Money & Banking TCU Test 2
At a growth rate of 6 percent an economy will double in size in A)7 years. B)14 years. C)12 years. D)6 years.
12 years.
The Federal Reserve was created in A)1929. B)1913. C)1909. D)1945.
1913
How many members belong to the board of directors for each of the Reserve Banks of the Fed? A)7 B)9 C)12 D)14
9
Which one of the following statements is true? A)Adverse selection is a problem of monopoly and moral hazard is a problem of information asymmetry. B)Adverse selection and moral hazard are problems stemming from asymmetric information. C)Adverse selection is a problem that occurs after a transaction. D)Moral hazard is a problem that occurs before a transaction.
Adverse selection and moral hazard are problems stemming from asymmetric information.
Which one of the following is a problem of moral hazard? A)A lender cannot distinguish good risk from bad risk borrowers. B)An individual who purchases auto insurance begins to leave his or her keys in the car while running into a store. C)Life insurance companies offer an average premium to smokers and non-smokers so they do not have to have two different premiums. D)An auto insurance company charges higher premiums to younger drivers than what they charge to older drivers.
An individual who purchases auto insurance begins to leave his or her keys in the car while running into a store.
Which one of the following is responsible for invoking the Fed's emergency powers? A)FOMC B)Board of Governors C)Fed Chairman D)a majority of the Federal Reserve Bank presidents
Board of Governors
In the U.S., the authority to issue currency is held by the A)Federal Reserve. B)U.S. Treasury. C)Office of the Comptroller of the Currency. D)U.S. Mint.
Federal Reserve.
Monetary policy in the United States is under the control of the A)U. S. Treasury. B)President. C)Federal Reserve. D)U.S. Senate.
Federal Reserve.
The central bank in the United States is the A) Bank of America. B) Federal Reserve. C) U.S. Treasury. D) Bank of the United States.
Federal Reserve.
A lender usually knows less about the creditworthiness of a borrower than the borrower does. This is an example of A) opportunistic behavior. B) economies of scale. C) diminishing marginal returns. D) information asymmetry.
Information asymmetry.
Considering the Federal Reserve Districts, which one of the following is true? A) With the exception of New York, no district coincides with a single state. B) No district coincides with a single state. C) Some districts are made up of single states. D) The districts are divided with equal population.
No district coincides with a single state.
Which one of the following statements is not true? A)Periods of growth above the potential level are periods of high employment. B)Periods of growth below the potential level are periods of low unemployment. C)Periods of growth above the potential level are periods of low unemployment. D)Periods of growth below the potential level are periods of high unemployment.
Periods of growth below the potential level are periods of low unemployment.
The relationship between stability and economic growth is best summarized by which one of the following statements? A)Stability results in higher output growth rates. B)Inflation volatility results in higher output growth rates. C)There is no correlation between the volatility in growth rates and annual output growth. D)The more volatile the growth rate, the higher is the annual output growth.
Stability results in higher output growth rates.
Credit may dry up at the start of an economic downturn because of all of the following except which one? A)Lenders require information and accurate information is more difficult to obtain. B)It becomes more difficult for lenders to determine the creditworthiness of borrowers. C)Lenders see greater risk in making loans to borrowers. D)The free-rider problem worsens during a downturn.
The free-rider problem worsens during a downturn.
A typical FOMC meeting would best be described as A)an informal meeting with significant give and take among participants. B)an informal meeting with the Chairman as a passive observer. C)a fairly formal session with not much give and take. D)a press conference, where the financial press can ask questions regarding the Fed's view of the economy.
a fairly formal session with not much give and take.
The principal-agent problem is A) a form of adverse selection. B) when stockholders are not acting in the best interest of managers. C) a form of moral hazard. D) due to managers not being able to monitor stockholder behavior.
a form of moral hazard.
An unsecured loan is A)a loan where the applicant does not have any net worth. B)a loan where the applicant does not post any collateral. C)another name for a mortgage loan. D)usually a low-risk loan.
a loan where the applicant does not post any collateral.
The problem of adverse selection created the opportunity for A)lenders to profit significantly at the expense of borrowers. B)significant deregulation of financial markets. C)a new market in the trading of information. D)stock prices for many years to be much lower than what they should have been.
a new market in the trading of information.
The federal funds rate is stated as A)a real interest rate. B)a nominal interest rate. C)a rate that is automatically indexed to inflation. D)the current rate less the expected rate of inflation.
a nominal interest rate.
Mutual funds offer investors A)a greater return for greater risk than what an investor can earn on his own. B)a lower return for more risk than what the investor could earn on his own. C)a lower return for less risk than what the investor could earn on his own. D)a way for individuals to eliminate the idiosyncratic risk associated with any single investment.
a way for individuals to eliminate the idiosyncratic risk associated with any single investment.
Most economists agree that the target rate of inflation for central banks should be A)between 7 and 9 percent. B)less than zero. C)above zero for fears of deflation. D)something over 3 but less than 6 percent.
above zero for fears of deflation.
Beginning in July of 2018, President Donald Trump openly and frequently criticized the Federal Reserve and its Chairman Jay Powell. Blatantly undermining the independence of the Fed in this way would likely A)add a risk premium, driving down prices of U.S. assets. B)cause the Fed to change course and move in the opposite direction of Trump's wishes. C)result in the Fed carrying out the monetary policy recommended by President Trump. D)illustrate the strength of the U.S. economy and encourage investment from abroad.
add a risk premium, driving down prices of U.S. assets.
One reason the government requires public corporations to disclose so much information is to A)minimize the monopoly profits some corporations earn. B)give small corporations a better chance of competing against large corporations. C)address the potential harm from asymmetric information. D)discourage risk-taking by investors.
address the potential harm from asymmetric information.
Interest rate volatility is a problem because it A)adds to uncertainty, thereby diminishing an investment.B)decreases risk.C)can impact productivity in a positive way.D)can make financial decisions less difficult.
adds to uncertainty, thereby diminishing an investment
Asymmetric information poses two important obstacles to the smooth flow of funds from savers to investors. They are A)adverse selection, which arises before the transaction occurs, and moral hazard, which occurs after the transaction. B)moral hazard, which arises before the transaction occurs, and adverse selection, which occurs after the transaction. C)adverse selection and moral hazard, both of which occur after the transaction. D)adverse selection and moral hazard, both of which occur before the transaction.
adverse selection, which arises before the transaction occurs, and moral hazard, which occurs after the transaction.
In the bond market, the assigning of a risk premium is a tool designed to address the problem of A) adverse selection. B) information asymmetry. C) the free-rider. D) moral hazard.
adverse selection.
The function of providing liquidity by financial intermediaries A) includes depositors withdrawing funds but not borrowers. B) only considers people who borrow on a short-term basis, but not depositors. C) affects people who need to borrow and depositors who withdraw their funds. D) only affects customers with savings accounts.
affects people who need to borrow and depositors who withdraw their funds.
Providing stock options to corporate managers was an idea designed to A) hide increases in pay of corporate executives from stockholders. B) align managers' interest with the stockholders' interest. C) treat adverse selection. D) treat the free-rider problem.
align managers' interest with the stockholders' interest.
Currently the requirement of holding a non-interest-bearing reserve account at the Fed must be met by A)all banks, member or not. B)only member banks. C)member banks and nonmember banks with over $100 million in assets. D)only nationally chartered banks.
all banks, member or not.
Changes in the federal funds rate influence the economy's growth rate through all of the following except by A)making it more or less attractive to save. B)making it more or less expensive to borrow. C)making investment spending more or less attractive. D)altering the real interest rate when inflation is changing quickly
altering the real interest rate when inflation is changing quickly
Time consistency is critical for economic policy to be credible because A)people make decisions today with no regard for the future. B)the ability to update decisions over time is necessary for policy to be effective. C)it is not possible to improve outcomes by limiting discretion in future time periods. D)an effective policy is a strategy for the future, so it must be costly for policymakers to renege.
an effective policy is a strategy for the future, so it must be costly for policymakers to renege.
Each of the Reserve Banks has a president who is A) appointed by the bank's board of directors but approved by the board of governors. B) appointed by the board of governors but approved by the bank's board of directors. C) elected by the commercial banks in their district. D) selected from the Board of Directors.
appointed by the bank's board of directors but approved by the board of governors.
The scandals involving Enron, World Com, Global Crossing, and other large firms A)are examples of asymmetric information and led, at least temporarily, to a less well-functioning stock market. B)should have been expected on the part of investors since that is why there is a risk premium. C)have resulted in a cry for less government regulation of public corporations. D)demonstrate that the government should be responsible for collecting and distributing financial information on firms.
are examples of asymmetric information and led, at least temporarily, to a less well-functioning stock market.
Lines of credit provided by financial intermediaries A)decrease liquidity for customers but increase income for the intermediary. B)are pre-approved loans that can increase liquidity and lower transaction costs. C)are costly for intermediaries to provide so are only available to large commercial customers. D)require deposits in the intermediary that equal or exceed the amount of the line of credit.
are pre-approved loans that can increase liquidity and lower transaction costs.
The actions of central banks around the world A)are most extreme in developing economies. B)are politically controversial during financial crises. C)are vital to the day-to-day operation of any modern economy. D)affect citizens of modern economies only during times of financial crisis.5
are vital to the day-to-day operation of any modern economy.
The stability of the financial system is enhanced by the ability of central banks to A)be a lender of last resort. B)provide loans to insolvent banks. C)provide deposit insurance. D)convert poorly run banks into branches of the central bank.
be a lender of last resort.
Moral hazard problems arise because A)lenders cannot distinguish good risks from bad risks. B)borrowers have incentives to act in ways that do not reflect the lender's interest. C)firms hire incompetent employees.D)lenders charge interest rates that are too low.
borrowers have incentives to act in ways that do not reflect the lender's interest.
The usual situation in banking regarding asymmetric information is that A)borrowers know more than lenders. B)lenders know more than borrowers. C)borrowers and lenders have the same information. D)lenders and borrowers have perfect information
borrowers know more than lenders.
The objectives set for the Fed by Congress are A)very specific, which adds to the Fed's accountability. B)by design, quite vague, allowing the Fed to really set its own goals. C)specific regarding inflation, but vague on all other goals. D)specific on the growth rate for the economy, but vague on all other objectives.
by design, quite vague, allowing the Fed to really set its own goals.
The interest rate decisions made by the Federal Open Market Committee A)can be overridden by the president. B)can be overridden by the Secretary of the Treasury. C)can be overridden by the U.S. Senate by a two-thirds majority. D)cannot be overridden by anyone outside of the Federal Reserve.
cannot be overridden by anyone outside of the Federal Reserve.
One valuable lesson investors should learn from the stock market behavior during the late 1990s and early 2000s is that the Fed A)can control the stock market. B)can reduce the idiosyncratic risk of investing but not the systematic risk. C)can eliminate the risk from investing. D)cannot prevent a stock market decline.
cannot prevent a stock market decline.
In the United States, monetary policy is formed by A)an individual advised by a close group of people. B)committee. C)the president and approved by Congress. D)the Chairman of the Federal Reserve and can only be overturned by the presidents of the Regional Federal Reserve Banks.
committee
The fact that financial intermediaries employ experts to carry out particular activities and, therefore, reduce transactions costs is an example of which one of the following economic concepts? A)law of demand B)economies of scale C)comparative advantage D)information costs
comparative advantage
To be independent, a central bank must have A)policies that can be overturned only by the president. B)control of its own budget. C)board members who are appointed for very short terms. D)the chairperson serve as a member of the president's cabinet.
control of its own budget.
One function of modern central banks is to A)control securities markets. B)control the government's budget. C)control the availability of money and credit. D)manage fiscal policy.
control the availability of money and credit.
Prior to the creation of the Federal Reserve System in the United States, how did financial panics typically begin? A) shortage of gold B) stock market crash C) bank run on an urban bank D) crop failure or a bumper crop that drove the market price down
crop failure or a bumper crop that drove the market price down
The primary purpose of meetings of the FOMC is to A)set the required reserve rate. B)set the discount rate. C)decide on how to influence financial conditions. D)set the prime rate.
decide on how to influence financial conditions
When a bank takes savings from many small savers and lends it to many borrowers, the bank A)decreases the risk to savers through diversification. B)increases the risk to borrowers through high transaction costs. C)decreases the risk to savers through economies of scale. D)decreases the return to savers and increases the cost to borrowers.
decreases the risk to savers through diversification
Emerging market economies, compared to industrialized economies, have financial markets that A)differ in composition and size. B)differ in composition but not in size. C)are the same in composition but differ in size. D)are similar in composition and size.
differ in composition and size.
Financial intermediation exists, in part, because A)financial markets work so well. B)direct finance through stocks and bonds is the dominant form of financing. C)transaction costs of financial intermediation is always higher than direct finance. D)the transaction costs associated with direct finance can at times be prohibitive.
direct finance through stocks and bonds is the dominant form of financing.
The main problem from inflation as seen by most economists is that A)inflation raises prices more than wages. B)inflation harms lenders more than it benefits borrowers. C)during periods of inflation some prices fall. D)inflation creates risk.
during periods of inflation some prices fall.
The fact that a financial intermediary can hire a lawyer to write one contract that works for many customers is an example of A)economies of scale. B)the law of diminishing marginal returns. C)the law of increasing opportunity cost. D)the law of demand.
economies of scale
Which one of the following would give the most importance to the goal of exchange rate stability? A)large, closed economies B)the United States and Japan and other developed countries C)emerging market countries where exports and imports are central to the structure of the economy D)Europe
emerging market countries where exports and imports are central to the structure of the economy
Exchange rate stability is likely to be a more important goal for the central banks of A)emerging market economies than the central bank of the United States. B)the United States and Japan than most small developing countries. C)countries where exports and imports make up a small total of all economic activity. D)large, closed economies.
emerging market economies than the central bank of the United States.
The rationale for the existence of central banks is mainly that A)financial markets lack transparency. B)they are needed for the supervision of banks. C)financial intermediation cannot occur without a central bank. D)financial systems are prone to periods of extreme volatility
financial systems are prone to periods of extreme volatility
The problem for a central bank setting a zero-inflation policy would be that A)there is risk of high employment. B)it is impossible to have zero inflation. C)firms would have to cut the nominal wage to reduce the real wage. D)economic growth would also have to be zero.
firms would have to cut the nominal wage to reduce the real wage.
Each president of a Reserve Bank serves for a A)fourteen-year term. B)five-year term. C)seven-year term. D)two-year renewable term.
five-year term.
Which one of the following is not a role of a financial institution acting as a financial intermediary? A)pooling the resources of small savers B)formulating oversight regulations C)providing ways to diversify risk D)supplying liquidity
formulating oversight regulations
The price for private information is likely higher than it should be due to the problem of A)adverse selection. B)free-riders. C)the government regulations regarding information. D)moral hazard.
free-riders.
Unsecured loans A) generally involve very high interest rates as a result of the free-rider problem. B) generally involve very high interest rates as a result of adverse selection. C) are no longer made; all loans now must have some form of collateral. D) are only made to individuals with very high net worth because it is the only way to limit the risk.
generally involve very high interest rates as a result of adverse selection.
The interest rates charged on most credit cards are A)high due to the problem of adverse selection. B)high because Visa and MasterCard have a virtual monopoly on this business. C)high due to diseconomies of scale that exist in this market. D)lower than they should be given the problem of adverse selection.
high due to the problem of adverse selection.
The specific goals of central banks include each of the following except which one? A)high and stable real growth B)low and stable inflation C)high levels of exports D)low and stable unemployment
high levels of exports
Which one of the following could the lemons problem, applied to financial markets, explain? A)lenders seeing a disproportionate share of high quality loan applicants. B)an average interest rate that is too high for the actual risk obtained. C)profits for many lenders increasing significantly. D)high quality potential borrowers relying more on internally generated funds to finance investment
high quality potential borrowers relying more on internally generated funds to finance investment.
The FOMC controls the real interest rate A)if inflation changes quickly. B)if inflation doesn't change quickly. C)only if it adjusts the federal funds rate to match the changes in the rate of inflation. D)only on an annual basis.
if inflation doesn't change quickly.
Requiring a home buyer to have a large down payment reduces risk to a mortgage lender because it means that A)if the price of the house falls, the owner suffers the loss. B)the buyer is less likely to sell the house. C)the buyer likely underpaid when she bought the house. D)there is more information available on the buyer.
if the price of the house falls, the owner suffers the loss.
In the United States, one problem with central bank independence is that A)it is almost impossible to obtain because Congress controls the budget of the Federal Reserve. B)in a representative democracy, monetary policymakers must be held accountable to the public. C)central bank independence has not produced favorable results. D)the central bank can control policy, but the U.S. Treasury controls the money supply.
in a representative democracy, monetary policymakers must be held accountable to the public.
Financial intermediaries, through their ability to lower transaction costs, A)allow for people to be more self-sufficient. B)increase the amount of trading that occurs in an economy. C)take people away from their comparative advantage. D)reduce the number of financial transactions that occur.
increase the amount of trading that occurs in an economy.
Financial institutions, acting as financial intermediaries, perform all of the following, except which one? A)provide ways to diversify risk B)pool resources of small savers C)increase transactions costs D)provide safekeeping and accounting services
increase transactions costs
As the inflation rate A)increases, inflation becomes less stable. B)decreases, inflation becomes less stable. C)decreases, inflation becomes more volatile. D)increases, inflation becomes more stable.
increases, inflation becomes less stable.
There is a strong consensus among economists that monetary policy is more effective when it is formulated A)by an individual rather than a committee. B)in secrecy without the reasoning behind it being revealed for many years. C)in a manner that keeps financial markets guessing. D)independently of political pressure.
independently of political pressure.
The policy directive that is produced from the FOMC meeting A)details the exact amount of U.S. Treasury securities the System Open Market Account Manager is to purchase or sell. B)sets the specific discount rate for the next eight weeks. C)sets the specific range that the target interest rate can fall within. D)instructs the staff of the New York Fed on how to manage the Fed's balance sheet.
instructs the staff of the New York Fed on how to manage the Fed's balance sheet.
The correlation between high rates of inflation and economic growth is A)direct; one brings about the other. B)inverse; high inflation usually means low economic growth. C)nonexistent; there is no correlation between these measures. D)direct at low rates of economic growth and inverse at high rates.
inverse; high inflation usually means low economic growth.
One monopoly that modern central banks have is in A)regulating commercial banks. B)making loans to banks. C)issuing U.S. Treasury securities. D)issuing currency.
issuing currency.
In terms of economic growth, the central bank would like to A)have the maximum growth rate possible. B)keep the growth rate averaging zero. C)keep the economy close to its potential or sustainable rate of growth. D)balance every recession with a boom.
keep the economy close to its potential or sustainable rate of growth.
Used car dealers that provide warranties on the cars they sell are addressing the A)lemons problem. B)monopoly problem. C)problem of people preferring foreign cars. D)free rider problem of buyers preferring new versus used cars.
lemons problem.
During the financial crisis of 2007-2009 the U.S. Federal Reserve used its powers in all but which one of the following ways? A) lending to nonbanks B) accepting very illiquid collateral against its loans C) lowering bank reserve requirements D) lowering its policy rate to zero
lowering bank reserve requirements
One reason for having a monetary policy framework is that it A)makes clear what specific goals the central bankers are pursuing. B)provides leeway for central bankers to change their goals without communicating the change and disrupting financial markets. C)provides central bankers the secrecy needed to perform their jobs effectively. D)can make goal setting vague enough so that the central bankers can always claim success.
makes clear what specific goals the central bankers are pursuing.
If prices are not stable, A)money becomes less useful as a store of value. B)money performs better as a unit of account. C)it may be an inconvenience, but resources are still allocated efficiently. D)prices become highly useful for conveying information.
money becomes less useful as a store of value.
Two problems that arise from asymmetric information are A)adverse selection and diseconomies of scale. B)moral hazard and the free-rider problem. C)moral hazard and adverse selection. D)the free-rider problem and adverse selection.
moral hazard and adverse selection.
Requiring a large net worth on the part of an applicant is one way lenders treat the problem of A)free-riders. B)adverse selection. C)moral hazard. D)the lemons market.
moral hazard.
Venture capital firms and private equity firms are types of financial intermediaries that can help reduce problems of A) moral hazard. B) adverse selection. C) a prisoners' dilemma. D) limited liability.
moral hazard.
Considering state chartered banks, A) most elect to join the Federal Reserve System. B) those with assets exceeding $100 million must join the Federal Reserve System. C) most elect not to join the system. D) only those that join the system must abide by reserve requirements.
most elect not to join the system.
Financial intermediation is A) far less important than direct finance through stock and bond markets. B) only a little more important than direct finance in the United States. C) much more important than direct finance through stock and bond markets. D) the same thing as finance through stock and bond markets.
much more important than direct finance through stock and bond markets.
Member banks of the Federal Reserve System include A)only nationally chartered banks. B)all state chartered banks with assets exceeding $100 million. C)nationally chartered banks and state chartered banks that decide to join. D)nationally chartered banks and all state chartered banks.
nationally chartered banks and state chartered banks that decide to join.
Higher than expected inflation will increase the A)real interest rate borrowers pay on fixed rate mortgages. B)nominal amounts people need to save for retirement. C)real interest rate savers earn on fixed rate CDs. D)real interest rates both paid on mortgages and earned on CDs.
nominal amounts people need to save for retirement.
Prior to 1980, A)member banks of the Federal Reserve did not have to hold non-interest-bearing reserve deposits at the Fed. B)nonmember banks had to hold non-interest-bearing reserve deposits at the Fed. C)nonmember banks did not have to hold non-interest-bearing reserve deposits at the Fed. D)all banks, member or not, had to hold non-interest-bearing reserve deposits at the Fed.
nonmember banks did not have to hold non-interest-bearing reserve deposits at the Fed.
The lines drawn to establish Federal Reserve Districts were based A)solely on population distribution in 1914. B)solely on economic forces that existed in 1914. C)on economic and political forces that existed in 1914. D)on economic and political forces as well as population distribution in 1914.
on economic and political forces as well as population distribution in 1914.
The Federal Reserve's policy regarding announcing its policy decisions has A) always been to announce it immediately because this was part of the original Federal Reserve Act of 1913. B) only recently gone to immediate announcement; until 1994 these policy decisions were secret. C) been to release the decisions immediately since its early failure at preventing the Great Depression. D) changed so that now the Fed does not release its decisions publicly.
only recently gone to immediate announcement; until 1994 these policy decisions were secret.
To say monetary policy is transparent implies that A)anyone could figure out what the correct policy should be. B)monetary policy should not be so difficult that most people couldn't understand it. C)policy makers offer plausible explanations for their decisions along with supporting data. D)when faced with the same problem, policy makers will always react the same way.
policy makers offer plausible explanations for their decisions along with supporting data.
The primary objective of most central banks in industrialized economies is A)high securities prices. B)low unemployment. C)price stability. D)a strong domestic currency.
price stability.
A firm that has a well-earned reputation for providing high quality has found a way to address the A)free-rider problem. B)moral hazard problem. C)problem of adverse selection. D)problem of economies of scale.
problem of adverse selection.
Requiring that borrowers put up collateral to obtain a loan is a tool designed to treat the A)lemons problem. B)problem of adverse selection. C)problem of moral hazard. D)free-rider problem.
problem of moral hazard.
Mutual funds are attractive because they A)provide high returns from purchasing the financial securities of a few select companies. B)provide the investor with greater diversification at a lower cost than what most investors could obtain individually. C)have inside information that is not available to other investors. D)routinely obtain inside information because they run most of the companies they invest in.
provide the investor with greater diversification at a lower cost than what most investors could obtain individually.
In its role as the bankers' bank, a central bank performs each of the following except which one? A)providing loans during times of financial distress B)providing deposit insurance C)overseeing commercial banks and the financial system D)managing the payments system
providing deposit insurance
A primary goal of central banks is to A)reduce the idiosyncratic risk that impacts specific investments. B)reduce systematic risk. C)keep stock and bond prices high. D)keep inflation rates high.
reduce systematic risk.
Financial intermediaries A)increase the cost of financial transactions but offset these higher costs by providing safekeeping of customer funds. B)provide handling of payments but usually less efficiently than other firms. C)reduce the cost of financial transactions. D)provide safety of resources only for the large borrowing customers who can afford it.
reduce the cost of financial transactions.
Recent history has shown that the government regulations requiring the disclosure of information from public corporations have A)all but eliminated the problems of asymmetric information.B)reduced but not eliminated the problems of asymmetric information.C)just about eliminated the market for information services.D)resulted in symmetric information.
reduced but not eliminated the problems of asymmetric information.
Each of the following is an example of a restrictive covenant on a mortgage loan, except which one? A) net worth requirements B) requiring that the borrower reside in a home for which he or she receives a mortgage C) insisting the borrower carry physical damage insurance on the property securing the loan D) requiring the borrower to obtain comprehensive health insurance
requiring the borrower to obtain comprehensive health insurance
Adverse selection A)increases the efficiency of most markets. B)usually causes prices to adjust faster than they otherwise would. C)makes it easier for all customers to find what they want. D)results in fewer market transactions.
results in fewer market transactions.
Most of the Fed's income is A)paid to member banks in the form of a dividend. B)sent to the FDIC to shore up the depositor insurance fund. C)returned to the U.S. Treasury. D)used to build the Fed's portfolio of securities.
returned to the U.S. Treasury.
Central banks are in a position to control risk in the economy because they control A)the unemployment rate. B)the economy's real growth rate. C)short-term interest rates. D)tax rates.
short-term interest rates.
The reduction in transaction costs provided by financial intermediaries benefit A)small borrowers and small savers. B)large borrowers but not small savers. C)society in the net, but small savers bear much of the cost. D)small borrowers but not small savers.
small borrowers and small savers.
One reason it took so long to have a central bank in the United States is that A)it was not needed. B)states feared centralization of power. C)state currencies worked fine. D)the primarily agrarian economy made it difficult for financial difficulties to become widespread.
states feared centralization of power.
The moral hazard that can result from debt financing is mainly due to the borrower A) not working as hard once he or she obtains the loan. B) wanting to refinance the loan. C) taking greater risk in hopes of obtaining a larger return. D) defaulting because the economy turned sour.
taking greater risk in hopes of obtaining a larger return.
The efficient allocation of resources requires A)that prices reflect the relative value of goods and services. B)that inflation not exceed three percent a year. C)deflation. D)prices to remain constant.
that prices reflect the relative value of goods and services.
The real power in the FOMC lies with A) the President of the New York Fed Bank. B) the System Open Market Manager. C) the Chairman of the Board of Governors. D) no single individual; all participants have an equal share of the power.
the Chairman of the Board of Governors.
The three branches of the Federal Reserve System include each of the following, except which one? A)the Board of Governors. B)the Federal Deposit Insurance Corporation. C)the Federal Open Market Committee. D)the twelve regional Federal Reserve Banks.
the Federal Deposit Insurance Corporation.
The ability to create money means the central bank can control A)the availability of money and credit in a country's economy. B)tax revenue. C)the unemployment rate. D)government expenditures.
the availability of money and credit in a country's economy.
The Reserve Banks of the Federal Reserve System are owned by A)the taxpayers in their districts. B)the U.S. Treasury. C)the Board of Governors. D)the commercial banks in their districts.
the commercial banks in their districts.
Large companies seeking to raise funds often will use a well-known investment bank because A)the investment bank's reputation identifies the company as being credit worthy. B)they are required to do so by government regulation. C)the investment bank is paying the company for the publicity and goodwill it will generate. D)this minimizes moral hazard.
the investment bank's reputation identifies the company as being credit worthy.
A borrower who obtains funds from a lender to purchase additional inventory but uses the funds to finance a trip to Las Vegas for a weekend of gambling at the opening of a new casino is an example of A)the problem of adverse selection. B)the free-rider. C)the moral hazard problem. D)lax government regulation.
the moral hazard problem.
One reason lenders usually require a lot of information from loan applicants is to avoid A)the problem of moral hazard. B)the problem of adverse selection. C)being harmed by symmetric information. D)charges of discrimination in lending.
the problem of adverse selection.
We often see companies offering money-back guarantees to customers if they are not satisfied. These guarantees are a way to treat the problem of A) buyers having more information about the product than the seller. B) the seller having more information about the product than the buyer. C) symmetric information. D) adverse selection.
the seller having more information about the product than the buyer.
Assume there are two companies that issue stock, but one is high quality and the other is low quality. If potential investors cannot distinguish the quality of the company, A)the shares of the low quality firm will disappear from the market. B)the shares of both companies will trade on the market. C)the shares of the high quality firm will disappear from the market. D)this is an example of moral hazard and the shares of both companies will cease to trade.
the shares of the high quality firm will disappear from the market.
In a financial market where information is symmetric, A)there would be moral hazard. B)one party to a transaction knows information the other party does not. C)the ability to obtain information is available to only one party. D)there would be no adverse selection.
there would be no adverse selection.
Often a bank will require a loan officer to make personal visits on customers with loans outstanding. This is encouraged because A)the bank worries about another bank trying to steal their customers. B)the bank wants to make sure the business is busy. C)this is an effective monitoring technique and should reduce moral hazard. D)the bank has excess funds available and hopes to make another loan to the business.
this is an effective monitoring technique and should reduce moral hazard.
The Federal Reserve System is composed of A)five branches with clear responsibilities. B)six branches with overlapping responsibilities. C)three branches with overlapping responsibilities. D)twelve branches with clear responsibilities.
three branches with overlapping responsibilities.
The number of regional Federal Reserve Banks is A)nine. B)seven. C)five. D)twelve.
twelve.
The Federal Reserve Bank of New York is unique from other Reserve banks because it is A)the only regional Bank that serves just one state. B)the only regional Bank located in a financial center. C)where the Federal Reserve System's portfolio is managed. D)the oldest and therefore the largest.
where the Federal Reserve System's portfolio is managed.
A monetary policy framework is used to clarify all of the following except which one? A)the likely response when policy goals are in conflict with one another B)the goal that is currently receiving the most attention C)how goals will be measured D)why zero inflation is not desirable
why zero inflation is not desirable
Mary Jones is the president of a local bank. She knows that half of the loan applicants in town she would classify as high risk and the other half as low risk. She observes that the other banks in town charge two different interest rates, a lower rate for low risk borrowers and the higher rate for high risk borrowers. She decides that to have an advantage over the other banks, she will offer an average rate to everyone. The likely result will be that Mary's bank A)will be highly successful as this will provide the bank with a large competitive advantage. B)is likely to see a dramatic increase in both types of borrowers. C)will experience adverse selection and have a disproportionate number of low risk borrowers. D)will experience adverse selection and have a disproportionate number of high risk borrowers.
will experience adverse selection and have a disproportionate number of high risk borrowers.
