Money and Banking Final Exam Multiple Choice

The Federal Reserve entity that makes decisions regarding the conduct of open market operations is the Select one: A. Federal Open Market Committee. B. Open Market Advisory Council C. chairman of the Board of Governors. D. Board of Governors.

A. Federal Open Market Committee.

Everything else held constant, if the sum of the required reserve ratio and the excess reserve ratio is less than one, an increase in the currency-deposit ratio causes the M1 money multiplier to ________ and the money supply to ________. Select one: A. decrease; decrease B. increase; increase C. increase; decrease D. decrease; increase

A. decrease; decrease

Suppose a person cashes his payroll check and holds all the funds in the form of currency. Everything else held constant, total reserves in the banking system ________ and the monetary base ________. Select one: A. decrease; remains unchanged B. decrease; decreases C. remain unchanged; increases D. decrease; increases

A. decrease; remains unchanged

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

B. the value of the house fell below the amount of the mortgage.

Each Federal Reserve bank has nine directors. Of these ________ are appointed by the member banks and ________ are appointed by the Board of Governors. Select one: A. six; three B. five; four C. four; five D. three; six

A. six; three

In the simple deposit expansion model, a decline in checkable deposits of $1,000 when the required reserve ratio is equal to 20 percent implies that the Fed Select one: A. sold $200 in government bonds. B. sold $500 in government bonds. C. purchased $200 in government bonds. D. purchased $500 in government bonds.

A. sold $200 in government bonds.

In the market for reserves, if the federal funds rate is above the interest rate paid on excess reserves, an open market purchase ________ the ________ of reserves which causes the federal funds rate to fall, everything else held constant. Select one: A. increases; demand B. increases; supply C. decreases; demand D. decreases; supply

B. increases; supply

The ability of a central bank to set monetary policy instruments is Select one: A. political independence. B. instrument independence. C. goal independence. D. policy independence.

B. instrument independence.

If reserves in the banking system increase by $100, then checkable deposits will increase by $500 in the simple model of deposit creation when the required reserve ratio is Select one: A. 0.01. B. 0.10. C. 0.20 D. 0.05.

C. 0.20

Subject to the approval of the Board of Governors, the decision of choosing the president of a district Federal Reserve Bank is made by Select one: A. three district bank directors who are professional bankers. B. the six district bank directors elected by the member banks. C. district bank directors who are not professional bankers. D. all nine district bank directors. E. class A and class B directors.

C. district bank directors who are not professional bankers.

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

C. Lehman Brothers

The president from which Federal Reserve Bank always has a vote in the Federal Open Market Committee? Select one: A. San Francisco B. Boston C. New York D. Philadelphia

C. New York

A ________ pays out cash flows from a collection of assets in different tranches, with the highest-rated tranch paying out first, while lower ones paid out less if there are losses on the underlying assets. Select one: A. adjustable-rate mortgage B. negotiable CD C. collateralized debt obligation (CDO) D. discount bond

C. collateralized debt obligation (CDO)

The monetary base minus reserves equals Select one: A. the borrowed base. B. discount loans. C. currency in circulation. D. the nonborrowed base.

C. currency in circulation.

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

C. debt deflation.

Suppose that from a new checkable deposit, First National Bank holds two million dollars in vault cash, one million dollars in required reserves, and faces a required reserve ratio of ten percent. Given this information, we can say First National Bank has ________ million dollars on deposit with the Federal Reserve. Select one: A. one B. two C. eight D. ten

C. eight

The Federal Open Market Committee usually meets ________ times a year. Select one: A. four B. six C. eight D. twelve

C. eight

Assuming initially that the required reserve ratio = 10%, the currency-deposit ratio = 40%, and the excess reserve ratio = 0, an increase in the currency-deposit ratio to 50% causes the M1 money multiplier to ________, everything else held constant. Select one: A. increase from 2.5 to 2.8 B. increase from 2.33 to 2.8 C. decrease from 2.8 to 2.5 D. decrease from 2.8 to 2.33

C. decrease from 2.8 to 2.5

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 Select one: A. capitulation. B. releveraging. C. deleveraging. D. deflation.

C. deleveraging.

If a foreign bank operates a subsidiary bank in the U.S., the subsidiary bank is Select one: A. subject to the same regulations as a U.S. owned bank. B. only subject to the regulations of the country in which the foreign bank is chartered. C. restricted to accepting deposits from foreign citizens living in the U.S. D. restricted to making loans to only foreign citizens in the U.S.

A. subject to the same regulations as a U.S. owned bank.

Suppose that from a new checkable deposit, First National Bank holds two million dollars in vault cash, eight million dollars on deposit with the Federal Reserve, and one million dollars in required reserves. Given this information, we can say First National Bank faces a required reserve ratio of ________ percent. Select one: A. ten B. twenty C. eighty D. ninety

A. ten

Which of the following is NOT an entity of the Federal Reserve System? Select one: A. the Comptroller of the Currency B. Federal Reserve Banks C. the Board of Governors D. the Federal Open Market Committee

A. the Comptroller of the Currency

The legislation overturning the Glass-Steagall Act is Select one: A. the Gramm-Leach-Bliley Act. B. the Garn-St. Germain Act C. the Riegle-Neal Act. D. the McFadden Act.

A. the Gramm-Leach-Bliley Act.

The Chairman of the Board of Governors is chosen from among the seven governors and serves a ________, renewable term. Select one: A. one-year B. two-year C. four-year D. eight-year

C. four-year

The Fed can exert more precise control over ________ than it can over ________. Select one: A. the monetary base; high-powered money B. reserves; high-powered money C. high-powered money; reserves D. high-powered money; the monetary base

C. high-powered money; reserves

During the 2007-2009 financial crisis the excess reserve ratio Select one: A. increased slightly. B. decreased sharply. C. increased sharply. D. decreased slightly.

C. increased sharply.

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. Select one: A. more; no B. less; no C. more; less D. less; more

C. more; less

Thrift institutions include Select one: A. brokerage firms B. commercial banks. C. mutual savings banks. D. insurance companies.

C. mutual savings banks.

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. Select one: A. democratization of credit B. debt deflation C. principal-agent D. collateralized debt

C. principal-agent

The three players in the money supply process include Select one: A. banks, depositors, and borrowers. B. banks, depositors, and the U.S. Treasury. C. banks, borrowers, and the central bank. D. banks, depositors, and the central bank.

D. banks, depositors, and the central bank.

Deposits in European banks denominated in dollars for the purpose of international transactions are known as Select one: A. Eurodollars. B. European Monetary Units. C. European Currency Units. D. International Monetary Units.

A. Eurodollars.

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

A. a contraction in economic activity.

Everything else held constant, a decrease in holdings of excess reserves will mean Select one: A. an increase in the money supply. B. a decrease in the money supply. C. an increase in discount loans. D. a decrease in checkable deposits.

A. an increase in the money supply.

An important function of the regional Federal Reserve Banks is Select one: A. clearing checks. B. determining monetary policy. C. setting margin requirements. D. setting reserve requirements.

A. clearing checks.

The ________, the difference between the interest rate on Baa corporate bonds and U.S. Treasury bonds. rose sharply during the Great Depression. Select one: A. credit spread B. credit boom C. default swap D. adjustable-rate

A. credit spread

Both ________ and ________ are monetary liabilities of the Fed. Select one: A. currency in circulation; reserves B. securities; loans to financial institutions C. securities; reserves D. currency in circulation; loans to financial institutions

A. currency in circulation; reserves

The interest rate charged on overnight loans of reserves between banks is the Select one: A. federal funds rate. B. Treasury bill rate. C. prime rate. D. discount rate.

A. federal funds rate.

When the Fed extends a $100 discount loan to the First National Bank, reserves in the banking system Select one: A. increase by $100. B. increase by more than $100. C. decrease by $100. D. decrease by more than $100.

A. increase by $100.

When the Federal Reserve purchases a government bond from a primary dealer, reserves in the banking system ________ and the monetary base ________, everything else held constant. Select one: A. increase; increases B. increase; decreases C. decrease; increases D. decrease; decreases

A. increase; increases

The presence of so many commercial banks in the United States is most likely the result of Select one: A. prior regulations that restricted the ability of these financial institutions to open branches. B. consumers' strong desire for dealing with only local banks. C. adverse selection and moral hazard problems that give local banks a competitive advantage over larger banks. D. consumers' preference for state banks.

A. prior regulations that restricted the ability of these financial institutions to open branches.

Reserves are equal to the sum of Select one: A. required reserves and excess reserves. B. vault cash reserves and total reserves. C. required reserves and vault cash reserves. D. excess reserves and vault cash reserves.

A. required reserves and excess reserves.

In the market for reserves, if the federal funds rate is above the interest rate paid on excess reserves, then an open market ________ the supply of reserves, raising the federal funds interest rate, everything else held constant. Select one: A. sale decreases B. purchase decreases C. sale increases D. purchase increases

A. sale decreases

In the simple deposit expansion model, if the Fed purchases $100 worth of bonds from a bank that previously had no excess reserves, deposits in the banking system can potentially increase by Select one: A. $10. B. $100 times the reciprocal of the required reserve ratio. C. $100. D. $100 times the required reserve ratio.

B. $100 times the reciprocal of the required reserve ratio.

If the required reserve ratio is 10 percent, currency in circulation is $1,200 billion, checkable deposits are $1,600 billion, and excess reserves total $2,500 billion, then the M1 money multiplier is Select one: A. 2.5. B. 0.73. C. 1.7. D. 7.3.

B. 0.73.

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 Select one: A. 5%. B. 10%. C. 50%. D. 20%.

B. 10%.

There are ________ members of the Board of Governors of the Federal Reserve System. Select one: A. 5 B. 7 C. 12 D. 19

B. 7

A major difference between the United States and Japanese banking systems is that Select one: A. Japanese banks are usually organized as bank holding companies. B. Japanese banks are allowed to hold substantial equity stakes in commercial firms, whereas American banks cannot. C. American banks are allowed to hold substantial equity stakes in commercial firms, whereas Japanese banks cannot. D. bank holding companies are illegal in the United States.

B. Japanese banks are allowed to hold substantial equity stakes in commercial firms, whereas American banks cannot.

The main center of the Eurodollar market is Select one: A. Basel. B. London. C. Paris. D. New York.

B. London.

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

B. Securitization

If the required reserve ratio is 10 percent, currency in circulation is $400 billion, checkable deposits are $800 billion, and excess reserves total $0.8 billion, then the money supply is ________ billion. Select one: A. $8000 B. $8400 C. $1200 D. $1200.8

C. $1200

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

B. asset-price bubble

What makes the Federal Reserve so unique compared to other central banks around the world is its Select one: A. monetary policy functions. B. decentralized structure. C. centralized structure. D. regulatory functions.

B. decentralized structure.

The Second Bank of the United States Select one: A. is considered to be the primary cause of the bank panic of 1907. B. had its charter renewal vetoed in 1832. C. was disbanded in 1811 when its charter was not renewed. D. None of the above.

B. had its charter renewal vetoed in 1832.

When the Fed supplies the banking system with an extra dollar of reserves, deposits ________ by ________ than one dollar—a process called multiple deposit creation. Select one: A. decrease; less B. increase; more C. decrease; more D. increase; less

B. increase; more

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

B. less lending to small businesses.

All ________ are required to be members of the Fed. Select one: A. banks with assets less than $500 million B. national banks chartered by the Office of the Comptroller of the Currency C. state chartered banks D. banks with assets less than $100 million

B. national banks chartered by the Office of the Comptroller of the Currency

An increase in the monetary base that goes into currency is ________, while an increase that goes into deposits is ________. Select one: A. not multiplied; not multiplied B. not multiplied; multiplied C. multiplied; multiplied D. multiplied; not multiplied

B. not multiplied; multiplied

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

B. not subject to reserve requirements.

The Federal Reserve Banks are ________ institutions since they are owned by the ________. Select one: A. public; Board of Governors B. quasi-public; private commercial banks in the district where the Reserve Bank is located C. quasi-public; Board of Governors D. public; private commercial banks in the district where the Reserve Bank is located

B. quasi-public; private commercial banks in the district where the Reserve Bank is located

The Federal Open Market Committee consists of the Select one: A. five senior members of the seven-member Board of Governors. B. seven members of the Board of Governors and five presidents of the regional Fed banks. C. seven members of the Board of Governors and seven presidents of the regional Fed banks. D. twelve regional Fed bank presidents and the chairman of the Board of Governors.

B. seven members of the Board of Governors and five presidents of the regional Fed banks.

Which of the following is an entity of the Federal Reserve System? Select one: A. the Comptroller of the Currency B. the FOMC C. the FDIC D. the U.S. Treasury Secretary

B. the FOMC

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 Select one: A. the FDIC. B. the Federal Reserve. C. the Treasury. D. the state banking authorities.

B. the Federal Reserve.

The legislation that overturned the prohibition on interstate banking is Select one: A. the Glass-Steagall Act. B. the Riegle-Neal Act. C. the McFadden Act. D. the Gramm-Leach-Bliley Act.

B. the Riegle-Neal Act.

The Dodd-Frank legislation of 2010 permanently increased the federal deposit insurance to Select one: A. $40,000. B. $100,000. C. $250,000. D. $200,000.

C. $250,000.

The three largest Federal Reserve banks (New York, Chicago, and San Francisco) combined hold more than ________ percent of the assets of the Federal Reserve System. Select one: A. 25 B. 33 C. 50 D. 67

C. 50

The FHLBS gives loans to S&Ls and thus performs a function similar to the ________ for commercial banks. Select one: A. U.S. Mint B. Office of the Comptroller of the Currency C. Federal Reserve D. U.S. Treasury

C. Federal Reserve

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

C. a contraction of economic activity.

Total Reserves minus vault cash equals Select one: A. currency in circulation. B. required reserves. C. bank deposits with the Fed. D. excess reserves.

C. bank deposits with the Fed.

The Fed does not tightly control the monetary base because it does NOT completely control Select one: A. open market sales. B. the discount rate. C. borrowed reserves. D. open market purchases.

C. borrowed reserves.

Both ________ and ________ are Federal Reserve assets. Select one: A. currency in circulation; reserves B. currency in circulation; securities C. securities; loans to financial institutions D. securities; reserves

C. securities; loans to financial institutions

Member commercial banks have purchased stock in their district Fed banks; the dividend paid by that stock is limited by law to ________ percent annually. Select one: A. four B. five C. six D. eight

C. six

The global financial crisis of 2007-2009 not only led to a worldwide recession, but also a ________ in the European nations that use the euro currency. Select one: A. currency devaluation B. tax cut C. sovereign debt crisis D. budget surplus

C. sovereign debt crisis

In the model of the money supply process, the depositor's role in influencing the money supply is represented by Select one: A. the market interest rate. B. the currency holdings and excess reserve. C. the currency holdings. D. the currency holdings and borrowed reserve.

C. the currency holdings.

In the model of the money supply process, the bank's role in influencing the money supply process is represented by Select one: A. both the excess reserve and the market interest rate. B. only borrowed reserves. C. the excess reserve. D. the currency ratio.

C. the excess reserve.

Everything else held constant, an increase in currency holdings will cause Select one: A. the money supply to remain constant. B. checkable deposits to rise. C. the money supply to fall. D. the money supply to rise.

C. the money supply to fall.

In the model of the money supply process, the Federal Reserve's role in influencing the money supply is represented by Select one: A. only nonborrowed reserves. B. both the required reserve ratio and the market interest rate. C. the required reserve ratio, nonborrowed reserves, and borrowed reserves. D. only borrowed reserves.

C. the required reserve ratio, nonborrowed reserves, and borrowed reserves.

An essential characteristic of credit unions is that Select one: A. their lending is primarily for mortgage loans. B. branching across state lines is prohibited. C. they are organized for individuals with a common bond. D. they are typically large.

C. they are organized for individuals with a common bond.

In a ________ banking system, commercial banks provide a full range of banking, securities, and insurance services, all within a single legal entity. Select one: A. severable B. dividerless C. universal D. barrier-free

C. universal

Excess reserves are equal to Select one: A. vault cash minus required reserves. B. total reserves minus discount loans. C. vault cash plus deposits with Federal Reserve banks minus required reserves. D. deposits with the Fed minus vault cash plus required reserves.

C. vault cash plus deposits with Federal Reserve banks minus required reserves.

If the required reserve ratio is 10 percent, currency in circulation is $1,200 billion, checkable deposits are $1,600 billion, and excess reserves total $2,500 billion, then the excess reserves-checkable deposit ratio is Select one: A. 0.48. B. 0.72. C. 0.56. D. 1.56.

D. 1.56.

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

D. Credit unions

A(n) ________ is a subsidiary of a U.S. bank that is engaged primarily in international banking. Select one: A. universal bank B. Eurodollar agency C. McFadden corporation D. Edge Act corporation

D. Edge Act corporation

The Dodd-Frank bill created an agency to monitor markets for asset price bubbles and the buildup of systemic risk. This agency is called the Select one: A. Macroprudential Supervisory Agency. B. Board of Governors. C. Resolution Trust Authority. D. Financial Stability Oversight Council.

D. Financial Stability Oversight Council.

________ within the U.S. can make loans to foreigners but cannot make loans to domestic residents. Select one: A. Euro banks B. Universal banks C. Edge Act corporations D. International Banking Facilities

D. International Banking Facilities

The Federal Reserve Bank of ________ houses the open market desk. Select one: A. San Francisco B. Boston C. Chicago D. New York

D. New York

Banks subject to reserve requirements set by the Federal Reserve System include Select one: A. only banks with assets less than $500 million. B. only nationally chartered banks. C. only banks with assets less than $100 million. D. all banks whether or not they are members of the Federal Reserve System.

D. all banks whether or not they are members of the Federal Reserve System.

Members of the Board of Governors are Select one: A. appointed by the newly elected president of the United States, as are cabinet positions. B. never allowed to serve more than 7-year terms. C. chosen by the Federal Reserve Bank presidents. D. appointed by the president of the United States and confirmed by the Senate.

D. appointed by the president of the United States and confirmed by the Senate.

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

D. bank consolidation.

A financial innovation that developed as a result of banks avoidance of bank branching restrictions was Select one: A. junk bonds. B. commercial paper. C. money market mutual funds. D. bank holding companies.

D. bank holding companies.

The global financial crisis showed the need for increased financial regulation, however, too much or poorly designed regulation could Select one: A. increase the efficiency of the financial system. B. increase economic growth. C. increase international financial integration. D. choke off financial innovation.

D. choke off financial innovation.

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

D. credit boom.

The monetary base consists of Select one: A. currency in circulation and the U.S. Treasury's monetary liabilities. B. reserves and Federal Reserve Notes. C. currency in circulation and Federal Reserve notes. D. currency in circulation and reserves.

D. currency in circulation and reserves.

When the Federal Reserve sells a government bond to a primary dealer, reserves in the banking system ________ and the monetary base ________, everything else held constant. Select one: A. increase; increases B. increase; decreases C. decrease; increases D. decrease; decreases

D. decrease; decreases

In the market for reserves, if the federal funds rate is above the interest rate paid on excess reserves, an open market sale ________ the ________ of reserves, causing the federal funds rate to increase, everything else held constant. Select one: A. decreases; demand B. increases; supply C. increases; demand D. decreases; supply

D. decreases; supply

If the Fed injects reserves into the banking system and they are held as excess reserves, then the money supply Select one: A. increases by a multiple of the initial increase in reserves. B. increases by only one-half the initial increase in reserves. C. increases by only the initial increase in reserves. D. does not change.

D. does not change.

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

D. increased demand for houses and helped fuel the boom in housing prices.

The public's fear of centralized power and distrust of moneyed interests led to the demise of the first two experiments in central banking, otherwise known as Select one: A. the First Central Bank of the United States and the Second Central Bank of the United States. B. the First Bank of North America and the Second Bank of North America. C. the First Bank of the United States and the Central Bank of the United States. D. the First Bank of the United States and the Second Bank of the United States.

D. the First Bank of the United States and the Second Bank of the United States.

Reasons for holding Eurodollars include Select one: A. the fact that minimum transaction sizes are very low, making Eurodollars an attractive savings instrument for consumers. B. the fact that Eurodollar deposits are heavily regulated. C. the fact that Eurodollar deposits are insured by the FDIC. D. the fact that dollars are widely used to conduct international transactions.

D. the fact that dollars are widely used to conduct international transactions.

As the banking system in the United States evolves, it is expected that Select one: A. the number and importance of large banks will decrease. B. the number and importance of small banks will increase. C. small banks will grow at the expense of large banks. D. the number and importance of large banks will increase.

D. the number and importance of large banks will increase.

Total reserves minus bank deposits with the Fed equals Select one: A. required reserves. B. currency in circulation. C. excess reserves. D. vault cash.

D. vault cash.