Exam 2 - ECN 352

Suppose that a bank with no excess reserves receives a deposit into a checking account of $19000 in currency. If the required reserve ratio is 0.15, what is the maximum amount that the bank can lend out?

16150

Suppose that a bank with no excess reserves receives a deposit into a checking account of $5000 in currency. If the required reserve ratio is 0.15, what is the maximum amount that the bank can lend out?

4250

The only state to have two Federal Reserve District Banks is A. Missouri. B. California. C. Texas. D. Pennsylvania.

A. Missouri

As of 2015, which of the following was the largest stock exchange in terms of total value traded? A. New York Stock Exchange B. Tokyo Stock Exchange C. Shanghai Stock Exchange D. London Stock Exchange

A. New York Stock Exchange

The supply of loanable funds has a ________ slope because the greater the interest rate, the ________ the reward to saving, and the ________ the quantity of loanable funds supplied. A. positive; greater; greater B. positive; greater; lesser C. negative; lesser; greater D. positive; lesser; lesser

A. positive; greater; greater

The regional Federal Reserve Banks are owned by A. private banks which are part of the Federal Reserve System in each region. B. the state governments covered by each bank's region. C. the federal government. D. the Federal Reserve System.

A. private banks which are part of the Federal Reserve System in each region.

The McFadden Act of 1927 A. prohibited national banks from operating branches outside their home states. B. put a tax on the issuance of bank notes by state banks. C. established the Federal Reserve System. D. separated commercial banking from investment banking.

A. prohibited national banks from operating branches outside their home states.

How can the Fed increase banks' holdings of reserves and potentially lower the money supply? A. raising interest rates B. conducting open market purchases by buying bonds C. reducing reserve ratio D. reducing income tax rates

A. raising interest rates

Damian wants to start a business where he is the only owner and the company does not issue stock. The type of business Damian wants to start is a A. sole proprietorship. B. partnership. C. corporation. D. Any of the above could be correct.

A. sole proprietorship.

An increase in the government budget deficit will shift the ________ curve for loanable funds to the ________ and the equilibrium real interest rate will ________. A. supply; left; rise B. demand; right; rise C. supply; right; fall D. demand; left; fall

A. supply; left; rise

Monetary policy refers to the actions the Federal Reserve takes to manage A. the money supply and interest rates to pursue its economic objectives. B. government spending and income tax rates to pursue its economic objectives. C. income tax rates and interest rates to pursue its economic objectives. D. the money supply and income tax rates to pursue its economic objectives.

A. the money supply and interest rates to pursue its economic objectives.

During a banking panic, a lender of last resort will A. make loans to insolvent but liquid banks. B. make loans to solvent but temporality illiquid banks. C. make loans to any banks which request them. D. purchase banks which are having difficulty but appear sound.

B. make loans to solvent but temporality illiquid banks.

Juliana, Gabrielle, and Marcela want to start a business they are the only owners and the company does not issue stock. The type of business they want to start is a A. sole proprietorship. B. partnership. C. corporation. D. Any of the above could be correct.

B. partnership.

Dividends are A. payments made to bond holders. B. payments made to stockholders. C. payments to holders of common stock, not preferred stock. D. the total profit earned by a corporation.

B. payments made to stockholders.

What is meant by economic well-being? Economic well-being is typically determined by the A. cost of goods and services that individuals can enjoy. B. quantity and quality of goods and services that individuals can enjoy. C. institutional framework that defines the deliberate incentive structure of a society. D. stock of human knowledge particularly as applied to the human command over nature.

B. quantity and quality of goods and services that individuals can enjoy.

When expected inflation increases, investors ________ their demand for bonds because, for each nominal interest rate, the higher the inflation rate, the ________ the real interest rate investors will receive. A. increase; lower B. reduce; lower C. increase; higher D. reduce; higher

B. reduce; lower

Members of the Board of Governors A. may serve no more than three consecutive four-year terms. B. serve one nonrenewable fourteen-year term. C. serve for life or good behavior. D. must resign when the President who has appointed them leaves office.

B. serve one nonrenewable fourteen-year term.

The idea that nominal interest rates rise or fall one for one with expected inflation is known as A. market risk. B. the Fisher effect. C. systematic risk. D. idiosyncratic risk.

B. the Fisher effect.

Equilibrium in the loanable funds market determines A. the expected interest rate. B. the real interest rate. C. the nominal interest rate. D. the current interest rate.

B. the real interest rate.

Which of the following will increase the real interest rate? A. an increase in the supply of loanable funds B. an increase in household saving C. an increase in the demand for loanable funds D. an increase in the budget surplus

C. an increase in the demand for loanable funds

Members of the Board of Governors are A. elected by the district bank presidents. B. appointed by the Securities and Exchange Commission, subject to congressional veto. C. appointed by the President of the United States, subject to confirmation by the Senate. D. appointed by the National Monetary Commission.

C. appointed by the President of the United States, subject to confirmation by the Senate.

Suppose some members of Enron's board of directors are aware of the company's true financial condition, information that is not available to most investors. This is an example of A. the lemons problem. B. moral hazard. C. asymmetric information. D. adverse selection.

C. asymmetric information.

When there's asymmetric information, who tends to have the better information?A. lender B. intermediary C. borrower D. equally likely to be the borrower or the lender

C. borrower

The assumption of asymmetric information means that A. borrowers and lenders have perfect information. B. borrowers and lenders have the same information. C. borrowers know more than lenders. D. lenders know more than borrowers.

C. borrowers know more than lenders.

Arturo wants to start a business where he is the chief executive officer and the company does issue stock. The type of business Arturo wants to start is a A. sole proprietorship. B. partnership. C. corporation. D. Any of the above could be correct.

C. corporation.

If technological change increases the profitability of new investments for firms, then the ________ curve for loanable funds will shift to the ________. A. supply; right B. demand; left C. demand; right D. supply; left

C. demand; right

If technological change increases the profitability of new investment for firms, then the ________ curve for loanable funds will shift to the ________ and the equilibrium real interest rate will ________. A. supply; right; fall B. demand; left; fall C. demand; right; rise D. supply; left; rise

C. demand; right; rise

The difference between the value of a firm's assets and the value of its liabilities is known as A. limited liability. B. profit. C. equity. D. stock.

C. equity.

A decrease in the real interest rate will A. decrease investment and government spending. B. increase consumption and reduce investment. C. increase consumption and investment. D. increase saving and investment.

C. increase consumption and investment.

Higher expected inflation ________ the supply of bonds and ________ the demand for bonds. A. increases; increases B. reduces; increases C. increases; reduces D. reduces; reduces

C. increases; reduces

The problem faced by the lender that the borrower may take on additional risk after receiving the loan is called A. diversification. B. adverse selection. C. moral hazard. D. transactions costs.

C. moral hazard.

If you have $2 million in a CD at a commercial bank that is a member of the FDIC, how much of your funds are uninsured? A. $2 million B. $1 million C. $0 D. $1.75 million

D. $1.75 million

Which of the following cities contains a Federal Reserve bank? A. Pittsburgh B. Dallas C. Los Angeles D. Seattle

D. Dallas

Monetary policy refers to the actions the A.Federal Reserve takes to manage government spending and taxes to pursue its economic objectives. B. President and Congress take to manage government spending and taxes to pursue their economic objectives. C. President and Congress take to manage the money supply and interest rates to pursue their economic objectives. D. Federal Reserve takes to manage the money supply and interest rates to pursue its economic objectives.

D. Federal Reserve takes to manage the money supply and interest rates to pursue its economic objectives.

Which of the following is NOT true of moral hazard? A. It would not exist in a world of perfect information. B. It describes a lender's problem in verifying borrowers are using their funds as intended. C. It arises because borrowers typically know more than lenders. D. It describes a lender's problem of distinguishing the good risk applicants from the bad risk applicants.

D. It describes a lender's problem of distinguishing the good risk applicants from the bad risk applicants.

What is the simple deposit multiplier?A. It is the percentage of checkable deposits that the Fed specifies banks must hold as reserves. B. It is the ratio of the amount of deposits created by banks to the amount of already existing reserves. C. It is the ratio of the amount of new reserves to the amount of deposits created by banks. D. It is the ratio of the amount of deposits created by banks to the amount of new reserves.

D. It is the ratio of the amount of deposits created by banks to the amount of new reserves.

Which of the following cities does NOT contain a Federal Reserve bank? A. Boston B. Dallas C. Cleveland D. Los Angeles

D. Los Angeles

Which of the following is NOT a popular stock market index? A. Dow Jones Industrial Average B. NASDAQ C. S&P 500 D. Moody's Market Index

D. Moody's Market Index

The president of which Federal Reserve Bank is always a voting member of the Federal Open Market Committee? A. Philadelphia B. Boston C. Chicago D. New York

D. New York

What do open market operations imply? A. Setting the discount rate and the terms of discount lending B. Paying interest on banks' required reserve and excess reserve deposits C. Requiring banks to hold a fraction of checkable deposits as vault cash or deposits with the Fed D. The purchase or sale of securities, typically U.S. Treasury securities, in financial markets

D. The purchase or sale of securities, typically U.S. Treasury securities, in financial markets

The loanable funds market is given in the figure above. If the current real interest rate is 5 percent, which of the following is true? A. The quantity of loanable funds being demanded in the market is less than $90 million. B. The loanable funds market is in equilibrium. C. There is a shortage of loanable funds in the market. D. There is a surplus of loanable funds in the market.

D. There is a surplus of loanable funds in the market.

Moral hazard problems arise when A. lenders have difficulty in distinguishing between good and lemon firms. B. a downturn in economic activity makes repaying loans difficult for borrowers. C. borrowers default on loans. D. borrowers have an incentive to conceal information.

D. borrowers have an incentive to conceal information.

Loans by the Federal Reserve to banks are known as A. cash items in the process of collection. B. federal funds. C. repurchase agreements. D. discount loans.

D. discount loans.

The Fed's monetary policy tools A. have proven to be of little value in helping the Fed to achieve its monetary policy goals. B. have allowed the Fed to achieve its monetary policy goals directly. C. are no longer as effective in achieving its monetary policy goals, due to restrictive legislation passed by Congress in the 1990s. D. have allowed the Fed to achieve its monetary policy goals indirectly.

D. have allowed the Fed to achieve its monetary policy goals indirectly.

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. A. costly state verification B. agency C. adverse selection D. moral hazard

D. moral hazard

Financial securities are exchanged by dealers linked by computers in a(n) A. public exchange. B. financial exchange. C. stock exchange. D. over-the-counter market.

D. over-the-counter market.

Which of the following are goals of monetary policy? A. price stability, maximizing the value of the dollar relative to other currencies, and high employment B. price stability, economic growth, and maximizing the value of the dollar relative to other currencies C. maximizing the value of the dollar relative to other currencies, economic growth, and high employment D. price stability, economic growth, and high employment

D. price stability, economic growth, and high employment

Limited liability can best be defined as the legal provision that A. gives holders of preferred stock priority over holders of common stock. B. reduces the exposure of sole proprietorships to law suits. C. protects bond holders from being sued by other creditors. D. shields owners of a corporation from losing more than what they invested in a firm.

D. shields owners of a corporation from losing more than what they invested in a firm.

An increase in the government budget surplus will shift the ________ curve for loanable funds to the ________ and the equilibrium real interest rate will ________. A. supply; left; rise B. demand; left; fall C. demand; right; rise D. supply; right; fall

D. supply; right; fall

The loanable funds market is in equilibrium, as shown in the figure above. As a result of an increase in the government budget deficit, the ________ for loanable funds will ________, thereby ________ the equilibrium real interest rate and ________ the equilibrium quantity of loanable funds. A. demand; shift right; increasing; decreasing B. supply; shift right; decreasing; increasing C. demand; shift left; decreasing; decreasing D. supply; shift left; increasing; decreasing

D. supply; shift left; increasing; decreasing

Who is considered to wield the most power in the Federal Reserve System? A. member banks B. the Treasury Secretary C. the president of the Federal Reserve Bank of New York D. the Fed chair

D. the Fed chair

A sole proprietorship is the type of business that has ________ government rules and regulations affecting it. A. the most B. only federal C. no D. the fewest

D. the fewest

Open market _____, thereby _____. sales shrink decreasing A. the money multiplier; the money supply B. the money base; the money multiplier C. the money multiplier; reserves and the monetary base D. the monetary base; the money supply

D. the monetary base; the money supply

Monetary policy is conducted by the U.S. Treasury Department. T/F

F

If the Fed cuts the required reserve ratio from 19% to 17%, calculate the change in the value of the simple deposit multiplier. The simple deposit multiplier would (increase or decrease) by what? (Round your response to two decimal places. )

Increase by 0.62

One of the monetary policy goals of the Federal Reserve is price stability. T/F

T

What is the difference between moral hazard and adverse selection?(1) occurs when bad risks are more likely to seek/accept a financial contract than are good risks. (2) occurs in financial markets when borrowers use borrowed funds differently than they would have used their own funds.The "lemons problem" A. is a problem that buyers of used cars face, but there is no such problem in the financial market. B. refers to either the adverse selection or moral hazard problem that arises from asymmetric information. C. refers to the adverse selection problem that arises from asymmetric information. D. refers to the moral hazard problem that arises from asymmetric information./ How does the lemons problem lead many firms to borrow from banks rather than from individual investors? (Check all that apply.) A. Because potential investors have difficulty in distinguishing good borrowers from bad borrowers, they offer good borrowers terms they are reluctant to accept. B. Because banks specialize in gathering information, they are able to overcome the problem of distinguishing good borrowers from bad borrowers. C. Because banks have difficulty in distinguishing good borrowers from bad borrowers, they offer good borrowers terms they are reluctant to accept. D. Because potential investors specialize in gathering information, they are able to overcome the problem of distinguishing good borrowers from bad borrowers.

1) Adverse Selection 2) Moral Hazzard C. refers to the adverse selection problem that arises from asymmetric information./ A. Because potential investors have difficulty in distinguishing good borrowers from bad borrowers, they offer good borrowers terms they are reluctant to accept. B. Because banks specialize in gathering information, they are able to overcome the problem of distinguishing good borrowers from bad borrowers.

In the current U.S. economy, who plays the role of lender of last resort? A. The Federal Reserve System B. The Federal Deposit Insurance Corporation C. The Social Security Administration D. The Securities and Exchange Commission

A. The Federal Reserve System

The market is in equilibrium. If the government budget deficit rises, which of the following would you expect to see? A. The quantity of loanable funds demanded by firms will fall below $120 million. B. The budget deficit will have no impact on the quantity of loanable funds demanded by firms. C. The interest rate will fall below 4 percent. D. The quantity of loanable funds demanded by firms will rise above $120 million.

A. The quantity of loanable funds demanded by firms will fall below $120 million.

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

A. adverse selection.

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. asymmetric information. B. non collateralized risk. C. adverse selection. D. moral hazard.

A. asymmetric information.

The "lemons problem" exists because of A. asymmetric information. B. economies of scale. C. transactions costs. D. rational expectations.

A. asymmetric information.

Moral hazard is not eliminated in debt financing because A. borrowers have an incentive to assume greater risk than is in the interest of the lender. B. firms with a great deal of debt often go bankrupt. C. principal agent problems are greater with debt financing than with equity financing. D. the use of restrictive covenants tends to increase moral hazard.

A. borrowers have an incentive to assume greater risk than is in the interest of the lender.

An increase in expected inflation results in A. higher nominal interest rates and lower bond prices. B. lower real interest rates and higher bond prices. C. higher real interest rates and lower bond prices. D. lower nominal interest rates and higher bond prices.

A. higher nominal interest rates and lower bond prices.

Assuming a required reserve ratio of 10% and the Fed purchased $1 million worth of mortgage-backed securities, make use of the simple deposit multiplier to determine by how much checking deposits would change. A. increase by $10 million B. increase by $1 million C. decrease by $1 million D. decrease by $10 million

A. increase by $10 million

Because ________ in the government budget deficit increase the real interest rate, budget deficits can ________ firm investment. A. increases; decrease B. increases; increase C. decreases; increase D. decreases; decrease

A. increases; decrease

Investors value liquidity in an asset because A. liquid assets incur lower selling costs. B. whereas liquid assets have high information costs, their low risk offsets this. C. liquid assets incur lower tax liabilities. D. liquid assets tend to have high rates of return.

A. liquid assets incur lower selling costs.

The principal agent problem would not occur if ________ of a firm had complete information about actions of the ________. A. owners; managers B. owners; customers C. managers; customers D. managers; owners

A. owners; managers

Interest rates typically fall during recessions, suggesting that A. the supply curve for bonds shifts more to the left than does the demand curve for bonds. B. the demand curve for bonds shifts to the left and the supply curve for bonds shifts to the right. C. the demand curve for bonds shifts more to the left than does the supply curve for bonds. D. the supply curve for bonds shifts to the left and the demand curve for bonds shifts to the right.

A. the supply curve for bonds shifts more to the left than does the demand curve for bonds.

The Dow Jones Industrial Average is the best-known measure of the performance of the U.S. stock market, and is an average of the stock prices of A. the 500 largest corporations in the United States. B. 30 large corporations. C. over 3,200 high-tech stocks. D. all major banking and financial companies.

B. 30 large corporations.

Which of the following is NOT an example of adverse selection? A. A company in serious financial trouble offers to pay you 30% on a loan. B. A company uses the proceeds of a new stock sale to build an unnecessarily luxurious new headquarters. C. A terminal cancer patient buys life insurance. D. A family with a home ten feet from a large river buys flood insurance.

B. A company uses the proceeds of a new stock sale to build an unnecessarily luxurious new headquarters.

Which of the following is an example of adverse selection? A. A woman with a large life insurance policy takes up sky diving. B. A man with a bad heart condition buys a large life insurance policy. C. A homeowner with a large fire insurance policy allows the wiring in her house to deteriorate. D. Your brother in law borrows $20,000 from you to open a pizza parlor, but spends it gambling at the racetrack instead.

B. A man with a bad heart condition buys a large life insurance policy.

Before the financial crisis of 2007 2009, what were the monetary policy tools that the Fed relied on? (Check all that apply. ) A. Interest rate on reserve balances B. Discount policy C. Open market operations D. Reserve requirements E. Term deposit facility

B. Discount policy C. Open market operations D. Reserve requirements

Which of the Fed's traditional monetary policy tools was the most important? A. Discount policy B. Open market operations C. Reserve requirements D. They are all equally important.

B. Open market operations

8.19.20.In the current U.S. economy, who plays the role of lender of last resort? A. The Social Security Administration B. The Federal Reserve System C. The Federal Deposit Insurance Corporation D. The Securities and Exchange Commission

B. The Federal Reserve System

What is the aim of monetary policy? Monetary policy aims to A. keep the level of inflation at zero. B. advance the economic well-being of the country's citizens. C. determine the correct allocation of social benefits among citizens. D. encourage a financial crisis.

B. advance the economic well-being of the country's citizens.

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

B. asymmetric information

Moral hazard problems arise when A. a downturn in economic activity makes repaying loans difficult for borrowers. B. borrowers have an incentive to act in ways that do not reflect the lender's interests. C. borrowers default on loans. D. lenders have difficulty in distinguishing between good and lemon firms.

B. borrowers have an incentive to act in ways that do not reflect the lender's interests.

Alternating periods of economic expansion and recession are known as the: A. market risk B. business cycle C. Fisher effect D. systematics

B. business cycle

The interest rate on interbank loans is called the A. prime rate. B. federal funds rate. C. repo rate. D. discount rate.

B. federal funds rate.

If the Fed wished to decrease the money supply, it could A. lower the unemployment rate B. lower the interest rate C. lower the required reserve ratio. D. raise the interest rate

B. lower the interest rate

Currently, the FDIC insures deposits up to a limit of A. $1,000. B. $100,000. C. $250,000. D. $1,000,000.

C. $250,000.

How many Federal Reserve districts are there? A. 50 B. 2 C. 12 D. 1

C. 12

If the required reserve ratio is 5%, what is the value of the simple deposit multiplier? A. 0.05 B. 0.20 C. 20 D. 5

C. 20

Which of the following statements is true? A. Corporations have one owner, while proprietorships have many owners. B. Proprietorships have limited liability while corporations have unlimited liability. C. Corporations can issue stocks and bonds, while proprietorships cannot. D. Corporations face fewer taxes than do proprietorships.

C. Corporations can issue stocks and bonds, while proprietorships cannot.

Which of the following is NOT true of adverse selection? A. It arises because borrowers typically know more than lenders. B. It would not exist in a world of perfect information. C. It describes a lender's problem in verifying borrowers are using their funds as intended. D. It describes a lender's problem of distinguishing the good risk applicants from the bad risk applicants.

C. It describes a lender's problem in verifying borrowers are using their funds as intended.

The loanable funds market is in equilibrium, as shown in the figure to the right. An increase in the supply of loanable funds could result in which of the following combinations of the real interest rate and quantity of loanable funds at a new equilibrium? A. The real interest rate is 3 percent, and the quantity of loanable funds is $90 million. B. The real interest rate is 5 percent, and the quantity of loanable funds is $150 million. C. The real interest rate is 3 percent, and the quantity of loanable funds is $150 million. D. The real interest rate is 5 percent, and the quantity of loanable funds is $90 million.

C. The real interest rate is 3 percent, and the quantity of loanable funds is $150 million.

Why is adverse selection more likely in financial markets when interest rates rise? A. Banks eliminate risky borrowers by raising interest rates. B. If firms have to pay higher interest rates, they may choose to use the funds differently than they first intended. C. The remaining borrowers are more likely to be risky. D. Higher interest rates are likely to hurt the economy.

C. The remaining borrowers are more likely to be risky.

The Fed can implement open market operations A. less rapidly than either changes in the discount rate or changes in reserve requirements. B. more rapidly than changes in the discount rate, but less rapidly than changes in reserve requirements. C. more rapidly than either changes in the discount rate or changes in reserve requirements. D. more rapidly than changes in reserve requirements, but less rapidly than changes in the discount rate.

C. more rapidly than either changes in the discount rate or changes in reserve requirements.

The Federal Reserve Act of 1913 required that A. national banks establish branches in the cities containing Federal Reserve banks. B. state banks be subject to the same regulations as national 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.

The "lemons problem" exists in the market for goods because A. of moral hazard. B. buyers tend to try to take advantage of sellers. C. of the differences in the quality of the goods being exchanged. D. sellers tend to try to take advantage of buyers.

C. of the differences in the quality of the goods being exchanged.

The most commonly used means of changing the money supply is: A. changes in the Regulation Q ceiling. B. changing reserve requirements. C. open market operations. D. changing the bank rate.

C. open market operations.

Generally, when there is asymmetric information A. a lender will only lend to well known borrowers. B. a lender will only lend to the government. C. practical solutions are devised to allow lending to take place. D. a lender will cease all lending activities.

C. practical solutions are devised to allow lending to take place.

Which of the following is considered to be a goal of monetary policy? A. a low federal budget deficit B. an end to poverty C. price stability D. fair wages

C. price stability

Members of the Board of Governors A. serve for life or good behavior. B. must resign when the President who has appointed them leaves office. C. serve one nonrenewable fourteen year term. D. may serve no more than three consecutive four year terms.

C. serve one nonrenewable fourteen year term.

The "lemons problem" in the used car market arises from A. the tendency of buyers of used cars to pay for them with bad checks. B. the reluctance of many car dealers to handle used cars. C. the difficulty buyers have in distinguishing good cars from lemons. D. the difficulty U.S. producers have in making reliable cars.

C. the difficulty buyers have in distinguishing good cars from lemons.

If the Fed's policy is contractionary, it will A. use open market operations to buy Treasury bills. B. lower the reserve requirement. C. use open market operations to sell Treasury bills. D. lower the discount rate.

C. use open market operations to sell Treasury bills.

The principal agent problem− A. in financial markets helps to explain why equity is a relatively important source of finance for American business. B. 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. D. occurs when managers have more incentive to maximize profits than the stockholders owners do.

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