Money, Banking, and Financial Markets Final Exam Review

If a bank has $10 million of checkable deposits, a required reserve ratio of 10 percent, and it holds $2 million in reserves, then it will not have enough reserves to support a deposit outflow of A) $1.2 million. B) $1.1 million. C) $1 million. D) $900,000.

$1.2 million

Purchase price of a consul(perpetuity) that provides an annual payment of $200 at 8% rate of interest is

$2500

If the reserve ratio is 10%, Cash is the economy is $50 mn, Excess Reserves are $30 mn and Deposits are $1500 mn, the general money multiplier is ....

(1+50/1500)/(.1+50/1500+30/1500)

Treasury sells a Bond for $100 mn to the Public. The impact on the monetary base is ........ and money supply is ......;

0, and 0

The one period interest rates during the next four years are forecast as 1%, 2%, 1% and 3%. According to Expections Theory, the interest rate of a 3 year bond is

1.33%

If the reserve ration is 10%, the simple money multiplier is......

10

Treasury sells a bond for $100 mn to the Federal Reserve, and deposits cash in a bank. The impact on the monetary base is..... and money supply is......

100 , and 100/reserve ratio

If the bond yields 8% at maturity, what is the purchase price?

1083

There are.... Federal Reserve Banks throughout USA

12

What is the yield to maturity of the following coupon bond? C= $100, F= $1000, P= $900, N=5

12.63%

The US Federal Reserve System was established in

1913

A Bank gets a Discount Loan from the Federal Reserve of $100 mn. The impact on the monetary base is...... and money supply is....

200, and 100/reseve ratio

An adequately capitalized bank in USA has a capital adequacy ratio of....

4%

f the money supply is $500 and nominal income is $3,000, the velocity of money is MV =PY P is price level; and Y is real income PY is nominal income MV=3000 V = 3000/M = 3000/500 = 6 A) 1/60. B) 1/6. C) 6. D) 60.

6

The BASEL requirement for capital adequacy is... of risk weighted assets

8%

If you lend $100 this year and receive $120 after 2 years, the yield to maturity is

9.5%

The present value of $120 you would receive after two years at 10% discount rate is

99.2

Which of the following can be described as involving direct finance

A corporation issues new shares of stock

Which of the following can be described as involving indirect finance

A corporation takes out loans from a bank

The Federal Reserve System is

A decentralized system

Which of the following are duties of the Board of Governors of the Federal Reserve System A) Setting margin requirements, the fraction of the purchase price of the securities that has to be paid for with cash. B) Setting the maximum interest rates payable on certain types of time deposits under Regulation Q. C) Regulating credit with the approval of the president under the Credit Control Act of 1969. D) All governors advise the president of the United States on economic policy.

A) Setting margin requirements, the fraction of the purchase price of the securities that has to be paid for with cash.

If expectations of the future inflation rate are formed solely on the basis of a weighted average of past inflation rates, then economists would say that expectation formation is

Adaptive

If bad credit risks are the ones who most actively seek loans and, therefore, receive them from financial intermediaries, then financial intermediaries face the problem of

Adverse selection

Which of the following is NOT an element of inflation targeting? A) A public announcement of medium-term numerical targets for inflation B) An institutional commitment to price stability as the primary long-run goal C) An information-inclusive approach in which only monetary aggregates are used in making decisions about monetary policy D) Increased accountability of the central bank for attaining its inflation objectives

An information-inclusive approach in which only monetary aggregates are used in making decisions about monetary policy

base money

Another name for high powered money, the sum of cash held by public and reserves of the banking system, and reserve money

Which of the following statements are true? A) An increase in tax rates will increase the demand for Treasury bonds, lowering their interest rates. B) Because the tax-exempt status of municipal bonds was of little benefit to bond holders when tax rates were low, they had higher interest rates than U.S. government bonds before World War II. C) Interest rates on municipal bonds will be higher than comparable bonds without the tax exemption. D) Because coupon payments on municipal bonds are exempt from federal income tax, the expected after-tax return on them will be higher for individuals in lower income tax brackets.

B) Because the tax-exempt status of municipal bonds was of little benefit to bond holders when tax rates were low, they had higher interest rates than U.S. government bonds before World War II.

Which of the following statements is false?

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

If a US government bond with $1000 face value, 5 year maturity, and 10% coupon rate purchased at $900 in 2018 sells at $850 in 2019, which of the following statements is true i. The rate of return on the bond is 5.6% ii. The market interest rate has increased in 2019

Both I and ii are correct

M1 is defined as

Cash held by public + demand deposits

Which of the following are bank liabilities

Checkable deposits

A credit market instrument that pays the owner a fixed coupon payment every year until the maturity date and then repays the face value is called a

Coupon Bond

If the First National Bank has a gap equal to a negative $30 million, then a 5 percentage point increase in interest rates will cause profits to

Decline by $1.5 million

The risk that interest payments will not be made, or that the face value of a bond is not repaid when a bond matures is

Default risk

U.S. Treasury bills pay no interest but are sold at a _, i.e., you will pay a lower purchase price than the amount you receive at maturity

Discount

Periodic payments of net earnings to shareholders are known as

Dividends

The Federal Open Market Committee usually meets_____ times a year

Eight

The present value of an expected future payment _ as the interest rate increases

Falls

The operating target of the US Federal Reserve is

Federal Funds Rate

The ability of a central bank to set monetary policy goals is

Goal independence

Banking is a.... industry

Imperfectly competitive

If wealth increases, the demand for stocks _ and demand for long-term bonds _, everything else held constant

Increases, increases

A business cycle expansion.... the demand for bonds,.... the supply of bonds and..... the price of bonds

Increases; increases; lowers

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

Increasing; Decreasing

US government bonds have a.... risk, but do not have a.... risk

Interest rate, default

An example of the Goal Independence of a Central Bank is

Its ability to choose an inflation target

When you deposit a $50 bill in the Security Pacific National Bank

Its assets increase by $50

Of the four effects on interest rates from an increase in the money supply, the one that works in the opposite direction of the other three is the

Liquidity effect

If an individual moves money from a savings deposit account to a demand deposit account

M1 increases and M2 stays the same

The quantity Theory of Money is based on the following Equation of Exchange

MV=PY

If the money supply grows at 12%, and real output grows at 4%, the inflation rate is a. 3% b. 0.33% c. 8% d. 16%

MV=PY. DM/M+0=DP/P+DY/Y. 12=?+4. ?=8. A=8

If the relationship between the monetary aggregate and the goal variable is weak, then

Monetary aggregate targeting will not work

To an economist, ________ is anything that is generally accepted in payment for goods and services or in the repayment of debt.

Money

If a borrower misuses funds then financial intermediaries face the problem of

Moral Hazard

An example of a fixed payment loan is

Mortgage Loan

Which of the following instruments are traded in a debt market

Municipal Bonds, Treasury Bonds, and Repurchase agreements

The Federal Reserve Bank of_____ houses the open market desk

New York

The first country to adopt inflation targeting was

New Zealand

The view that velocity is constant in the short run transforms the equation of exchange into the quantity theory of money. According to the quantity theory of money, when the money supply doubles

Nominal income doubles

Each governor on the Board of Governors can serve

One full nonrenewable fourteen-year term plus part of another term

Independence of the Fed is important because

People form expectations based on the credibility of the Fed, and independence enhances credibility and The Fed can choose any goal of monetary policy

The type of monetary policy regime that the Federal Reserve has been following in recent years can best be described as

Policy with an implicit nominal anchor

If the purchase price is above the face value, the bond is purchased at... and yield to maturity is... than the coupon rate

Premium, below

The primary goal of the European Central Bank is

Price stability

A candidate for a measure of Core inflation is an index containing

Prices of consumer goods and services excluding food items

One purpose of regulation of financial markets is to

Promote the provision of information to shareholders, depositors, and the public

An increase in the expected rate of inflation will_ the demand for bonds and _ the supply of bonds.... the price of the bond

Reduce, Increase Lowering

Quantitative Easing is increasing........ when....... is no longer an effective policy tool

Reserve money; interest rate

Financial Markets promote greater economic efficiency by channeling funds from_ to _

Savers; borrowers

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

Term or Liquidity Premium

Which of the following is an entity of the Federal Reserve System

The FOMC

In rational expectations theory, the term " optimal forecast" is essentially. synonymous with

The best guess

Because the quantity theory of money tells us how much money is held for a given amount of aggregate income, it is also a theory of

The demand for money

In the one-period valuation model, the current stock price increases if

The expected sales price increases

The monetary policy strategy that provides the least accountability is

The implicit nominal anchor

Which of the following is a potential operating instrument for the central bank?

The monetary base

Which of the following instruments are traded in a capital market

U.S. Government Treasury Bonds

Which of the following instruments are traded in a money market

U.S. Treasury bills

Which of the following bonds are considered to be default-risk free?

U.S. Treasury bonds

Another way to state the efficient markets condition is: in an efficient market,

Unexpected profit opportunities will be quickly eliminated

The average number of times that a dollar is spent in buying the total amount of final goods and services produced during a given time period is known as

Velocity

An assumption made in arriving at the answer to the above question is a. Velocity grows at 1% b. Velocity is constant c. Velocity is immaterial d. Velocity is negative

Velocity is constant

The concept of adverse selection helps to explain all of the following except

Why direct finance is more important that indirect finance as a source of business finance

The decision by inflation targets to choose inflation targets________ zero reflects the concern of monetary policymakers that particularly______ inflation can have substantial negative effects on real economic activity.

above; low

If a bank's liabilities are more sensitive to interest rate fluctuations than are its assets, then _____ in interest rates will_______ bank profits

an increase; reduce

Discount Rate is an effective monetary policy tool if it is...... the Fed Funds rate

below

If the Fed requires the Fed Funds rate to be 1.75% and if the rate increases as a result of increasing demand, the Fed undertakes...... open market operations, by undertaking an open market...... of a bond

defensive; purchase

f the Fed requires the Fed Funds rate to be 1.75%, and if the rate increases as a result of increasing demand, the Fed undertakes ............... (defensive/dynamic) open market operations, by undertaking an open market ........... (sale/purchase) of a bond.;

defensive; purchase

f the Fed requires the Fed Funds rate to increase from 1.75% to 2%, the Fed undertakes ............... (defensive/dynamic) open market operations, by undertaking an open market ........... (sale/purchase) of a bond.

dynamic; sale

The_ interest rate is the.... interest rate adjusted for expected inflation.

ex ante real, nominal

What is the impact on Federal Funds rate if the reserve ratio is increased

increase

A business cycle expansion increases income, causing money demand to_____ and interest rates to _____, everything else held constant

increase; increase

The large number of banks in the United States is an indication of

lack of competition within the banking industry.

The most common definition that monetary policymakers use for price stability is

low and stable inflation

The dual mandate of the Federal Reserve is

price stability and high employment

The Federal Reserve Banks are ________ institutions since they are owned by the ________.

quasi-public; private commercial banks in the district where the Reserve Bank is located

If the desired intermediate target is a monetary aggregate, then the preferred policy instrument will be a ________ variable like the ________.

reserve aggregate; monetary base

According to Expectations Theory the steeply upward sloping yield curve indicates that

short-term interest rates are expected to rise in the future

Both ________ and ________ were financial innovations that occurred because of loophole mining.

sweep accounts; money market mutual funds

Which of the following are bank assets

the building owned by the bank

According to the liquidity premium theory of the term structure

the interest rate on long-term bonds will equal an average of short-term interest rates that people expect to occur over the life of the long-term bonds plus a term premium