Money and Banking Exam 2

Because of an expected rise in interest rates in the future, a banker will likely 1) buy short-term rather than long-term bonds. 2) make either short or long-term loans; expectations of future interest rates are irrelevant. 3) make long-term rather than short-term loans. 4) buy long-term rather than short-term bonds.

1) buy short-term rather than long-term bonds.

As information technology improves, the lending role of financial institutions such as banks should ________. 1) decrease 2) stay the same 3) increase somewhat 4) increase significantly

1) decrease

The ________ problem helps to explain why the private production and sale of information cannot eliminate ________. 1) free-rider; adverse selection 2) principal-agent; moral hazard 3) free-rider; moral hazard 4) principal-agent; adverse selection

1) free-rider; adverse selection

All ________ are required to be members of the Fed. 1) nationally chartered banks 2) banks with assets less than $500 million 3) state chartered banks 4) banks with assets less than $100 million

1) nationally chartered banks

If, after a deposit outflow, a bank has a reserve deficiency of $ 3 million, it can meet its reserve requirements by 1) selling $3 million of securities. 2) repaying its discount loans from the Fed. 3) increasing loans by $3 million. 4) reducing deposits by $3 million.

1) selling $3 million of securities.

The share of checkable deposits in total bank liabilities has 1) shrunk over time. 2) expanded dramatically over time. 3) remained virtually unchanged since 1960. 4) expanded moderately over time.

1) shrunk over time.

Banks responded to disintermediation by 1) supporting the elimination of interest rate regulations, enabling them to better compete for funds. 2) supporting the elimination of interest rate regulations, as this would reduce their cost of funds. 3) demanding that interest rate regulations be imposed on money market mutual funds. 4) opposing the elimination of interest rate regulations, as this would increase their cost of funds.

1) supporting the elimination of interest rate regulations, enabling them to better compete for funds.

The legislation overturning the Glass-Steagall Act is 1) the Gramm-Leach-Bliley Act. 2) the McFadden Act. 3) the Riegle-Neal Act. 4) the Garn-St. Germain Act

1) the Gramm-Leach-Bliley Act.

In the absence of regulation, banks would probably hold 1) too little capital. 2) too much capital, reducing the profitability of banks. 3) too much capital, making it more difficult to obtain loans. 4) too much capital, reducing the efficiency of the payments system.

1) too little capital.

A venture capital firm protects its equity investment from moral hazard through which of the following means? 1) It places people on the board of directors to better monitor the borrowing firm's activities. 2) It requires a 50% stake in the company. 3) It prohibits the borrowing firm from replacing its management. 4) It writes contracts that prohibit the sale of an equity investment to the venture capital firm.

1) It places people on the board of directors to better monitor the borrowing firm's activities.

In the United States, the government agency requiring that firms that sell securities in public markets adhere to standard accounting principles and disclose information about their sales, assets, and earnings is the 1)Securities and Exchange Commission. 2)Federal Reserve System. 3)Federal Communications Commission. 4)Federal Trade Commission.

1) Securities and Exchange Commission.

The chartering process is especially designed to deal with the ________ problem, and regular bank examinations help to reduce the ________ problem. 1) adverse selection; moral hazard 2) moral hazard; moral hazard 3) moral hazard; adverse selection 4) adverse selection; adverse selection

1) adverse selection; moral hazard

Depositors lack of information about the quality of bank assets can lead to ________. 1) bank panics 2) asset transformation 3) sequencing 4) bank booms

1) bank panics

The leverage ratio is the ratio of a bank's 1) capital divided by its total assets. 2) assets divided by its liabilities. 3) capital divided by its total liabilities. 4) income divided by its assets.

1) capital divided by its total assets.

As information technology improves, the lending role of financial institutions such as banks should ________. 1)decrease 2)stay the same 3)increase somewhat 4)increase significantly

1) decrease

The fact that banks operate on a "sequential service constraint" means that 1) depositors arriving first have the best chance of withdrawing their funds. 2) depositors arriving last are just as likely to receive their funds as those arriving first. 3) banks randomly select the depositors who will receive all of their funds. 4) all depositors share equally in the bank's funds during a crisis.

1) depositors arriving first have the best chance of withdrawing their funds.

A debt contract is incentive compatible 1) if the borrower has the incentive to behave in the way that the lender expects and desires, since doing otherwise jeopardizes the borrower's net worth in the business. 2) if the lender has the incentive to behave in the way that the borrower expects and desires. 3) if the debt contract is treated like an equity. 4) if the borrower's net worth is sufficiently low so that the lender's risk of moral hazard is significantly reduced.

1) if the borrower has the incentive to behave in the way that the lender expects and desires, since doing otherwise jeopardizes the borrower's net worth in the business.

Nonfinancial businesses in Germany, Japan, and Canada raise most of their funds 1)from bank loans. 2)by issuing stock. 3)by issuing bonds. 4)from nonbank loans.

1)from bank loans.

Which of the following statements are true? 1) A bank's liabilities are its uses of funds. 2) A bank's balance sheet shows that total assets equal total liabilities plus equity capital. 3) A bank's assets are its sources of funds. 4) A bank's balance sheet indicates whether or not the bank is profitable.

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

Which of the following statements is false? 1) A bank's assets are its uses of funds. 2) Bank capital is recorded as an asset on the bank balance sheet. 3) The bank's assets provide the bank with income. 4) A bank issues liabilities to acquire funds.

2) Bank capital is recorded as an asset on the bank balance sheet.

Which of the following statements most accurately describes the task of bank asset management? 1) Banks seek to have the highest liquidity possible subject to earning a positive rate of return on their operations. 2) Banks seek the highest returns possible subject to minimizing risk and making adequate provisions for liquidity. 3) Banks seek to acquire funds in the least costly way. 4) Banks seek to prevent bank failure at all cost; since a failed bank earns no profit, liquidity needs supersede the desire for profits.

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

________ is the process of researching and developing profitable new products and services by financial institutions. 1) Customer manipulation 2) Financial engineering 3) Financial manipulation 4) Customer engineering

2) Financial engineering

When a lender refuses to make a loan, although borrowers are willing to pay the stated interest rate or even a higher rate, the bank is said to engage in 1) coercive bargaining. 2) credit rationing. 3) strategic holding out. 4) collusive behavior.

2) credit rationing.

The process in which people take their money out of financial institutions seeking higher interest rates is called 1) loophole mining. 2) disintermediation. 3) capital mobility. 4) deposit jumping.

2) disintermediation.

The Glass-Steagall Act, before its repeal in 1999, prohibited commercial banks from 1) selling new issues of government securities. 2) engaging in underwriting and dealing of corporate securities. 3) purchasing any debt securities. 4) issuing equity to finance bank expansion.

2) engaging in underwriting and dealing of corporate securities.

The difference of rate-sensitive liabilities and rate-sensitive assets is known as the 1) interest-sensitivity index. 2) gap. 3) rate-risk index. 4) duration.

2) gap.

As the costs associated with deposit outflows ________, the banks willingness to hold excess reserves will ________. 1) decrease; increase 2) increase; increase 3) increase; decrease 4) decrease; not be affected

2) increase; increase

A bank that wants to monitor the check payment practices of its commercial borrowers, so that moral hazard can be prevented, will require borrowers to 1) purchase the bank's CDs. 2) keep compensating balances in a checking account at the bank. 3) place a bank officer on their board of directors. 4) place a corporate officer on the bank's board of directors.

2) keep compensating balances in a checking account at the bank.

The most significant change in the economic environment that changed the demand for financial products since 1970 has been 1) the deregulation of financial institutions. 2) the dramatic increase in the volatility of interest rates. 3) the dramatic increase in competition from foreign banks. 4) the aging of the baby-boomer generation.

2) the dramatic increase in the volatility of interest rates.

If a banker expects interest rates to fall in the future, her best strategy for the present is 1) to increase the duration of the bank's liabilities. 2) to increase the duration of the bank's assets. 3) to sell long-term certificates of deposit. 4) to buy short-term bonds.

2) to increase the duration of the bank's assets.

Banks are required to file ________ usually quarterly that list information on the bank's assets and liabilities, income and dividends, and so forth. 1) examiner updates 2) call reports 3) regulatory sheets 4) balance reports

2) call reports

Banks will be examined at least once a year and given a CAMELS rating by examiners. The L stands for ________. 1) leverage 2) liquidity 3) loans 4) liabilities

2) liquidity

The practice of keeping high-risk assets on a bank's books while removing low-risk assets with the same capital requirement is know as 1) a dual banking system. 2) regulatory arbitrage. 3) competition in laxity. 4) depositor supervision.

2) regulatory arbitrage.

If a bank has $100,000 of checkable deposits, a required reserve ratio of 20 percent, and it holds $40,000 in reserves, then the maximum deposit outflow it can sustain without altering its balance sheet is 1) $30,000. 2) $10,000. 3) $25,000. 4) $20,000.

3) $25,000.

Which bank regulatory agency has the sole regulatory authority over bank holding companies? 1) The FHLBS 2) The Comptroller of the Currency 3) The Federal Reserve System 4) The FDIC

3) The Federal Reserve System

An instrument developed to help investors and institutions hedge interest-rate risk is 1) a put option. 2) a mortgage-backed security. 3) a financial derivative. 4) a call option.

3) a financial derivative.

The problem created by asymmetric information before the transaction occurs is called ________, while the problem created after the transaction occurs is called ________. 1) costly state verification; free-riding 2) moral hazard; adverse selection 3) adverse selection; moral hazard 4) free-riding; costly state verification

3) adverse selection; moral hazard

Because of their ________ liquidity, ________ U.S. government securities are called secondary reserves. 1) low; long-term 2) low; short-term 3) high; short-term 4) high; long-term

3) high; short-term

The most important source of the changes in supply conditions that stimulate financial innovation has been the 1) dramatic increase in competition from foreign banks. 2) deregulation of financial institutions. 3) improvement in computer and telecommunications technology. 4) dramatic increase in the volatility of interest rates.

3) improvement in computer and telecommunications technology.

Net profit after taxes per dollar of equity capital is a basic measure of bank profitability called 1) return on investment. 2) return on assets. 3) return on equity. 4) return on capital.

3) return on equity.

When a $10 check written on the First National Bank of Chicago is deposited in an account at Citibank, then 1) the liabilities of the First National Bank increase by $10. 2) the assets of Citibank fall by $10. 3) the liabilities of Citibank increase by $10. 4) the reserves of the First National Bank increase by $ 10.

3) the liabilities of Citibank increase by $10.

Bank reserves include 1) deposits at other banks and deposits at the Fed. 2) deposits at the Fed and short-term treasury securities. 3) vault cash and deposits at the Fed. 4) vault cash and short-term Treasury securities.

3) vault cash and deposits at the Fed.

Since depositors, like any lender, only receive fixed payments while the bank keeps any surplus profits, they face the ________ problem that banks may take on too ________ risk. 1) adverse selection; little 2) adverse selection; much 3) moral hazard; much 4) moral hazard; little

3) moral hazard; much

Professional athletes often have contract clauses prohibiting risky activities such as skiing and motorcycle riding. These clauses are 1) illegal. 2) risk insurance. 3) restrictive covenants. 4) limited-liability clauses.

3) restrictive covenants.

Of the following sources of external finance for American nonfinancial businesses, the least important is 1)loans from banks. 2)loans from other financial intermediaries. 3)stocks. 4)bonds and commercial paper.

3) stocks

The contagion effect refers to the fact that 1) deposit insurance has eliminated the problem of bank failures. 2) bank runs involve only sound banks. 3) the failure of one bank can hasten the failure of other banks. 4) bank runs involve only insolvent banks

3) the failure of one bank can hasten the failure of other banks.

In a ________ banking system, commercial banks provide a full range of banking, securities, and insurance services, all within a single legal entity. 1) dividerless 2) severable 3) universal 4) barrier-free

3) universal

Which of the following are reported as liabilities on a bank's balance sheet? 1) Reserves 2) Deposits with other banks 3) Loans 4) Checkable deposits

4) Checkable deposits

Which of the following is NOT an entity of the Federal Reserve System? 1) The Federal Open Market Committee 2) The Board of Governors 3) Federal Reserve Banks 4) The Comptroller of the Currency

4) The Comptroller of the Currency

Which regulatory body charters national banks? 1) The FDIC 2) The U.S. Treasury 3) The Federal Reserve 4) The Comptroller of the Currency

4) The Comptroller of the Currency

The financial panic of 1907 resulted in such widespread bank failures and substantial losses to depositors that the American public finally became convinced that 1) the Federal Reserve System had failed to serve as a lender of last resort. 2) the Second Bank of the United States had failed to serve as a lender of last resort. 3) the First Bank of the United States had failed to serve as a lender of last resort. 4) a central bank was needed to prevent future panics.

4) a central bank was needed to prevent future panics.

All else the same, if a bank's liabilities are more sensitive to interest rate fluctuations than are its assets, then ________ in interest rates will ________ bank profits. 1) a decline; not affect 2) an increase; increase 3) a decline; reduce 4) an increase; reduce

4) an increase; reduce

Since 1980 1) banks have offset the decline in profits from off-balance-sheet activities with increased income from traditional activities. 2) bank profitability has declined. 3) bank profits have grown rapidly due to deregulation. 4) banks have offset the decline in profits from traditional activities with increased income from off-balance-sheet activities.

4) banks have offset the decline in profits from traditional activities with increased income from off-balance-sheet activities.

The rapid growth of the commercial paper market since 1970 is due to 1) government regulation. 2) FDIC insurance for commercial paper. 3) the fact that commercial paper has no default risk. 4) improved information technology making it easier to screen credit risks.

4) improved information technology making it easier to screen credit risks.

Holding large amounts of bank capital helps prevent bank failures because 1) it makes loans easier to sell. 2) it means that the bank has a higher income. 3) it makes it easier to call in loans. 4) it can be used to absorb the losses resulting from a deposit outflow.

4) it can be used to absorb the losses resulting from a deposit outflow.

Newly-issued high-yield bonds rated below investment grade by the bond-rating agencies are frequently referred to as 1) "fallen angels." 2) municipal bonds. 3) Yankee bonds. 4) junk bonds.

4) junk bonds.

Banks earn profits by selling ________ with attractive combinations of liquidity, risk, and return, and using the proceeds to buy ________ with a different set of characteristics. 1) securities; deposits 2) loans; deposits 3) assets; liabilities 4) liabilities; assets

4) liabilities; assets

Long-term customer relationships ________ the cost of information collection and make it easier to ________ credit risks. 1) reduce; increase 2) increase; increase 3) increase; screen 4) reduce; screen

4) reduce; screen

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 1) share draft account. 2) stockman account. 3) removed-repo account. 4) sweep account.

4) sweep account.

The public's fear of centralized power and distrust of moneyed interests led to the demise of the first two experiments in central banking: 1) the First Central Bank of the United States and the Second Central Bank of the United States. 2) the First Bank of North America and the Second Bank of North America. 3) the First Bank of the United States and the Central Bank of the United States. 4) the First Bank of the United States and the Second Bank of the United States.

4) the First Bank of the United States and the Second Bank of the United States.

A major controversy involving the banking industry in its early years was 1) whether banks should be allowed to issue Federal Reserve notes. 2) whether banks should both accept deposits and make loans or whether these functions should be separated into different institutions. 3) what percent of deposits banks should hold as fractional reserves. 4) whether the federal government or the states should charter banks.

4) whether the federal government or the states should charter banks.

The result of the too-big-to-fail policy is that ________ banks will take on ________ risks, making bank failures more likely. 1) big; fewer 2) small; fewer 3) small; greater 4) big; greater

4) big; greater

Financial intermediaries develop ________ in things such as computer technology which allows them to lower transactions costs. 1)regulations 2)equity 3)diversification 4)expertise

4) expertise

Property that is pledged to the lender in the event that a borrower cannot make his or her debt payment is called 1)interest. 2)good faith money. 3)points. 4)collateral.

4)collateral.

A sharp decline in the stock market increases moral hazard problems because it reduces uncertainty in the economy and increases market efficiency. lenders are more willing to make loans. borrowing firms have less to lose if their investments fail. it is immoral to profit from someone's loss.

borrowing firms have less to lose if their investments fail.

A major disruption in financial markets characterized by sharp declines in asset prices and financial-firm failures is called a free-rider problem. "lemons" problem. financial crisis. fiscal imbalance.

financial crisis.

A sharp decline in the stock market means that the ________ of corporations has fallen, making lenders ________ willing to lend. liability; less liability; more net worth; more net worth; less

net worth; less