositors and is another argument for government

Regulation

Which of the following bank assets is the most liquid?

Reserves

20. Paul, a customer of a bank, writes a check for $50,000 to a customer of another bank. Which of the following changes will be reflected in Paul's bank's balance sheet?

Reserves decrease by $50,000

52. _____ is a process of bundling together smaller loans (like mortgages) into standard debt securities.

Securitization

7. Of the following sources of external finance for American nonfinancial businesses, the least important is

Stocks

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

Take too much risk

18. Use the Gordon growth model, a stock's current price decreases when

The growth rate of dividends decreases

34. Using the Gordon growth model, a stock's current price decreases when

The growth rate of dividends decreases

42. 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 bank's final balance sheet,

The liabilities of the bank increase by $1,000,000

11. The efficient market hypothesis assumes that

There are many buyers and sellers in a stock market and stocks are liquid

28. Which of the following is not one of the eight basic puzzles about financial structure?

There is very little regulation of the financial system

33. By bundling share purchases of many investors together mutual funds can take advantage of economies of scale and thereby lower

Transaction costs

16. A bank's reserves equal its

Vault cash plus deposits at the Federal Reserve

43. The concept of adverse selection helps to explain all of the following except

Why direct finance is more important than indirect finance as a source of business finance

39. If uncertainty about banks' health causes depositors to begin to withdraw their funds from banks, the country experiences a(n)

banking crisis

2. Corporations pay back their loans before the scheduled maturity date. An example of the ____ problem would be if Brian borrowed money from Sean in order to purchase a used car and instead took a trip to Atlantic City using those funds

d. Moral hazard