Money Banking Midterm

Capital Market Instrument Government Security Stocks Agency Securities Corporate Bonds Mortgages Description 1. These​ long-term bonds are issued by institutions such as Ginnie​ Mae, the Federal Farm Credit​ Bank, and the TVA. Many of these securities are guaranteed by the federal government. 2. These​ long-term debt instruments are issued by the U.S. Treasury to finance the deficits of the federal government. 3. These are loans to households or firms to purchase​ housing, land, or other real​ structures, where the structure or land itself serves as collateral for the loans. 4. These are equity claims on the net income and assets of a corporation. 5. State and local bonds are​ long-term debt instruments issued by state and local governments to finance expenditures on​ schools, roads, and other large programs. 6. These​ long-term bonds are issued by corporations with very strong credit ratings.

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Concept Adverse selection Asymmetric information Moral hazard Description 1. A situation where the borrower might engage in activities that are undesirable from the​ lender's point of​ view, because they make it less likely that the loan will be paid back. 2. Investing in a collection​ (portfolio) of assets whose returns do not always move​ together, with the result that overall risk is lower than for individual assets. 3. Occurs when the potential borrowers who are the most likely to produce an undesirable​ (adverse) outcomelong dash—the bad credit riskslong dash—are the ones who most actively seek out a loan and are thus most likely to be selected. 4. A situation where one party often does not know enough about the other party to make accurate decisions. 5. A process of borrowing funds from the​ lender-savers and then using these funds to make loans to​ borrower-spenders.

341

Federal Reserve FDIC Office of Thrift Supervision Comptroller of the Currency SEC Description 1. Examines the books of savings and loan associations and imposes restrictions on assets they can hold. 2. Charters and examines the books of federally chartered commercial banks and imposes restrictions on assets they can hold. 3. Examines the books of commercial banks that are members of the Federal Reserve System and sets reserve requirements for all banks. 4. Provides insurance of at​ $250,000 for each depositor at a​ bank, examines the books of insured​ banks, and imposes restrictions on assets they can hold. 5. Requires disclosure of information of financial instruments traded in organized exchanges. 6. Regulates procedures for trading in futures markets.

34125

Financial market Primary market Capital market Money market Secondary market Debt market 1. A financial market in which only​ short-term debt instruments​ (generally those with original maturity of less than one​ year) are traded. 2. A financial market in which securities that have been previously issued can be resold. 3. A financial market in which new issues of a​ security, such as a bond or a​ stock, are sold to initial buyers by the corporation or government agency borrowing the funds. 4. A market in which​ longer-term debt​ (generally those with original maturity of one year or​ greater) and equity instruments are traded. 5. A market where bonds or​ mortgages, which are contractual agreements by the borrower to pay the holder of the instrument fixed dollar amounts at regular intervals until a specified date when a final payment is​ made, are traded. 6. A market in which dealers at different locations who have an inventory of securities stand ready to buy and sell securities to anyone who comes to them and is willing to accept their price.

34125

Commercial Bank Savings and Loan Credit Union Mutual Fund Description 1. These financial institutions are very small cooperative lending institutions organized around a particular​ group: union​ members, employees of a​ firm, and so forth. They acquire funds from deposits called shares and primarily make consumer loans. 2. These intermediaries raise funds by selling commercial paper​ (a short-term debt​ instrument) and by issuing stocks and bonds. They lend these funds to consumers and to small businesses. 3. These financial intermediaries raise funds primarily by issuing checkable​ deposits, savings​ deposits, and time deposits. They then use these funds to make​ commercial, consumer, and mortgage loans and to buy U.S. government securities and municipal bonds. 4. These depository institutions obtain funds primarily through savings deposits​ (often called​ shares) and time and checkable deposits. In the​ past, these institutions were constrained in their activities and mostly made mortgage loans for residential housing. 5. These financial intermediaries acquire funds by selling shares to many individuals and use the proceeds to purchase diversified portfolios of stocks and bonds.

3415

Financial market Foreign bonds Eurocurrency Eurodollars Eurobonds 1. A common currency used in the​ Euro-zone for buying and selling goods or for investments. 2. US dollars deposited in foreign banks outside the United States or in foreign branches of US banks. 3. Bonds sold in a foreign country and denominated in that​ country's currency. 4. A bond denominated in a currency other than that of the country in which it is soldlong dash—for ​example, a bond denominated in US dollars sold in London. 5. Foreign currencies deposited in banks outside the home country.

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Bonds account for a larger fraction of external funds relative to equities raised by American businesses​ because: A. costly state verification makes the equity contract less desirable than the debt contract. B. there is no moral hazard problem when using a debt contract. C. of the reduced scope for moral hazard problems under equity contracts as compared to debt contracts. D. equity contracts do not permit borrowing firms to raise additional funds by issuing debt.

A

Critics of Fed independence argue​ that: A. it is undemocratic to have monetary policy controlled by an elite group responsible to no one B. the​ Fed, since it does not face a binding budget​ constraint, spends too much of its earnings C. an independent Fed conducts monetary policy with a consistent inflationary bias D. Only A and B are correct

A

Financial intermediaries have a role to play in matching savers and borrowers for all of the following reasons except​: A. information symmetries B. minimising transaction costs C. economies of scale D. risk sharing

A

How can economies of scale help explain the existence of financial intermediaries .. ​? A. Financial intermediaries are able to operate with lower transaction costs relative to individual lenders or borrowers. B. Financial intermediaries are relatively large institutions. C. Financial intermediaries with their vault technology can specialize in keeping deposits safe. D. Financial intermediaries have exclusive access to communications technology in the financial sector.

A

How does a fall in the value of the pound sterling affect British​ consumers? A. Foreign goods are now relatively more​ expensive; British consumers are hurt B. Foreign goods are now relatively​ cheaper; British consumers will benefit C. Domestic goods are now relatively more​ expensive; British consumers are hurt D. Domestic interest rates​ increase; British consumers find it more expensive to borrow

A

If the Federal Reserve has a specific mandate from Congress to achieve​ "maximum employment and​ low, stable​ prices," then how does the Fed have goal​ independence? A. The Fed can choose any method it wants in order to achieve the assigned goal. B. The Fed is free to interpret exactly what these objectives mean. C. The Fed is free to discuss the assigned goals with Congress. D. The Fed is able to change its goals frequently.

A

If the Federal Reserve has a specific mandate from Congress to achieve​ "maximum employment and​ low, stable​ prices," then how does the Fed have goal​ independence? A. The Fed is free to interpret exactly what these objectives mean. B. The Fed can choose any method it wants in order to achieve the assigned goal. C. The Fed is free to discuss the assigned goals with Congress. D. The Fed is able to change its goals frequently.

A

If you are​ risk-averse and had to choose between the stock or the bond​ investments, you would​ choose: A. the bond portfolio because there is less uncertainty over the outcome. B. the bond portfolio because of greater expected return. C. the stock portfolio because there is less uncertainty over the outcome. D. the stock portfolio because of greater expected return.

A

Much of the U.S. government debt is held as Treasury bonds and bills by foreign investors. How do fluctuations in the dollar exchange rate affect the value of that debt held by​ foreigners? A. As the dollar becomes stronger relative to a foreign​ currency, for a given face value of bond​ holdings, it will yield more home currency to​ foreigners, so the asset will be worth more to foreign investors. B. Fluctuations in the dollar exchange rate affect the value of Treasury bonds and bills only if they are followed by changes in​ long-term interest rates. C. If the dollar becomes weaker relative to a foreign​ currency, U.S. exports​ rise, causing an increase in GDP and in the economy as a whole. As a​ result, the maturity date on​ T-bonds may be lowered and the profitability of debt held by foreigners rises. D. If the dollar is worth less relative to a foreign​ currency, the U.S. economy becomes weaker and the government decreases the interest rate on​ T-bonds, so for a given face value of bond​ holdings, the asset will be worth less to foreign investors.

A

The European System of Central Banks​ (ESCB) is similar to the Federal Reserve System in​ that: A. it is structured such that the central banks for each country have a similar role to that of the Federal Reserve banks. B. the ECB is involved in supervision and regulation of financial institutions. C. monetary operations are centralized. D. it is structured such that the central banks for each country control their own budgets as Federal Reserve banks do.

A

Which firms are most likely to use bank financing rather than to issue bonds or stocks to finance their​ activities? A. Sole​ proprietorships, partnerships, and small corporations. B. Industrial firms producing manufactured goods. C. Multinational firms. D. ​State-owned business firms.

A

Which of the following correctly lists a procedure used to reduce asymmetric information problems as well as the type of asymmetric information problem it​ reduces? A. Covenants are used to reduce moral hazard. B. Monitoring is used to reduce adverse selection. C. Screening is used to reduce moral hazard. D. All of the above correctly list a procedure and the type of problem it reduces.

A

Which of the following entities in the Federal Reserve System sets reserve​ requirements? A. The Board of Governors B. The FDIC C. The Federal Advisory Council D. Member commercial banks

A

​"No one who is​ risk-averse will ever buy a security that has a lower expected​ return, more​ risk, and less liquidity than another​ security." Is this statement​ true, false, or​ uncertain? A. True because for a​ risk-averse person, those characteristics make a security less desirable. B. False because by diversifying or hedging your​ portfolio, it is possible to avoid risks and increase your expected return. C. Uncertain because there may be other crucial characteristics to consider when purchasing a security

A

​Banks, savings and loan​ associations, mutual savings​ banks, and credit​ unions: A. have been adept at innovating in response to changes in the regulatory environment. B. have been deregulated and now provide services only to small depositors. C. produce nothing of value and are therefore a drain on​ society's resources. D. are no longer important players in financial intermediation.

A

A strong U.S. dollar means that U.S. goods exported abroad will​ cost: A. less in foreign countries and foreign goods imported will cost less in the United States. B. more in foreign countries and foreign goods imported will cost less in the United States. C. more in foreign countries and foreign goods imported will cost more in the United States. D. less in foreign countries and foreign goods imported will cost more in the United States.

B

Economists group commercial​ banks, savings and loan​ associations, credit​ unions, mutual​ funds, mutual savings​ banks, insurance​ companies, pension​ funds, and finance companies together under the heading financial intermediaries. What function do financial intermediaries​ perform? A. They produce nothing of value and are therefore a drain on​ society's resources. B. They provide a channel for linking those who want to save with those who want to invest. C. They are a source of slow and resistant financial innovation. D. These institutions can hurt the performance of the economy

B

Eliminating the​ Fed's independence might lead to a more pronounced political business cycle because a politically exposed Fed would be more concerned with​: A. ​long-run objectives and thus be a defender of a sound dollar and a stable price level. B. ​short-run objectives and thus be more likely to engage in expansionary policies designed to lower unemployment and interest rates before an election. C. ​short-run objectives and thus be a defender of a sound dollar and a stable price level. D. ​long-run objectives and thus be more likely to engage in expansionary policies designed to lower unemployment and interest rates before an election.

B

How do checkable deposits ... differ from demand deposits ... ​? A. Only checkable deposits can be utilized as a medium of exchange. B. Demand deposits are those transactions accounts against which an unlimited number of checks can ordinarily be written. Checkable deposits often carry restrictions on transferability. C. Only demand deposits can be utilized as a medium of exchange. D. Demand deposits are those transactions accounts against which a limited number of checks can ordinarily be written. Checkable deposits carry no restrictions on transferability.

B

If bond investors decide that​ 30-year bonds are no longer as desirable an​ investment, the yield curve​ would: A. result in a jump in the 30 minus year rate comma with the remainder of the yield curve unchangedresult in a jump in the 30−year rate, with the remainder of the yield curve unchanged. B. steepen at the end of the yield curve and flatten somewhere along the rest of the curvesteepen at the end of the yield curve and flatten somewhere along the rest of the curve. .C. flatten near the​ 30-year rate and steepen slightly along the smaller rates. D. slope less steeply upward toward the​ 30-year rate and remain the same after it.

B

If the next chair of the Federal Reserve Board has a reputation for advocating an even slower rate of money growth than the current​ chair, what will happen to interest​ rates? A. Slower money growth will lead to a liquidity​ effect, which will lower interest​ rates; however, the lower​ income, price​ level, and inflation will tend to raise interest rates. B. Slower money growth will lead to a liquidity​ effect, which will raise interest​ rates; however, the lower​ income, price​ level, and inflation will tend to lower interest rates. C. Slower money growth will lead to a liquidity​ effect, which will lower interest rates.​ Moreover, the lower​ income, price​ level, and inflation will reinforce the decrease in interest rates. D. Slower money growth will lead to a liquidity​ effect, which will raise interest rates.​ Moreover, the lower​ income, price​ level, and inflation will reinforce the increase in interest rates.

B

Is it better for bondholders when the yield to maturity increases or​ decreases? Bondholders are better off when the yield to​ maturity: A. ​increases, since this represents a decrease in the price of the bond and an increase in potential capital gains. B. ​decreases, since this represents an increase in the price of the bond and a decrease in potential capital losses. C. ​decreases, since this represents an increase in the coupon payment and an increase in potential capital gains. D. ​increases, since this represents a decrease in the bond maturity and a decrease in potential capital losses.

B

Risk premiums on corporate bonds are usually anticyclical​; that​ is, they decrease during business cycle expansions and increase during recessions. Why is this​ so? A. In anticipation of a​ recession, the Federal Reserve will begin to lower interest rates. B. As the economy enters an​ expansion, there is greater likelihood that borrowers will be able to service their debt. .C. As an economy enters a​ recession, business firms are less likely to default on their debt. D. During an economic​ expansion, there is greater inflationary pressure driving interest rates upward.

B

The Fed is the most independent of all US government agencies. What is the main difference between it and other government agencies that explains the​ Fed's greater​ independence? A. Congress cannot pass legislation that would restrict the​ Fed's independence B. The​ Fed's source of revenue is free from the appropriations process C. The Fed is a​ private, profit-making institution D. The Fed has established performance measures that it is required to achieve

B

The primary reason for the creation of the Federal Reserve System ... ​was: A. to eliminate​ state-chartered banks. B. to reduce or eliminate future bank panics. C. to stabilize​ short-term interest rates. D. to create a single central bank similar to the Bank of England.

B

The theory of bureaucratic behavior suggests that the objective of a bureaucracy is to​ maximize: A. conflicts between the executive and legislative branches of government. B. its own welfare. C. profits. D. the​ public's welfare.

B

To maximize your expected​ return, you should​ choose: A. stocks. B. commodities. C. bonds. D. All of the portfolios have the same expected return.

B

What is the difference between a mortgage and a ​mortgage-backed security​? A. No interest is paid on​ mortgage-backed securities, whereas interest and principal payments are paid on mortgages. B. Mortgages are​ loans, whereas​ mortgage-backed securities are​ bond-like debt instruments. C. Mortgages are usually used to create a​ portfolio, whereas​ mortgage-backed securities are held separately. D. Mortgages are provided to households or​ firms, whereas​ mortgage-backed securities are provided mainly to financial institutions.

B

What is the primary tool that Congress uses to exercise some control over the​ Fed? A. The threat that Congress can remove some members of the Board of Governors on a whim. B. The threat that Congress will acquire greater control over the​ Fed's finances and budget. C. The threat that Congress can withhold the​ Fed's appropriations. D. All of the above are correct.

B

What will happen to interest rates if the public suddenly expects a large increase in stock​ prices? A. Interest rates will fall because the expected increase in stock prices raises the liquidity of stocks relative to bonds and so the demand for bonds decreases B. Interest rates will rise because the expected increase in stock prices raises the expected return on stocks relative to bonds and so the demand for bonds decreases .C. Interest rates will rise because the expected increase in stock prices raises the liquidity of stocks relative to bonds and so the demand for bonds decreases D. Interest rates will fall because the expected increase in stock prices raises the expected return on stocks relative to bonds and so the demand for bonds decreases

B

When interest rates​ decrease, how might businesses and consumers change their economic​ behavior? A. Consumers and businesses will spend less and save more. B. There will be more consumption spending on​ interest-sensitive items and more investment by businesses. C. Consumers and businesses will hold smaller​ (average) cash balances. D. Consumers and businesses will invest in bonds or similar debt instruments.

B

Which of the following is a disadvantage of using fiat money... ​? A. Fiat money is not easily divisible or suitable for small purchases B. Public authorities may be tempted to produce too much of it C. Fiat money is not portable or widely accepted

B

Which of the following is not a function or service provided by secondary markets​? A. Providing information to borrowers and lenders about expectations and attitudes of the economic climate B. Matching lenders​ (savers) with borrowers in need of funds C. Determining the price of the security that the issuing firm sells in the primary market D. Providing liquidity to owners of existing financial instruments

B

Which of the following is not an important financial intermediary in the​ economy? A. Insurance companies B. The Fed .C. Finance companies D. Commercial banks.

B

Which of the following is not part of the checks and balances of the Federal Reserve System LOADING... ​? A. The provision for three types of directors to district banks​ (A, B, and​ C) that would represent different groups​ (professional bankers, business​ people, and the​ public). B. The requirement that all depository institutions keep deposits at the Fed. C. The ability of the twelve regional banks to affect discount policy. D. The​ Fed's independence from the federal government and the setting up of the Federal Reserve banks as incorporated institutions.

B

Which of the following is true about techniques used to reduce asymmetric information​ problems? A. Monitoring is used before the​ transaction; screening is used after the transaction. B. Screening is used before the​ transaction; monitoring is used after the transaction. C. Both screening and monitoring are used after the transaction. D. Both screening and monitoring are used before the transaction.

B

Will there be an effect on interest rates if brokerage commissions on stocks​ fall? A. ​Yes, interest rates would fall because stocks would have a relatively higher rate of return than​ bonds, which would reduce the demand for bonds B. ​Yes, interest rates would rise because stocks become more liquid than​ before, which would reduce the demand for bonds C. ​No, interest rates would remain the same because the brokerage commissions would only affect the stock market D. ​Yes, interest rates would rise because people would want to hold more stocks and fewer​ bonds, which would increase the demand for bonds

B

Would you be more willing to lend to a friend if she put all of her life savings into her business than you would if she had not done​ so? A. You would be less willing because putting her life savings into a business that can potentially fail makes it more risky for you to loan her money. If the business​ fails, she will protect her investment before she considers repaying you B. You would be more willing because putting her life savings into her business provides you protection against the problem of moral hazard .C. Whether or not she puts her life savings into her business has no bearing on whether she repays the loan or not.​ Therefore, it should have no effect on your decision to loan her money D. You would be more willing because putting her life savings into her business provides you protection against the problem of adverse selection

B

A share of Microsoft common stock​ is: A. identical to a bond issued by Microsoft. B. an asset for Microsoft because it allows Microsoft to invest in capital equipment or other companies. C. an asset for its​ owner, which Microsoft shows as shareholder equity on its balance sheet. D. a liability to the shareholder because it must be sold to realise a capital gain.

C

During​ 2008, the difference in yield​ (the yield spread​) between​ 3-month AA-rated financial commercial paper and​ 3-month AA-rated nonfinancial commercial paper steadily increased from its usual level of close to​ zero, spiking to over a full percentage point at its peak in October 2008. Which of the following explains this sudden​ increase? A. The increase in the yield spread was due to government efforts to ease the debt burden for financial companies during the financial crisis. B. Increased yield spreads tend to occur because of the inefficient nature of nonfinancial commercial paper when economic instability is present. C. The increase in the yield spread was a result of the decrease in demand for financial commercial paper due to the uncertainty and soundness of financial companies and banks. D. The increase in the yield spread was caused by an increase in the supply of financial commercial paper to fund future real estate investments.

C

Evidence from business cycle fluctuations in the United States indicates​ that: A. recessions have been preceded by declines in share prices on the stock exchange. B. recessions have been preceded by dollar depreciation. C. recessions have been preceded by a decline in the growth rate of money. D. a negative relationship between money growth and general economic activity exists.

C

How can the existence of asymmetric information . provide a rationale for government regulation of financial​ markets? A. The production of information to combat these asymmetries is subject to moral hazard B. Good information becomes quickly obsolete C. The production of information to combat these asymmetries is subject to the​ free-rider problem D. The production of good information is so costly that all potential buyers of this information are priced out of the market

C

How do conflicts of interest make the asymmetric information problem​ worse? A. Competing interests may limit a financial​ institution's economies of​ scope, which lowers overall economy efficiency and profits. B. Conflicts of interest create an adverse selection​ problem, which prevents financial markets from channeling funds into the most productive investment opportunities. C. Competing interests may lead a financial institution to conceal information or disseminate misleading​ information, which prevents financial markets from channeling funds into the most productive investment opportunities. D. Conflicts of interest tend to lead financial institutions to lend money to the most risky​ borrowers, deepening the asymmetric information problem.

C

How does the Federal Reserve have a high degree of instrument​ independence? A. The Federal Reserve is not subject to the influence of Congress. B. The Federal Reserve is able to set the goals of monetary policy. C. The Federal Reserve can choose any method it wants in order to achieve a given set of policy objectives. D. The Federal Reserve can contract with independent experts to choose the appropriate fiscal instruments.

C

In​ prison, cigarettes are sometimes used among inmates as a form of payment. All of the following explain how cigarettes solve the​ "double coincidence of​ wants" problem, even if a prisoner does not​ smoke, except​: A. cigarettes are widely accepted as a form of payment in prison. B. prisoners can exchange cigarettes for other goods and services. C. exchanging cigarettes for other goods and services increases transaction costs. D. cigarettes serve as a medium of exchange.

C

People in the United States in the nineteenth century were sometimes willing to be paid by cheque rather than with​ gold, even though they knew that there was a possibility that the cheque might bounce. Which of the following would represent an advantage of gold over cheques as a form of​ money? A. Gold is easy to transfer from one city to another or one state to another B. Gold is easily divisible and may be used for small expenditures C. Gold has intrinsic value when compared to cheques D. Gold is easy for an individual to carry from place to place

C

Prior to​ 2008, mortgage lenders required a house inspection to assess its​ value, and often used the same one or two inspection companies in the same geographical market. Following the collapse of the housing market in​ 2008, mortgage lenders required a house​ inspection, but this was arranged through a third party. How does this illustrate a conflict of interest similar to the role that​ credit-rating agencies played in the global financial​ crisis? A. Mortgage lenders may have wanted to increase home sales without assuming the additional costs to add more inspection companies. B. Fees for home inspections may have been unreasonably high to ensure high profits for the inspection company. C. Inspection companies may have provided overly optimistic assessments of home values to ensure continued work in the future. D. This situation does not illustrate any conflict of​ interest, as the services provided by​ credit-ratings agencies and home inspection companies are unrelated.

C

The foreign exchange market​ is: A. the price of one​ country's currency in terms of another​ country's currency B. where imports and exports are traded for one another C. where the currency of one country is converted into the currency of another country D. the amount of loans made from one​ country's bank to another​ country's bank

C

The free rider​ problem: A. makes it easier for an investor to continue to buy securities at less than the true value B. will make more people willing to provide information services C. results from the production of information being much like a public good where exclusion is not possible D. will only occur if information costs are zero

C

True or​ False: With a discount​ bond, the return on a bond is equal to the rate of capital gain. A. ​False: Bond returns can never equal the rate of capital​ gain; there must be a capital loss or gain indicated. B. ​True: A discount bond pays fixed interest payments every year so the return is equal to the rate of capital gain. C. ​True: A discount bond has no coupon payments so the return on the bond is equal to the rate of capital gain. D. There is no way to determine this without the knowing the coupon amount and interest rate.

C

What would happen to the risk premium.. on corporate bonds if brokerage commissions were lowered in the corporate bond​ market? A. Lower brokerage commissions for corporate bonds would only reduce the cost of buying and selling the​ bonds, which would have no impact on the risk premium B. Lower brokerage commissions for corporate bonds would make them more desirable to hold and thus increase​ demand; consequently, this would raise interest rates and thus raise the risk premium C. Lower brokerage commissions for corporate bonds would make them more liquid and thus increase​ demand, which would lower the risk premium D. None of the above

C

Which of the following entities in the Federal Reserve System LOADING... controls the discount rate LOADING... ​? A. Member commercial banks B. The Federal Advisory Council C. The Board of Governors D. The FDIC

C

Which of the following statements about central bank structure and independence is​ true? A. In recent​ years, greater independence has been granted to many central banks with the exception of the Bank of England and the Bank of​ Japan, which are still subject to strict governmental control. B. In​ theory, central banks subject to government control produce better monetary​ policy, but experience suggests that more independent central banks have produced superior monetary policy results. C. In recent​ years, there has been a remarkable trend toward increasing independence. D. Only A and C are correct. E. All of the above are correct.

C

Why do managers of financial institutions care so much about the activities of the Federal Reserve​ System? A. Because the Federal Reserve conducts fiscal​ policy, which can have important impacts on the profitability of financial institutions. B. Because financial institutions count on the Federal Reserve as being the lender of last resort​ and, as​ such, follow the​ Fed's activities closely to monitor whether there are enough reserves in the system to receive a​ bailout, if necessary. C. Because the Federal Reserve affects interest​ rates, inflation, and business​ cycles, all of which have an important impact on the profitability of financial institutions. D. None of the abovelong dash—financial institutions are only directly influenced by the activities of Congress and the Securities and Exchange Commission.

C

Why would a life insurance company be concerned about the financial stability of major corporations or the health of the housing​ market? A. During financial crises and​ recessions, the number of deaths is much higher than usual and payments of insurance indemnity increase significantly. B. Today life insurance companies are the largest holders of corporate stocks and​ mortgage-backed securities. C. Most life insurance companies hold large amounts of corporate bonds and mortgage assets. D. When there are negative changes in financial or housing​ markets, people have no money for life insurance payments.

C

Would interest rates of Treasury securities be affected by the tax rate​ change? A. ​Yes, because municipal bonds are less risky than Treasury​ securities, the demand for Treasury securities will decrease. B. ​No, there would be no impact on the market for Treasury securities. C. ​Yes, because the reduction in the​ tax-exempt privilege in municipal bonds would raise the relative value of Treasury​ securities, making Treasury securities more desirable. D. ​Yes, because the increase in interest rates would increase the desire to hold more municipal bonds and less Treasury securities.

C

A financial adviser has just given you the following​ advice: "Long-term bonds are a great investment because their interest rate is over​ 20%." Is the financial adviser necessarily​ right? A. Yes. The higher the annual interest​ rate, the higher the annual income on bonds. B. No. When making an investment​ decision, you should take the yield to maturity into​ account, not the interest rate. C. Yes. If the interest rate remains unchanged until​ maturity, the price of the bond will be more than its face value. D. No. If interest rates rise sharply in the​ future, long-term bonds may suffer a sharp fall in​ price, causing their return to be quite low.

D

Asymmetric information 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. A. debt deflation B. adverse selection C. ​free-rider D. ​principal-agent

D

Evidence from the United States and other foreign countries indicates​ that: A. money growth is clearly unrelated to inflation. B. there is little support for the assertion that​ "inflation is always and everywhere a monetary​ phenomenon." C. countries with low monetary growth rates tend to experience higher rates of​ inflation, all else being constant. D. there is a strong positive association between inflation and the growth rate of money over long periods of time.

D

Following a policy meeting on March​ 19, 2009, the Federal Reserve made an announcement that it would purchase up to​ $300 billion of​ longer-term Treasury securities over the following six months. What effect might this policy have on the yield​ curve? A. The yield curve would jump with​ medium- and​ long-term rates and remain unchanged with​ short-term rates. B. The yield curve would steadily shift​ up, with slightly more increase in​ short-term rates. C. The yield curve would steepen at the end and flatten somewhere along the rest of the curve. D. The yield curve would shift​ down, but mostly on​ medium- and​ long-term maturities.

D

How do financial intermediaries benefit by providing​ risk-sharing services? A. They are able to turn safe assets into​ high-risk, high-return investments B. A collection of riskier assets is always more profitable for a bank or intermediary C. Customers pay a fee to financial intermediaries for being able to invest in safer assets D. They are able to earn a profit on the spread between the returns they earn on risky assets and the payments they make on the assets they have sold

D

Problems created by asymmetric information after the transaction occurs is called​ ________, while the problem created before a transaction occurs is called​ ________. A. costly state​ verification; free riding B. free​ riding; costly state verification C. adverse​ selection; moral hazard D. moral​ hazard; adverse selection

D

What effect will a sudden increase in the volatility of gold prices have on interest​ rates? A. Interest rates will increase because bonds will become relatively more​ risky, which decreases the demand for bonds B. Interest rates will increase because bonds will become relatively less​ risky, which increases the demand for bonds C. Interest rates will decrease because bonds will become relatively more​ risky, which decreases the demand for bonds D. Interest rates will decrease because bonds will become relatively less​ risky, which increases the demand for bonds

D

What effect would reducing income tax rates have on the interest rates of municipal​ bonds? A. Interest rates would fall because Treasury securities are now less valuable and more people will want to hold municipal bonds. B. Interest rates would fall because the reduction in income tax rates would make the​ tax-exempt privilege for municipal bonds less valuable and reduce the demand for municipal bonds. C. Interest rates would rise because Treasury securities are now less valuable and more people will want to hold municipal bonds. D. Interest rates would rise because the reduction in income tax rates would make the​ tax-exempt privilege for municipal bonds less valuable and reduce the demand for municipal bonds.

D

What is the main disadvantage of moving to e-money ... or moving to a cashless​ society? A. The use of​ e-money does not work with vending machines or other​ coin-based transactions B. It is difficult to keep track of electronic purchases C. Funds are debited too quickly from the​ payer's account D. There are problems with security and privacy

D

What is the typical relationship between interest rates on​ 6-month Treasury​ bills, 10-year Treasury​ notes, and Baa corporate​ bonds? A. They tend to move randomly and independent of each other B. All three rates are virtually exact representations of the rate of inflation C. They tend to move together over time with the​ 6-month Treasury bill having the highest rate of interest D. They tend to move together over time with the corporate bond having the highest rate of interest

D

What was the main cause of the recession that began in​ 2007? A. Collapse of the​ high-tech bubble. B. Rapid increases in the money supply. C. Large fluctuations in interest rates. D. Defaults in subprime residential mortgages.

D

Which of the following entities in the Federal Reserve System directs open market operations LOADING... ​? A. The Federal Advisory Council B. The Board of Governors C. Member commercial banks D. The FOMC

D

Which of the following statements concerning external sources of financing for nonfinancial businesses in the United States is​ true? A. Financial intermediaries such as banks are the least important source of external funds for businesses B. Stocks and bonds combined supply more than​ one-half of the external funds C. Since​ 1970, more than half of the new issues of stock have been sold to American households D. Bonds are a far more important source of financing than are stocks

D

While legislation enacted in 1998 granted the Bank of Japan new powers and greater​ autonomy, its critics contend​ that: A. its independence is too great since the Ministry of Finance no longer has veto power over the​ Bank's budget. B. its independence is too great because it need not pursue a policy of price stability even if that is the popular will of the people C. its independence is limited since the Ministry of Finance can dismiss senior bank officials D. its independence is limited by the Ministry of​ Finance's veto power over part of the​ Bank's budget E. None of the above are correct

D

Why was the Federal Reserve System set up with twelve regional Federal Reserve banks rather than one central​ bank, as in other​ countries? A. By creating twelve regional​ banks, writers of the Federal Reserve Act could ensure that finances from all parts of the country would flow through the Federal Reserve System. B. With twelve regional​ banks, employees of the Federal Reserve could quickly and easily get to a monetary crisis point anywhere in the United States. C. With twelve regional​ banks, the Federal Reserve could easily influence politics in all parts of the United States. D. The writers of the Federal Reserve Act wanted to ensure the​ Fed's power was not centralized in a single location.

D

Gustavo is a young doctor who lives in a country with a relatively inefficient legal and financial system. When Gustavo applied for a​ mortgage, he found that banks usually required collateral for up to​ 300% of the amount of the loan. Why might banks require that much collateral in a financial system like​ Gustavo's country? A. An inefficient legal system implies weak property rights but also high property​ values, making collateral more highly valued and hence more desirable. B. An inefficient legal system implies strong property​ rights, and collateral helps banks recoup some of their loan if the borrower defaults. C. An inefficient legal system implies strong property​ rights, and under such a strong​ system, collateral is more highly valued and hence more desirable. D. An inefficient legal system implies weak property​ rights, and collateral helps banks recoup some of their loan if the borrower defaults. As a​ result, when compared to other​ countries, we would expect​ Gustavo's nation to​ have: A. less investment and faster economic growth. B. more investment and faster economic growth. C. more investment and slower economic growth. D. less investment and slower economic growth.

DD

The European Central Bank​ (ECB) has complete control over monetary policy in eleven euro countries and has a charter that cannot be changed by legislation. In comparison to the Federal Reserve System , the ECB​ is: A. equally independent. B. more independent. C. less independent.

b

The theory of bureaucratic behaviour when applied to the Fed ... helps to explain why the​ Fed: A. sought less control over banks in the 1980s B. is so secretive about the conduct of future monetary policy C. is supportive of congressional attempts to limit the central​ bank's autonomy D. is willing to take on powerful groups that may threaten its autonomy

b