ECO 3355 Final

Assuming that the average duration of its assets is four years, while the average duration of its liabilities is three years, then a 5% increase in interest rates will cause the net worth of First National to _______ by _______ of the total original asset value. A. decline, 5% B. decline, 10% C. decline, 15% D. increase, 20%

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Decisions by depositors to increase their holdings of ________, or of banks to hold ________ will result in a smaller expansion of deposits than the simple model predicts. A. deposits, smaller B. deposits, larger C. currency, smaller D. currency, larger

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If interest rates rise by 5%, from 3% to 8%, bank profits (measured using gap analysis) will A. decline by .5 million B. decline by 1.5 million C. decline by 2.5 million D. increase by 2 million

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When $100,000 is deposited at a bank, the required reserve ratio is 10 percent, and the bank chooses not to make any loans but to hold excess reserves instead, then, in the bank's final balance sheet A. the assets at the bank increase by $100,000 B. the liabilities of the bank decrease by $100,000 C. reserves increase by $9,000 D. The liabilities increase $10,000

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People hold money even during inflationary episodes when other assets prove to be better stores of value. This can be explained by the fact that money is A) extremely liquid. B) a unique good for which there are no substitutes. C) the only thing accepted in economic exchange. D) backed by gold.

A) extremely liquid

If a bank has $200,000 of deposits, a required reserve ratio of 20 percent, and $80,000 in reserves, then the maximum deposit outflow it can sustain without altering its balance sheet is A. $50,000 B. $40,000 C $30,000 D. $25,000

A. $50,000

Which of the following statements most accurately describes the task of bank asset management? A. Banks seek the highest returns possible subject to minimizing risk and making adequate provisions for liquidity B. banks seek to have the highest liquidity possible subject to earning a positive rate of return on their operations C. banks seek to prevent bank failure at all cost, since a failed bank earns no profit, liquidity needs supersede the desire for profit D. banks seek to acquire funds in the least costly way

A. Banks seek the highest returns possible subject to minimizing risk and making adequate provisions for liquidity

When I purchase a corporate ________, I am lending the corporation funds for a specific time. When I purchase a corporation's ________, I become an owner in the corporation. A. Bond, stock B. stock, bond C. stock, debt security D. bond, debt security

A. Bond, stock

When a new depositor opens a checking account at the first national bank, the banks assets _______ and its liabilities __________. A. Increase, increase B. increase, decrease C. decrease, increase D. decrease, decrease

A. Increase, increase

In which of the following bonds would you prefer to be buying? A. a $10,000 face value security with a 10% coupon selling for $9,000 B. a $10,000 face value security with a 7% coupon selling for $10,000 C. a $10,000 face value security with a 9% coupon selling for $10,000 D. a $10,000 face value security with a 10% coupon selling for $10,000

A. a $10,000 face value security with a 10% coupon selling for $9,000

which of the following can be described as involving direct finance? A. a corporation issues new shares of stock B. people buy shares in a mutual fund C. a pension fund manager buys a short-term corporate security in the secondary market D. an insurance company buys shares of common stock in the over-the-counter market

A. a corporation issues new shares of stock

Debt deflation occurs when A. an economic downturn causes the price level to fall and a deterioration in firms' net worth because of the increased burden of indebtedness B. rising interest rates worsen adverse selection and moral hazard problems C. lenders reduce their lending due to declining stock prices (equity deflation) that lowers the value of collateral D. corporations pay back their loans before the scheduled maturity date

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

The existence of deposit insurance can increase the likelihood that depositors will need deposit protection, as banks with deposit insurance A. are likely to take greater risks than they otherwise would B. are likely to be conservative, reducing the probability of turning a profit C. are likely to regard deposits as an unattractive source of funds due to depositors' demands for safety D. are placed in a competitive disadvantage in acquiring funds

A. are likely to take greater risks than they otherwise would

A possible sequence for the three stages of a financial crisis might be ______ leads to ________ leads to ________. A. asset price declines, banking crises, unanticipated decline in price level B. unanticipated decline in price level, banking crises, increase in interest rates C. banking crises, increase in interest rates, unanticipated decline in price level D. banking crises, increase in uncertainty, increase in interest rates

A. asset price declines, banking crises, unanticipated decline in price level

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

A. asset-price bubble

Of the following, which would be the last choice for a bank facing a reserve deficiency? A. call in loans B. borrow from the fed C. sell securities D. borrow from other banks

A. call in loans

An increase in the time to the promised future payment ________ the present value of the payment. A. decreases B. increases C. has no effect on D. is irrelevant to

A. decreases

If the interest rate on a bond is below the eq. interest rate, there is an excess ______ of bonds and the bond price will ________ A. demand, rise B. demand, fall C. supply, rise D supply, fall

A. demand, rise

When the Fed extends a $100,000 discount loan to the First National Bank, reserves in the banking system A. increase by $100,000 B. increase by more than $100,000 C. decrease by $100,000 D. decrease by more than $100,000

A. increase by $100,000

Kevin purchasing concert tickets with a $100 bill is an example of the ________ function of money. A. medium of exchange B. unit of account C. store of value D. specialization

A. medium of exchange

The recession caused by the global financial crisis was severe, but much smaller in magnitude than the Great Depression because A. of massive intervention by governments to prop up financial markets B. the larger world population C. modern technological inventions makes sustaining a crisis difficult D. the FED stayed out of the way during the most recent crisis

A. of massive intervention by governments to prop up financial markets

The Fed does not tightly control the monetary base because it does NOT completely control A. open market purchases B. open market sales C. Borrowed reserves

A. open market purchases

In this type of arrangement, any balances above a certain amount in a corporation's checking account at the end of the business day are "removed" and invested in overnight securities that pay the corporation interest. This innovation is referred to as a A. sweep account B. share draft account C. removed-repo account D. stockman account

A. sweep account

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

A. the building owned by the bank

In his Liquidity Preference Framework, Keynes assumed that money has a zero rate of return; thus, A. when interest rates rise, the expected return on money falls relative to the expected return on bonds, causing the demand for money to fall B. when interest rates rise, the expected return on money falls relative to the expected return on bonds, causing the demand for money to rise C. when interest rates fall, the expected return on money falls relative to the expected return on bonds, causing the demand for money to fall D. when interest rates fall, the expected return on money falls relative to the expected return on bonds, causing the demand for money to rise

A. when interest rates rise, the expected return on money falls relative to the expected return on bonds, causing the demand for money to fall

If $22,050 is the amount payable in two years for a $20,000 simple loan made today, the interest rate is A. 5% B. 10% C. 22% D. 25%

B. 10%

The ________ interest rate more accurately reflects the true cost of borrowing A. nominal B. Real C. discount D. market

B. Real

In which of the following situations would you prefer to be the lender? A. The interest rate is 9% and expected inflation rate is 7% B. The interest rate is 4% and the expected inflation rate is 1% C. The interest rate is 13% and the expected inflation rate is 15% D. The interest rate is 25% and the expected inflation rate is 50%

B. The interest rate is 4% and the expected inflation rate is 1%

Everything else held constant, when the federal funds rate is __________ the interest rate paid on reserves, the quantity of reserves demanded rises when the federal funds rate ________. A. above, rises B. above, falls C. below, rises D. below, falls

B. above, falls

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

B. currency in circulation, reserves

A financial market in which only short-term debt instruments are traded is called the _____ market A. bond B. money C. capital D. stock

B. money

If a bank has ________ rate-sensitive assets than liabilities, then ________ in interest rates will increase bank profits. A. more, a decline B. more, an increase C. fewer, an increase D. fewer, a surge

B. more, an increase

Either a dual or hierarchical mandate is acceptable as long as ________ is the primary goal in the ________. A. price stability, short run B. price stability, long run C. reducing business cycle fluctuations, short run C. reducing business cycle fluctuations, long run

B. price stability, long run

A corporation acquires new funds only when its securities are sold in the A. secondary market by an investment bank B. primary market by an investment bank C. secondary market by a stock exchange broker D. secondary market by a commercial bank

B. primary market by an investment bank

Open market purchases ________ reserves and the monetary base thereby ________ the money supply. A. raise, lowering B. raise, raising C. lower, lowering D. lower, raising

B. raise, raising

In order to compete with changing market conditions in the 1980's, banks supported legislation to remove interest rate ceilings and to allow banks to pay interest on checking accounts. These actions A. lowered transaction costs for banks B. raised the cost of acquiring funds for banks C. made banks less competitive in the financial markets D. raised the income banks received

B. raised the cost of acquiring funds for banks

Everything else held constant, in the market for reserves, when the federal funds rate is 1%, lowering the discount rate from 1% to 2% A. lowers the federal funds rate B. raises the federal funds rate C. has no effect on the federal funds rate D. has an indeterminate effect on the federal funds rate

B. raises the federal funds rate

Because it is a unit of account, money A. increases transaction cost B. reduces the number of prices that need to be calculated C. does not earn interest D. discourages specialization

B. reduces the number of prices that need to be calculated

in general, banks make profits by selling __________ liabilities and buying _______ assets. A. long term, shorter term B. short term, longer term C. illiquid, liquid D. risky, risk free

B. short term, longer term

Which of the following is NOT an entity of the federal reserve system? A. Federal reserve banks B. the comptroller of the currency C. the board of governors D. the federal open market committee

B. the comptroller of the currency

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

B. the higher is the return for the owners of the bank

Holding everything else constant A. if Asset A's risk relative to that of alternative assets, the demand will increase for asset A B. the more liquid is asset A, relative to alternative assets, the greater will be the demand for asset A C. the lower the expected return to asset A relative to alternative assets, the greater will be the demand for asset A D. if wealth increases, demand for asset A increases and demand for alternative assets decrease

B. the more liquid is asset A, relative to alternative assets, the greater will be the demand for asset A

When the growth rate of the money supply increases, interest rates end up being permanently lower if A. the liquidity effect is larger than the other effects B. there is a fast adjustment of expected inflation C. there is a slow adjustment of expected inflation D. the expected inflation effect is larger than the liquidity effect

B. there is a fast adjustment of expected inflation

A major controversy involving the bank industry in its early years was A. whether banks should both accept deposits and make loans or whether these functions should be separated into different institutions B. whether the federal government or the states should charter banks C. what percent of deposits banks should hold as fractional reserves D. whether banks should be allowed to issue their own bank notes

B. whether the federal government or the states should charter banks

When the expected inflation rate increases, the real cost of borrowing ________ and bond supply ________, everything else held constant. A. increases, increases B. increases, decreases C decreases, increases D. decreases, decreases

C decreases, increases

Each governor on the Board of Governors can serve A) only one nonrenewable fourteen-year term. B) one full nonrenewable fourteen-year term plus part of another term. C) only one nonrenewable eight-year term. D) one full nonrenewable eight-year term plus part of another term.

C) only one nonrenewable eight-year term.

If a bank has excess reserves of $10,000 and demand deposit liabilities of $80,000, and if the reserve requirement is 20 percent, then the bank has total reserves of A. $16,000 B. $20,000 C. $26,000 D. $36,000

C. $26,000

The relationship between borrowed reserves (BR), the nonborrowed monetary base (MBn), and the Monetary base (MB) is A. MB = Mbn - BR B. BR = Mbn - MB C. BR = MB - Mbn D MB = BR - MBn

C. BR = MB - Mbn

A bank failure is less likely to occur when A. a bank holds less government securities B. a bank suffers large deposit outflows C. a bank holds fewer excess reserves D. a bank has more capital

C. a bank holds fewer excess reserves

Typically, borrowers have superior information relative to lenders about the potential returns and risks associated with an investment project. The difference in information is called A. moral selection B. risk sharing C. asymmetric information D. adverse hazard

C. asymmetric information

the monetary base consists of A. currency in circulation and fed reserve notes B. currency in circulation and the US treasury's monetary liabilities C. currency in circulation and reserves D. reserves in fed reserve notes

C. currency in circulation and reserves

Which set of goals can, at times, conflict in the short run? A. high employment and economic growth rate B. interest rate stability and financial market stability C. high employment and price level stability D. exchange rate stability and financial market stability

C. high employment and price level stability

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

C. improvement in information technology

When the federal reserve extends a discount loan to a bank, the monetary base _____ and reserves ______. A. remains unchanged, decrease B. remains unchanged, increase C. increases, increase D. increases, remain unchanged

C. increases, increase

Holding large amounts of bank capital helps prevent bank failures because A. it means the bank has a higher income B. it makes loans easier to sell C. it can be used to absorb the losses resulting from bad loans D. it makes it easier to call in loans

C. it can be used to absorb the losses resulting from bad loans

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. A. two B. eight C. nine D. ten

C. nine

A Discount bond A. pays the bondholder a fixed amount every period and the face value of maturity B. pays the bondholder the face value at maturity C. pays all interest and the face value at maturity D. pays the face value at maturity plus any capital gains

C. pays all interest and the face value at maturity

Monetary policy is considered time inconsistent because A. of the lag times associated with the implementation of monetary policy and its effect on the economy B. policymakers are tempted to pursue discretionary policy that is more contractionary in the short run C. policymakers are tempted to pursue discretionary policy that is more expansionary in the short run D. of the lag times associated with the recognition of a potential economic problem and the implementation of monetary policy

C. policymakers are tempted to pursue discretionary policy that is more expansionary in the short run

The Feds discount lending is one of three types: ________ is the most category, __________ is given to a limited number of banks in vacation and agricultural areas, _______ is given to banks that have experienced severe liquidity problems A. seasonal credit, secondary credit, primary credit B. secondary credit, seasonal credit, primary credit C. primary credit, seasonal credit, secondary credit D. seasonal credit, primary credit, secondary credit

C. primary credit, seasonal credit, secondary credit

The Federal Open Market Committee consists of A. the five senior members of the seven-member board of governors B. seven members of the board of governors and seven presidents of the regional fed banks C. seven members of the board of governors and five presidents of the regional fed banks D. twelve regional fed bank presidents and the chairman of the board of governors

C. seven members of the board of governors and five presidents of the regional fed banks

The currency component includes paper money and coins held in A. bank vaults B. ATMs C. the hands of the nonbank public D. the central bank

C. the hands of the nonbank public

If a bank needs to raise the amount of capital relative to assets, a bank manager might choose to A. to buy back bank stock B. to pay higher dividends C. to reduce the bank's assets by making fewer loans D. to sell securities the bank owns and put the funds into the reserve account

C. to reduce the bank's assets by making fewer loans

Economists consider the ________ to be the most accurate measure of interest rates. A. simple interest rate B. current yield C. yield to maturity D. nominal interest rate

C. yield to maturity

Because borrowers, once they have a loan, are more likely to invest in high-risk investment projects, banks face the A) adverse selection problem. B) lemon problem. C) adverse credit risk problem. D) moral hazard problem.

D) moral hazard problem.

In the simple deposit expansion model, if the banking system has excess reserves of $75, and the required reserve ratio is 20%, the potential expansion of checkable deposits is A. $75 B. $750 C. $37.50 D. $375

D. $375

if an individual moves money from a small-denomination time deposit to a demand deposit account A. M1 increases and M2 stays the same B. M1 stays the same and M2 increases C. M1 stays the same and M2 stays the same D. M1 increases and M2 decreases

D. M1 increases and M2 decreases

Well-functioning financial markets A. cause inflation B. eliminate the need for indirect finance C. cause financial crises D. allow the economy to operate more efficiently

D. allow the economy to operate more efficiently

An increase in the monetary base that goes into __________ is not multiplied, while an increase that goes into ________ is multiplied A. deposits, currency B. excess reserves, currency C. currency, excess reserves D. currency, deposits

D. currency, deposits

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

D. decreases, increase

US treasury bills pay no interest but are sold at a _________. That is, you will pay a lower purchase price than the amount you receive at maturity A. premium B. collateral C. default D. discount

D. discount

Which of the following is NOT an operating instrument? A. nonborrowed reserves B. monetary base C. federal funds rate D. discount rate

D. discount rate

if there is an excess supply of money A. individuals sell bonds, causing the interest rate to rise B. individuals sell bonds, causing interest rates to fall C. individuals buy bonds, causing interest rates to fall D. individuals buy bonds, causing interest rates to rise

D. individuals buy bonds, causing interest rates to rise

everything else held constant, when stock prices become less volatile, the demand curve for bonds shifts to the _________ and the interest rate ________ A. right, rises B. right, falls C. left, falls D. left rises

D. left rises

Which of the following is NOT a requirement in selecting a policy instrument? A. measurability B. controllability C. flexibility D. predictability

D. predictability

When the federal funds rate equals the discount rate A. the supply curve of reserves is vertical B. the supply curve of reserves is horizontal C. the demand curve for reserves is vertical D. the demand curve for reserves is horizontal

D. the demand curve for reserves is horizontal

If a banker expects interest rates to fall in the future, her best strategy for the present is A. to increase the duration of the bank's liabilities B. to buy short term bonds C. to sell long term certificates of deposit D. to increase the duration of the bank's assets

D. to increase the duration of the bank's assets