Econ 3229 test 1 and 2

beginning of chapter 17 practice questions

beginning of chapter 17 practice questions

look at balance sheet question from test 2

look at balance sheet question from test 2

Which of the following would not be considered a characteristic of money? A) It is a means of payment. B) It is a unit of account. C) It is a store of value. D) It must have intrinsic value

D

the additional incentive that the purchaser of a treasury security requires to buy a long term security rather than a short term security is called the A) risk premium B) tax premium C) market premium D) term premium

D

the largest federal district geographically is serviced by A) the reserve bank in chicago B) the districts are divided fairly and equally C) the reserve bank in New York D) the reserve bank in San Francisco

D

the specific goals of central banks include all of the following except A) a stable exchange rate B) high and stable real growth C) low and stable inflation D) high stock prices

D

the three branches of the federal reserve system include each of the following, except A) the board of governors B) the federal open market committee C) the twelve regional federal reserve banks D) the federal deposit insurance corporation

D

which of the books used at the FOMC meetings contains information about business conditions in twelve districts collected by the Federal Reserve Banks A) the Bluebook B) both the Beigebook and Bluebook C) the Tealbook D) the Beigebook

D

A bank's net worth is synonymous with its A) capital B) assets C) assets + bank's liabilities D) required reserves

A

A financial intermediary: A) is a third-party that facilitates a transaction between a borrower and a lender. B) is an agency that guarantees a loan. C) would be used in direct finance. D) must be a depository institution

A

According to the WSJ article, investors poured billions into municipal bonds recently, sending their yields down. This happened despite the changes to the tax code under the current administration. Which of following changes made this municipal bond rush surprising? A) Lower federal income taxes. B) Higher federal income taxes. C) Exempting Treasury bonds from federal income tax D) Subjecting municipal bonds to federal income tax.

A

Although open market operations and discount loans both change the monetary base, the Fed has A) greater control over open market operations than over discount loans. B) greater control over discount loans than over open market operations. C) very little control over either discount loans or open market operations. D) complete control over both discount loans and open market operations

A

Everything else held constant, when the government has lower budget deficits A) the supply curve for bonds shifts to the left and the interest rate falls. B) the demand curve for bonds shifts to the left and the interest rate falls. C) the demand curve for bonds shifts to the left and the interest rate rises. D) the supply curve for bonds shifts to the right and the interest rate rises

A

Financial instruments used primarily as stores of value include each of the following, except: A) futures contracts. B) stocks. C) home mortgages. D) bonds.

A

If a bank has $120 million of checkable deposits, a required reserve ratio of 15%, and it holds $26.5 million reserves, then the maximum deposit outflow it can sustain without running into reserve deficiency is A) $10 million B) $4 million C) $18 million D) 8.5 million

A

If a bank has excess reserves of $4,000 and demand deposit liabilities of $100,000, and if the reserve requirement is 10 percent, then the bank has actual reserves of A) $14,000. B) $19,000. C) $24,000. D) $29,000

A

If a bond's rating improves, we would expect: A) the demand for this bond to increase, all other factors constant. B) the demand for this bond to decrease, and its yield to increase, all other factors constant. C) the demand for and the yield of this bond to increase, all other factors constant. D) both the demand for and the price of the bond to decrease, all other factors constant.

A

If a lender wants to earn a real interest rate of 3% and expects inflation to be 1%, he/she should charge a nominal interest rate of: A) 4% B) 3% C) 2% D) -2%

A

If a perpetuity (a consol bond) has a price of $4000 and an annual interest payment of $240, the interest rate is A) 6 percent. B) 7 percent. C) 7.5 percent. D) 10 percent.

A

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

A

Sophia moves $1,000 from her savings account to her checking account. Which of the following is correct? A) M1 increases and M2 does not change B) M1 increases and M2 decreases C) Both M1 and M2 increase D) M1 does not change and M2 decreases

A

The economist Irving Fisher, after whom the Fisher effect is named, explained why interest rates ________ as the expected rate of inflation ________, everything else held constant. A) rise; increases B) fall; increases C) rise; stabilizes D) fall; stabilizes

A

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

A

The value of fiat money: A) comes from government decree. B) comes from its intrinsic value. C) means that it is more desirable than currency. D) is worth more as a commodity than its value as money

A

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

A

When the Fed buys $100 worth of bonds from a primary dealer, reserves in the banking system A) increase by $100. B) increase by more than $100. C) decrease by $100. D) decrease by more than $100.

A

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

A

the federal deposit insurance corporation (FDIC) was created: A) in 1933 as a part of the Glass-Steagall Act B) when the Federal Reserve was created in 1914 C) prior to the stock market crash of 1929 D) In 1927 as part of the McFadden Act

A

when Jane Brown writes a $100 check to her nephew and he deposits the check at his bank, Ms. Brown's bank ______ assets of $100 and _______ liabilities of $100 A) loses; loses B) loses; gains C) gains; loses D; gains; gains

A

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. A) $8000 B) $1200 C) $1200.8 D) $8400

B

If the required reserve ratio is equal to 10 percent, a single bank can increase its loans up to a maximum amount equal to A) its excess reserves. B) 10 times its excess reserves. C) 10 percent of its excess reserves. D) its total reserves.

B

the governors of the Federal Reserve system serve terms of A) four years, the same as the US president, and the terms are not renewable B) fourteen years C) four years that can be renewed D) seven years

B

the number of voting members on the Federal Open Market Committee is A) 8 B) 12 C) 19 D) 7

B

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

C

Consider the bonds below. Which is subject to the greatest interest-rate risk? A) A Treasury bill B) A 20-year corporate bond C) A consol D) A 30-year Treasury bond

C

Considering the balance sheet for all commercial banks in the US, the largest category of liabilities is A) borrowings from non-banks in the US B) mortgage loans C) deposits D) borrowing from other banks in the US

C

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 A) 2.5. B) 1.7. C) 7.3. D) 0.73.

D

Everything else held constant, an increase in marginal tax rates would likely have the effect of ________ the demand for municipal bonds, and ________ the demand for U.S. government bonds. A) increasing; increasing B) decreasing; decreasing C) increasing; decreasing D) decreasing; increasing

C

If stock prices are expected to drop dramatically, then, other things equal, the demand for stocks will ________ and that of Treasury bills will ________. A) increase; decrease B) increase; increase C) decrease; increase D) decrease; decrease

C

In the bond market, the buyer is considered to be A) the lender or the borrower, depending upon whether interest rates are rising or falling. B) the borrower. C) the lender or the borrower, depending upon the use to which the funds are put. D) the lender

D

Inflation refers to growth in the economy's: A) money. B) Gross Domestic Product (GDP). C) interest rates. D) prices.

D

Money eliminates the need for: A) specialization of labor. B) government regulation. C) financial Intermediaries. D) a search for a double coincidence of wants

D

Most of the buying and selling in primary markets: A) is done by the Federal Reserve. B) is highly transparent and closely monitored by the governnment. C) is in the public view. D) involve an investment bank.

D

If the expected return on bonds increases, all else equal, the demand for bonds increases, the price of bonds ________, and the interest rate ________. A) decreases; increases B) increases; increases C) increases; decreases D) decreases; decreases

C

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 A) $10. B) $100. C) $100 times the reciprocal of the required reserve ratio. D) $100 times the required reserve ratio

C

President Trump reduced the top income tax bracket from 39.6% to 37%. Supply and demand analysis predicts the impact of this change was a ________ interest rate on municipal bonds and a ________ interest rate on Treasury bonds. A) higher; higher B) lower; lower C) lower; higher D) higher; lower

D

Suppose that your marginal federal income tax rate is 30%, your marginal state income tax rate is 5%, and the yield on thirty-year U.S. Treasury bonds is 4%. You would be indifferent between buying a thirty-year Treasury bond and buying a thirty-year municipal bond issued within your state (ignoring differences in liquidity, risk, and costs of information) if the municipal bond has a yield of A) 10.0%. B) 1.6%. C) 2.8%. D) 3.0%

C

The excess reserves ratio is ________ related to expected deposit outflows, and is ________ related to the market interest rate. A) negatively; negatively B) negatively; positively C) positively; negatively D) positively; positively

C

There are two ways in which the Fed can provide additional reserves to the banking system: it can ________ government bonds or it can ________ discount loans to commercial banks. A) sell; extend B) sell; call in C) purchase; extend D) purchase; call in

C

What is the price of a coupon bond that has annual coupon payments of $5, a face value of $100, a yield to maturity of 10%, and a maturity of two years? A) $87.84 B) $87.0 C) $91.32 D) $107.70

C

Which of the following $1,000 face-value securities has the lowest yield to maturity? A) a 4 percent coupon bond with a price of $1,000 B) a 6 percent coupon bond with a price of $800 C) a 4 percent coupon bond with a price of $1,050 D) a 7 percent coupon bond with a price of $600

C

Which of the following assets is the most liquid? A) Art B) Houses C) Demand deposits D) Stocks

C

Which of the following is NOT one of the provisions of the Dodd-Frank Act of 2010? A) Requiring SIFI to submit approved living wills B) restrictions on certain trading activities by large banks C) extends Fed's regulatory powers to shadow banks D) Limitations on Fed's emergency lending authority

C

banks face liquidity risk because A) they are unable to borrow from the federal reserve B) households and businesses may seek to borrow a large amount of funds in a short period of time C) they can have difficulty meeting their depositor's demands to withdraw money D) governments tend to run high budget deficits

C

if a bank's capital to asset ratio is 0.05 and its return on equity is 20%, what is the return on assets? A)2.0% B) 400% C) 1% D) 20%

C

suppose the economy has an inverted yield curve. According to the expectations hypothesis, which of the following interpretations could be used to explain this? A) investors prefer bonds with less default risk B) investors prefer bonds with less interest rate risk C) interest rates are expected to fall in the future D) the term spread is positive

C

the glass steagall act of 1933 A) eliminated the FDIC B) required federally chartered banks to meet the branching restrictions of the states C) required commercial banks to sell off their investment banking operations D) required all state banks to get federal charters

C

The Gramm-Leach-Bliley Act A) reinforced the Glass-Steagall Act's limitation on commercial banks' ability to merge with insurance or securities firms by increasing the penalties for doing so B) repealed the McFadden Act's restriction on banking and bank branching C) repealed the Riegle Neal Interstate Banking and Branching Efficiency Act D) Repealed the Glass Steagall Act's prohibition of mergers between commercial banks and insurance or securities firms

D

The bond rating of a security reflects the: A) return a holder is likely to receive. B) size of the coupon payment relative to the face value. C) size of the coupon rate relative to other interest rates. D) likelihood the lender/borrower will be repaid by the borrower/issuer

D

When the long term interest rates are smaller than short term interest rates, this implies that the economy is more likely to enter A) an expansion B) a period of increasing output C) a boom time D) a recession

D

Which of the following assigns widely followed bond ratings? A) The U.S. Treasury B) The Federal Reserve C) The New York Stock Exchange D) Standard & Poor's

D

Which of the following involves banks borrowing funds from firms or other banks using the treasury securities as collateral A) counterparty lending B) federal funds C) money market account D) repurchase agreement

D

A one year and two year bond currently pays 2.4% and 2.0% respectively. what is the expected interest rate on a one year bond next year according to the liquidity premium theory if the two year premium is 0.2%? A) 0.85% B) 1.2% C) 0.4% D) 1.4%

B

A one year bond currently pays 2.1% interest. It is expected that it will pay 2% next year and 1.9% the following year. The two year premium is 0.05% while the three year term premium is 0.15%. What is the interest rate on a two year bond according to the liquidity premium theory? A) 2% B) 2.1% C) 2.15% D) 1.2%

B

According to the WSJ article, 2019 saw a big increases in the new corporate bond offerings, with companies like Apple and Disney leading the way. Which of the following explains such a high supply of corporate bonds? A) Ultra low prices for corporate bonds encouraged corporations to borrow more. B) Ultra low interest rates encouraged corporations to borrow more. C) Concerns about Brexit are pushing US corporations to borrow more. D) Trade war with China is encouraging US corporations to expand and thus borrow more

B

According to the WSJ article, in 2009 many of the investment banks were rescued by the Fed and Treasury as the crisis quickly spread. Fed's assistance packeges to some of the investment banks drew a heavy criticism. what provisions were put in place to make such bailouts unlikely in the future? A) Fed's emergency loans and assistance packages now have to be approved by the US congress B) Instead of bailout, troubled institutions now have to go through orderly liquidation authority overseen by the federal regulators C) under the legislation, healthy banks can no longer acquire troubled investment banks D) such bailouts now require not only the board of directors, but majority of the company shareholders' approval

B

According to the liquidity premium theory, a yield curve that is flat means that A) bond purchasers expect short term interest rates to rise in the future B) Bond purchasers expect short term interest rates to rise in the future C) the yield curve has nothing to do with expectations of bond purchasers D) bond purchasers expect short term interest rates to stay the same

B

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; required reserves B) deposits; excess reserves C) currency; required reserves D) currency; excess reserves

B

If a $5,000 face-value discount bond maturing in one year is selling for $4,400, then its yield to maturity is A) 0 percent. B) 13.6 percent. C) 12 percent. D) 88 percent

B

Money markets are where trades occur for: A) bonds of all maturities. B) short-term bonds issued by both governments and private companies. C) stocks. D) derivatives

B

Roles served by financial markets include the following, except: A) providing liquidity. B) eliminating risk. C) pooling and communicating information. D) sharing of risk.

B

Suppose in 2017 you buy two year $1,000 face-value 4% coupon bond for $1,000. In 2018, interest rates increase to 10%. If you decide to sell your bond in 2018, what will be the selling price and one-year rate of return for you? A) $1,020; 7% B) $945.5; -1.45% C) $1,000; 2% D) $927.3; -5.3%

B

Suppose the tax rate is 25% and the taxable bond yield is 8%. What is the equivalent tax-exempt bond yield? A) 6.9% B) 6% C) 2.3% D) 2%

B

The Federal Reserve bank of New York is unique from other reserve banks because it A) is the only regional bank located in a financial center B) is where the Federal Reserve System's portfolio is managed C) is the only regional bank that serves just one state D) is the oldest and therefore the largest

B

The government's too big to fail policy applies to A) large corporate payroll accounts held by some banks where many people would lose their income B) large banks whose failure would start a widespread panic in the financial system C certain highly populated states where a bank run impacts a large percent of the total population D) banks that have branches in more than two states

B

The interest rate falls when either the demand for bonds ________ or the supply of bonds ________. A) decreases; increases B) increases; decreases C) decreases; decreases D) increases; increases

B

Under the purchase and assumption method of dealing with a failed bank, the FDIC A) takes over the day to day management of the bank B) finds another bank to take over the insolvent bank C) sells the failed bank to the federal reserve D) sells off the profitable loans of the failed bank in an open auciton

B

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

B

Which of the following are depository institutions? A) Mutual funds B) Credit unions C) Insurance companies D) Pension funds

B

Which of the following is (are) not a permanent voting member on the FOMC A) The president of the Fed bank of New York B) the secretary of the treasury C) the seven governors of the Fed D) the chair of the board of governors

B

Which of the following is NOT a form of a short term liability in the shadow banking system A) money market mutual fund shares B) bank deposits C) commercial paper D) repurchase agreements

B

all of the following help make the Fed more independent of the political process except A) board members receive a long, nonrenewable appointment B) chair of Fed receives a lifetime appointment C) board members' terms expire at different times, reducing the possible number of appointees by any one president D) financial independence

B

considering the balance sheet for all commercial banks in the US, the largest category of assets is A) required reserves B) Loans C) US government securities D) Cash items

B

if the current 3 year interest rate is 1.8% and the expected 1 year interest rate 3 years from now is 2%, what is the interest rate on a 4 year bond today according to the expectations theory A) 0.2% B) 1.85% C) 1.9% D) 3.8%

B

suppose 1 year, 2 year, and 3 year interest rates today are 2.4%, 2.0%, and 1.8% respectively. What's the expected 1 year interest rate two years from now according to expectations theory? A) 1.3% B) 1.4% C) 2.0% D) 2.07%

B

. If the Fed purchases securities worth $10 million from a commercial bank, the banking system's balance sheet will show A) an increase in securities held of $10 million and an increase in bank reserves of $10 million. B) an increase in securities held of $10 million and a decrease in bank reserves of $10 million. C) a decrease in securities held of $10 million and an increase in bank reserves of $10 million. D) a decrease in securities held of $10 million and a decrease in bank reserves of $10 million

C

A borrower has information that is not available to a prospective lender; this is an example of: A) liquidity risk. B) a wise borrower and an unwise lender. C) information asymmetry. D) a transfer of risk

C

According to the WSJ article, after the surprise victory in the US elections by Donald Trump, the bond market saw a sharp increase in yields. Which of the following the best explains such increase in yields? A) Investors increased demand for government bonds anticipating future rise in interest rates. B) Investors reacted by selling off governments bonds to Donald Trump's promise of reducing income tax rates. C) Investors decreased demand for government bonds anticipating future rise in interest rates. D) Investors reacted by selling off governments bonds to Donald Trump's promise of reducing federal budget deficit.

C

According to the WSJ article, the US Treasury bond yields fell to historically lowest levels afer the UK's referendnum on exiting the European Union passed in 2016. Which of the following explains the effect of UK referendum on Treasuries? A) Investor demand for US Treasury bonds fell thus pushing bond yields down. B) Investor demand for US Treasury bonds fell thus pushing bond prices down. C) Investor demand for US Treasury bonds increased thus pushing bond yields down. D) Encouraged by the results of the referendum, investor demand for British bonds increased thus sending US Treasury bond yields down

C

According to the WSJ article, there are currently proposals for to relax the volcker rule of the dodd frank act of 2010. if implemented, how will this affect the financial institutions in general? A) it will allow large banks to acquire investment banks or insurance companies without the Fed's approval B) banks no longer will be required to submit "living wills" C) it will make it easier for banks to comply with restrictions on speculative trading D) it will allow large banks to merge without the Fed's approval

C

According to the WSJ article, many investors are feeling nervous about flattening yield curve in the past couple of years. What is one of the explanations why the flat yield curve indicates upcoming recession A) Flattening yield curve is widely seen as a factor behind a weak dollar B) the federal government typically increases taxes and decreases spending as a result of flattening yield curve C) federal reserve typically reacts to flat yield curve by hiking interest rates up D) in a self-fulfilling prophecy, banks cut back on lending in anticipation of recession and thus actually causing a recession

D

According to the WSJ article, which of the following summarizes a situation greek banks faced in the summer of 2015 A) Widespread runs as a result of capital controls imposed by germany and france B) widespread panic as a result of a national referendum where greeks voted to leave the EU C) through a contagion effect, greek households rushed to withdraw deposits after brexit D) Many greek banks experienced a liquidity crisis as deposit withdrawals surged and ECB cut the emergency lending

D

As a result of the 2007-2009 financial crisis, which of the following big five investment banks had to legally reorganize itself in order to accept bailout funds? A) Bear Stearns B)Merrill Lynch C) Lehman Brothers D) Morgan Stanley

D

Differences in ________ explain why interest rates on treasury securities are not all the same A) liquidity B) tax characteristics C) risk D) time to maturity

D

Higher the Bank's asset to capital ratio, A) lower its average is B) safer the bank is C) less exposed to insolvency it is D) higher its ROE for every dollar return on its assets

D

If a bond has a face value of $1000 and a coupon rate of 4.25%, the bond owner will receive annual coupon payments of: A) $4.25 B) a value that cannot be determined from the information provided. C) $425.00 D) $42.50

D

If prices in the bond market become more volatile, everything else held constant, the demand curve for bonds shifts ________ and interest rates ________. A) left; fall B) right; rise C) right; fall D) left; rise

D

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 A) 0.01. B) 0.10. C) 0.05. D) 0.20

D

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

D