Econ 303 test 2
According to PPP, the real exchange rate between two countries will always equal Selected Answer: 0.0. 0.5. 1.0. 1.5.
1
Of all commercial banks, about ________ belong to the Federal Reserve System. 10% one half one third 90%
1/3
The Chairman of the Board of Governors is chosen from among the seven governors and serves a ________, renewable term. one-year two-year four-year eight-year
4
If the money supply is $600 and nominal income is $3,000, the velocity of money is 1/50. 1/5. 5. 50.
5
The Federal Open Market Committee usually meets ________ times a year. four six eight twelve
8
A difference between inventory investment and fixed investment is that fixed investment is never unplanned. fixed investment is never planned. inventory investment is never unplanned. unplanned inventory investment is always zero.
A
A major disruption in financial markets characterized by sharp declines in asset prices and firm failures is called a financial crisis. "lemons" problem. fiscal imbalance. free-rider problem.
A
A reduction in government spending causes the equilibrium level of aggregate output to ________ at any given interest rate and shifts the ________ curve to the ________, everything else held constant. fall; IS; left rise; IS; right fall; LM; left rise; LM; right
A
A system of deposit insurance: attracts risk-taking entrepreneurs into the banking industry. encourages bank managers to decrease risk. increases the incentives of depositors to monitor the riskiness of their bank's asset portfolio. increases the likelihood of bank runs.
A
Although the subprime mortgage market problem began in the United States, the first indication of the seriousness of the crisis began in Europe. Australia. China. South America.
A
Assume that the following are the predicted inflation rates in these countries for the year: 2% for the United States, 3% for Canada; 4% for Mexico, and 5% for Brazil. According to the purchasing power parity and everything else held constant, which of the following would we expect to happen? The Brazilian real will depreciate against the U.S. dollar. The Canadian dollar will depreciate against the Mexican peso. The U.S. dollar will depreciate against the Canadian dollar. The Mexican peso will depreciate against the Brazilian real.
A
Banks engage in regulatory arbitrage by: keeping high-risk assets on their books while removing low-risk assets with the same capital requirement. buying risky assets from arbitragers. hiding risky assets from regulators. keeping low-risk assets on their books while removing high-risk assets with the same capital requirement.
A
Because ________ are less liquid for the depositor than ________, they earn higher interest rates. savings accounts; checkable deposits savings accounts; time deposits money market deposit accounts; time deposits checkable deposits; savings accounts
A
Each governor on the Board of Governors can serve one full nonrenewable fourteen-year term plus part of another term. only one nonrenewable eight-year term. one full nonrenewable eight-year term plus part of another term. only one nonrenewable fourteen-year term.
A
Firms that are designated as systemically important financial institutions (SIFIs) are subject to all of the following additional Federal Reserve regulations EXCEPT interest rate ceilings on time deposits. providing a plan for orderly liquidation if necessary. higher capital standards. stricter liquidity requirements.
A
If Treasury deposits at the Fed are predicted to ________, the manager of the trading desk at the New York Fed bank will likely conduct ________ open market operations to ________ reserves. increase; defensive; inject decrease; defensive; inject decrease; dynamic; drain increase; dynamic; inject
A
If the 2005 inflation rate in Canada is 4 percent, and the inflation rate in Mexico is 2 percent, then the theory of purchasing power parity predicts that, during 2005, the value of the Canadian dollar in terms of Mexican pesos will fall by 2 percent. rise by 2 percent. rise by 6 percent. fall by 6 percent.
A
In a bank panic, the source of contagion is the asymmetric information problem. transactions cost problem. free-rider problem. too-big-to-fail problem.
A
In the market for reserves, if the federal funds rate is above the interest rate paid on excess reserves, then an open market ________ the supply of reserves, raising the federal funds interest rate, everything else held constant. sale decreases purchase increases purchase decreases sale increases
A
In the market for reserves, if the federal funds rate is between the discount rate and the interest rate paid on excess reserves, a decline in the reserve requirement ________ the ________ curve of reserves and causes the federal funds interest rate to fall, everything else held constant. decreases; demand decreases; supply increases; demand increases; supply
A
Planned investment spending, a component of aggregate demand, is equal to fixed investment plus planned inventory investment. fixed investment. fixed investment plus actual inventory investment. fixed investment plus unplanned inventory investment.
A
That several hundred S&Ls were not even examined once in the period January 1984 through June 1986 can be explained by Congress's unwillingness to listen to campaign contributors. slower growth in lending meant that less regulation was needed. Congress's unwillingness to allocate the necessary funds to thrift regulators. regulators' reluctance to find the specific problem thrifts that they knew existed.
A
The Depository Institutions Deregulation and Monetary Control Act of 1980 established uniform reserve requirements for all banks. established higher reserve requirements for member than for nonmember banks. abolished reserve requirements. established higher reserve requirements for nonmember than for member banks.
A
The Depository Institutions Deregulation and Monetary Control Act of 1980: increased deposit insurance from $40,000 to $100,000. separated investment banks and commercial banks. imposed restrictive usury ceilings on large agricultural loans. restricted the use of ATS accounts.
A
The Fed's open market operations normally involve only the purchase of government securities, particularly those that are short-term. However, during the crisis, the Fed started new programs to purchase mortgage-backed securities and long-term Treasuries. Treasury bills and Treasury notes. commercial papers and short-term Treasuries. mortgage-backed securities and Treasury bills.
A
The Fed's support of the Depository Institutions Deregulation and Monetary Control Act of 1980 stemmed in part from its concern over declining Fed membership. belief that interest rate ceilings were too high. belief that depositors had to become more knowledgeable of banking operations. belief that all banking regulations should be eliminated.
A
The Second Bank of the United States was denied a new charter by President Andrew Jackson. Vice President John Calhoun. President John Q. Adams. President Benjamin Harrison.
A
The U.S. banking system is considered to be a dual system because it is regulated by both state and federal governments. it actually includes both banks and thrift institutions. banks offer both checking and savings accounts. it was established before the Civil War, requiring separate regulatory bodies for the North and South.
A
The case for Federal Reserve independence does NOT include the idea that: policy is always performed better by an elite group such as the Fed. political pressure would impart an inflationary bias to monetary policy. a Federal Reserve under the control of Congress or the president might make the so-called political business cycle more pronounced. a politically insulated Fed would be more concerned with long-run objectives and thus be a defender of a sound dollar and a stable price level.
A
The evidence from banking crises in other countries indicates that: deregulation combined with poor regulatory supervision raises moral hazard incentives. a government safety net for depositors need not increase moral hazard. regulatory forbearance never leads to problems. deposit insurance is to blame in each country.
A
The global financial crisis of 2007-2009 not only led to a worldwide recession, but also a ________ in the European nations that use the euro currency. sovereign debt crisis currency devaluation budget surplus tax cut
A
The interest rate for primary credit is usually set ________ basis points ________ the federal funds rate. In March 2008, this gap was changed to ________ basis points. 100; above; 25 50; below; 100 100; below; 50 50; above; 25
A
The opportunity cost of holding excess reserves is the federal funds rate minus the interest rate paid on excess reserves. plus the interest rate paid on excess reserves. plus the discount rate. minus the discount rate.
A
The theory of PPP suggests that if one country's price level rises relative to another's, its currency should depreciate. appreciate. float. do none of these.
A
The theory of purchasing power parity states that exchange rates between any two currencies will adjust to reflect changes in the price levels of the two countries. the trade balances of the two countries. the current account balances of the two countries. fiscal policies of the two countries.
A
The two types of open market operations are dynamic and defensive. active and passive. dynamic and reactionary.
A
U.S. banks have most of their branches in Latin America, the Far East, the Caribbean, and London. Mexico, the Middle East, the Caribbean, and London. South America, the Middle East, the Caribbean, and Canada. Latin America, the Middle East, the Caribbean, and London.
A
Under the European System of Central Banks, the National Central Banks have the same role as the ________ of the Federal Reserve System. Federal Reserve Banks Federal Advisory Council Board of Governors Federal Open Market Committee
A
With the creation of the Federal Deposit Insurance Corporation member banks of the Federal Reserve System were required to purchase FDIC insurance for their depositors, while non-member commercial banks could choose to buy deposit insurance. both member and non-member banks of the Federal Reserve System were required to purchase FDIC insurance for their depositors. member banks of the Federal Reserve System were given the option to purchase FDIC insurance for their depositors, while non-member commercial banks were required to buy deposit insurance. both member and non-member banks of the Federal Reserve System could choose, but were not required, to purchase FDIC insurance for their depositors.
A
________ of a foreign bank operates in the U.S. but cannot accept deposits from domestic residents. An agency office A McFadden corporation A Basel branch A universal corporation
A
If in an efficient market all prices are correct and reflect market fundamentals, which of the following is a FALSE statement? A stock that has done poorly in the past is more likely to do well in the future. Security prices can be used by managers to assess their cost of capital accurately. A security's price reflects all available information about the intrinsic value of the security. One investment is as good as any other because the securities' prices are correct.
A stock thats done poorly in the past...
The view that expectations change relatively slowly over time in response to new information is known in economics as: rational expectations. slow-response expectations. adaptive expectations. irrational expectations.
Adaptive expectations
Regular bank examinations and restrictions on asset holdings help to indirectly reduce the ________ problem because, given fewer opportunities to take on risk, risk-prone entrepreneurs will be discouraged from entering the banking industry. adverse selection moral hazard ex post shirking post-contractual opportunism
Adverse selection
The theory of portfolio choice indicates that factors affecting the demand for money include income. nominal interest rate. liquidity of other assets. all of these.
All
A decrease in the expected future domestic exchange rate causes the demand for domestic assets to shift to the ________ and the domestic currency to ________, everything else held constant. left; appreciate left; depreciate right; depreciate right; appreciate
B
A rise in autonomous planned investment spending causes the equilibrium level of aggregate output to ________ and shifts the ________ curve to the ________, everything else held constant. fall; IS; left rise; IS; right rise; LM; right fall; LM; left
B
A serious consequence of a financial crisis is financial engineering. a contraction in economic activity. an increase in asset prices. financial globalization.
B
An important function of the regional Federal Reserve Banks is setting margin requirements. clearing checks. setting reserve requirements. determining monetary policy.
B
An increase in the expected future domestic exchange rate causes the demand for domestic assets to shift to the ________ and the domestic currency to ________, everything else held constant. right; depreciate right; appreciate left; depreciate left; appreciate
B
Anything that increases the demand for foreign goods relative to domestic goods tends to ________ the domestic currency because domestic goods will only continue to sell well if the value of the domestic currency is ________, everything else held constant. appreciate; higher depreciate; lower appreciate; lower depreciate; higher
B
Critics of the current system of Fed independence contend that: the president has too much control over monetary policy on a day-to-day basis. the current system is undemocratic. the Board of Governors is held responsible for policy missteps. voters have too much say about monetary policy.
B
Everything else held constant, if aggregate output is to the left of the IS curve, then there is an excess ________ of goods which will cause aggregate output to ________. supply; rise demand; rise demand; fall supply; fall
B
Everything else held constant, when the current value of the domestic currency increases, the ________ domestic assets ________. demand for; increases quantity demanded of; decreases quantity demanded of; increases demand for; decreases
B
Financial innovations that grew out of the bank branching restrictions were automated teller machines and bank credit cards. bank holding companies and automated teller machines. bank holding companies and securitization. automated teller machines and sweep accounts.
B
If a borrower takes out a $200 million loan in a repo agreement and is asked to post $220 million of mortgage-backed securities as collateral, the "haircut" is 5%. 10%. 20%. 50%.
B
In September 2008, the Reserve Primary Fund, a money market mutual fund, found itself in the situation know as "breaking the buck." This means that they required shareholders to contribute a dollar more in fees each month. they could no longer afford to redeem shares at the par value of $1. shares earned more than a dollar in interest. shareholders were able to redeem shares for more than a $1.
B
In the long run, a rise in a country's price level (relative to the foreign price level) causes its currency to ________, while a fall in the country's relative price level causes its currency to ________. appreciate; depreciate depreciate; appreciate depreciate; depreciate appreciate; appreciate
B
In the market for reserves, if the federal funds rate is between the discount rate and the interest rate paid on excess reserves, a ________ in the reserve requirement increases the demand for reserves, ________ the federal funds interest rate, everything else held constant. decline; raising rise; raising decline; lowering rise; lowering
B
One suggested method of reducing excessive risk-taking by SIFIs is to require them to hold ________ capital when credit is expanding rapidly and ________ capital when credit is contracting. more; no more; less less; no less; more
B
Reasons for holding Eurodollars include: the fact that Eurodollar deposits are insured by the FDIC. the fact that dollars are widely used to conduct international transactions. the fact that Eurodollar deposits are heavily regulated. the fact that minimum transaction sizes are very low, making Eurodollars an attractive savings instrument for consumers.
B
Starting in 1974, the conventional M1 money demand function began to severely underpredict the demand for money. severely overpredict the demand for money. predict more precisely the demand for money. do none of these.
B
The Federal Reserve Banks are ________ institutions since they are owned by the ________. public; private commercial banks in the district where the Reserve Bank is located quasi-public; private commercial banks in the district where the Reserve Bank is located quasi-public; Board of Governors public; Board of Governors
B
The Federal Reserve ________ pay interest on reserves held on deposit. The European System of Central Banks ________ pay interest on reserves held on deposit. does not; does not does; does does; does not does not; does
B
The ability of a central bank to set monetary policy goals is instrument independence. goal independence. political independence. policy independence.
B
The directive of prompt corrective action means that: there must be an immediate response to an increase in interest rates. the FDIC will intervene earlier and more vigorously when a bank gets into trouble. the banks must take actions quickly to resolve reserve disputes. bank failures cannot occur.
B
The equivalent to the Federal Reserve's discount rate in the European System of Central Banks is the deposit facility rate. marginal lending rate. lombard rate. federal funds rate.
B
The global financial crisis showed the need for increased financial regulation, however, too much or poorly designed regulation could increase the efficiency of the financial system. choke off financial innovation. increase international financial integration. increase economic growth.
B
The oldest central bank, having been founded in 1694, is the Deutsche Bundesbank. Bank of England. Federal Reserve System. Bank of Japan.
B
The originate-to-distribute business model has a serious ________ problem since the mortgage broker has little incentive to make sure that the mortgagee is a good credit risk. debt deflation principal-agent collateralized debt democratization of credit
B
The primary difference between the "payoff" and the "purchase and assumption" methods of handling failed banks is: that the FDIC is more likely to use the purchase and assumption method for small institutions because it will be easier to find a purchaser for them compared to large institutions. that the FDIC guarantees all deposits when it uses the "payoff" method. that the FDIC is more likely to use the "payoff" method when the bank is large and it fears that depositor losses may spur business bankruptcies and other bank failures. that the FDIC guarantees all deposits when it uses the "purchase and assumption" method.
B
To lower interest rates on residential mortgages to stimulate the housing market, the Fed extended its open market operations to purchase commercial papers. mortgage-backed securities. Treasury bills and Treasury notes. long-term Treasuries.
B
When financial intermediaries deleverage, firms cannot fund investment opportunities resulting in an economic boom. a contraction of economic activity. a call for government regulation. an increased opportunity for growth.
B
When the exchange rate for the British pound changes from $1.80 per pound to $1.60 per pound, then, holding everything else constant, the pound has ________ and ________ expensive. depreciated; American wheat sold in Britain becomes less depreciated; American wheat sold in Britain becomes more appreciated; British cars sold in the United States become less appreciated; British cars sold in the United States become more
B
When the interest rate rises equilibrium income increases. planned investment falls. planned investment will be unaffected. planned investment rises.
B
When the value of loans begins to drop, the net worth of financial institutions falls causing them to cut back on lending in a process called releveraging. deleveraging. capitulation. deflation.
B
Which investment bank filed for bankruptcy on September 15, 2008 making it the largest bankruptcy filing in U.S. history? Goldman Sachs Lehman Brothers Bear Stearns Merrill Lynch
B
While the discount rate is "established" by the regional Federal Reserve Banks, in truth, the rate is determined by the president of the United States. the Board of Governors. Congress. the Senate.
B
in an agreement to exchange dollars for euros in three months at a price of $0.90 per euro, the price is the money exchange rate. forward exchange rate. spot exchange rate. fixed exchange rate.
B
________ is the field of study that applies concepts from social sciences such as psychology and sociology to help understand the behavior of securities prices. Strategical finance Procedural finance Methodical finance Behavioral finance
Behavioral Finance
Asset transformation can be described as borrowing long and lending short. borrowing and lending only for the short term. borrowing short and lending long. borrowing and lending for the long term.
Borrowing short and lending long
A decrease in the domestic interest rate causes the demand for domestic assets to ________ and the domestic currency to ________, everything else held constant. increase; appreciate increase; depreciate decrease; depreciate decrease; appreciate
C
A shift in tastes toward foreign goods ________ net exports in the U.S. and causes the quantity of aggregate output demanded to ________ in the U.S., everything else held constant. increases; fall decreases; rise decreases; fall increases; rise
C
An increase in autonomous consumer expenditure causes the equilibrium level of aggregate output to ________ at any given interest rate and shifts the ________ curve to the ________, everything else held constant. fall; IS; left rise; LM; right rise; IS; right fall; LM; left
C
Because Treasury bills pay a higher return than money and have no risk the transactions demand for money may be zero. the precautionary demand for money may be zero. the speculative demand for money may be zero. all three of these motives for holding money will be zero.
C
During times of financial crisis, mark-to-market accounting leads to an increase in financial firms' lending. results in financial firms' assets increasing in value. requires that a financial firms' assets be marked down in value which can worsen the lending crisis. leads to an increase in the financial firms' balance sheets since they can now get assets at bargain prices.
C
Everything else held constant, in the market for reserves, when the federal funds rate is 3%, lowering the interest rate paid on excess reserves rate from 2% to 1% lowers the federal funds rate. raises the federal funds rate. has no effect on the federal funds rate. has an indeterminate effect on the federal funds rate.
C
Everything else held constant, when the federal funds rate is ________ the interest rate paid on reserves, the quantity of reserves demanded rises when the federal funds rate ________. below, rises below, falls above, falls above, rises
C
If the consumption function is C = 20 + 0.8YD, then an increase in disposable income by $100 will result in an increase in consumer expenditure by $58. $64. $80. $100.
C
In the market for reserves, if the federal funds rate is between the discount rate and the interest rate paid on excess reserves, a decline in the reserve requirement ________ the demand of reserves, ________ the federal funds rate, everything else held constant. increases; lowering decreases; raising decreases; lowering increases; raising
C
Keynes's theory of the demand for money is consistent with ________ movements in ________. countercyclical; expectations procyclical; expectations procyclical; velocity countercyclical; velocity
C
Microprudential supervision does all of the following EXCEPT checking a bank's compliance with disclosure requirements. assessing the riskiness of an individual bank's activities. focusing on financial system liquidity. checking capital ratios of a bank.
C
Only when budget deficits are financed by money creation does the increased government spending lead to ________ in the ________. a decrease; money multiplier a decrease; monetary base an increase; monetary base an increase; money multiplier
C
Since 1974, commercial banks importance as a source of funds for nonfinancial borrowers: has expanded dramatically, from around 30 percent of total credit advanced to above 50 percent by 2014. has shrunk dramatically, from around 70 percent of total credit advanced to below 50 percent by 2014. has shrunk dramatically, from around 40 percent of total credit advanced to around 25 percent by 2014. has expanded dramatically, from around 50 percent of total credit advanced to above 70 percent by 2014.
C
The Baumol-Tobin analysis suggests that an increase in the brokerage fee for buying and selling bonds will cause the demand for money to ________ and the demand for bonds to ________. decrease; decrease decrease; increase increase; decrease increase; increase
C
The McFadden Act of 1927 separated the commercial banks and investment banks. required that banks maintain bank capital equal to at least 6 percent of their assets. effectively prohibited banks from branching across state lines. effectively required that banks maintain a correspondent relationship with large money center banks.
C
The ________, the difference between the interest rate on Baa corporate bonds and U.S. Treasury bonds. rose sharply during the Great Depression. credit boom default swap credit spread adjustable-rate
C
The condition that states that the domestic interest rate equals the foreign interest rate minus the expected appreciation of the domestic currency is called money neutrality. the theory of foreign capital mobility. the interest parity condition. the purchasing power parity condition.
C
The most important advantage of discount policy is that the Fed can use it to control the money supply. precisely control the monetary base. perform its role as lender of last resort. punish banks that have deficient reserves.
C
The most important source of the changes in supply conditions that stimulate financial innovation has been the dramatic increase in competition from foreign banks. dramatic increase in the volatility of interest rates. improvement in information technology. deregulation of financial institutions.
C
The process in which people seeking higher yielding securities take their funds out of the banking system thus restricting the amount of funds banks can lend is called loophole mining. capital mobility. disintermediation. deposit jumping.
C
The purpose of the commitment by the Fed to keep the federal funds rate at zero for a long period of time is to increase the long term interest rates. lower the short term interest rates. lower the long term interest rates. increase the short term interest rates.
C
The research document given to the Federal Open Market Committee that contains information on the state of the economy in each Federal Reserve district is called the black book. blue book. beige book. green book.
C
The too-big-to-fail policy reduces moral hazard problems. allows small banks to take on more risk than large banks. treats large depositors of small banks inequitably when compared to depositors of large banks. puts large banks at a competitive disadvantage in attracting large deposits.
C
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 incomes falls by 50 percent. velocity falls by 50 percent. nominal income doubles. velocity doubles.
C
When bad storms slow the check-clearing process, float tends to ________ causing the Fed to initiate defensive open market ________. decrease; purchases decrease; sales increase; sales increase; purchases
C
________ in the domestic interest rate causes the demand for domestic assets to ________ and the domestic currency to depreciate, everything else held constant. An increase; increase An increase; decrease A decrease; decrease A decrease; increase
C
________ may antagonize customers and thus can be a very costly way of acquiring funds to meet an unexpected deposit outflow. Selling loans Selling negotiable CDs Calling in loans Selling securities
Calling in loans
To say that stock prices follow a "random walk" is to argue that stock prices tend to follow trends. cannot be predicted based on past trends. rise, then fall, then rise again. rise, then fall in a predictable fashion.
Cannot be predicted on past trends
Conditions that likely contributed to a credit crunch during the global financial crisis include: capital shortfalls caused in part by falling real estate prices. increases in reserve requirements. falling interest rates that raised interest rate risk, causing banks to choose to hold more capital. regulated hikes in bank capital requirements.
Capital shortfalls
If expectations are formed rationally, then individuals use only the information from past data on a single variable to form their forecast. have forecast errors that are persistently low. will have a forecast that is 100% accurate all of the time. change their forecast when faced with new information.
Change their forecasts when faced with new info
Which of the following statements is FALSE? Checkable deposits are usually the lowest cost source of bank funds. Checkable deposits are payable on demand. Checkable deposits are the primary source of bank funds. Checkable deposits include NOW accounts.
Checkable deposits are the primary source of bank funds
Sometimes one observes that the price of a company's stock falls after the announcement of favorable earnings. This phenomenon is clearly inconsistent with the efficient markets hypothesis. consistent with the efficient markets hypothesis if the earnings were not as high as anticipated. consistent with the efficient markets hypothesis if the earnings were not as low as anticipated. consistent with the efficient markets hypothesis if the favorable earnings were expected.
Consistent with the EMH if the earnings were not as high as anticipated
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 collusive behavior. credit rationing. strategic holding out. Coercive bargaining
Credit rationing
All ________ are required to be members of the Fed. state chartered banks banks with assets less than $100 million banks with assets less than $500 million national banks chartered by the Office of the Comptroller of the Currency
D
His analysis started with the recognition that the total quantity demanded of an economy's output was the sum of four types of spending: consumer expenditure, planned investment spending, government spending, and net exports. Sir John Hicks Paul A. Samuelson Milton Friedman John Maynard Keynes
D
If aggregated demand is less than actual output, unplanned inventory ________ will cause output to ________. depletion; rise accumulation; rise depletion; fall accumulation; fall
D
If the government finances its spending by issuing debt to the public, the monetary base will ________ and the money supply will ________. increase; increase decrease; increase increase; decrease not change; not change
D
Keynes argued that when interest rates were high relative to some normal value, people would expect bond prices to ________, so the quantity of money demanded would ________. decrease; increase increase; increase decrease; decrease increase; decrease
D
Keynes argued that when interest rates were low relative to some normal value, people would expect bond prices to ________ so the quantity of money demanded would ________. decrease; decrease increase; increase increase; decrease decrease; increase
D
Regulatory forbearance: had the advantage of permitting many insolvent S&Ls the opportunity to return to profitability, saving the FSLIC billions of dollars. increased adverse selection dramatically. had the advantage of benefiting healthy S&Ls at the expense of "zombie S&Ls," as insolvent institutions lost deposits to health institutions. meant delaying the closing of "zombie S&Ls" as their losses mounted during the 1980s.
D
The Dodd-Frank bill created an agency to monitor markets for asset price bubbles and the buildup of systemic risk. This agency is called the Resolution Trust Authority. Macroprudential Supervisory Agency. Board of Governors. Financial Stability Oversight Council.
D
The ability of a central bank to set monetary policy instruments is policy independence. political independence. goal independence. instrument independence.
D
The bailout of the savings and loan industry was much delayed and, therefore, much more costly to taxpayers because: politicians listened to the taxpayers rather than the S&L lobbyists. regulators could not be fired, therefore, they didn't care if they did a good job or not. Congress did not wait long enough for many of the problems in the thrift industry to correct themselves. of regulators' initial attempts to downplay the seriousness of problems within the thrift industry.
D
The growth of the subprime mortgage market led to: decreased demand for houses as the less credit-worthy borrowers could not obtain residential mortgages. a decline in the housing industry because of higher default risk. a decrease in home ownership as investors chose other assets over housing. increased demand for houses and helped fuel the boom in housing prices.
D
The policy of ________ exacerbated ________ problems as savings and loans took on increasingly huge levels of risk on the slim chance of returning to solvency. regulatory agnosticism; moral hazard regulatory agnosticism; adverse hazard regulatory forbearance; adverse hazard regulatory forbearance; moral hazard
D
The political business cycle refers to the phenomenon that just before elections, politicians enact ________ policies. After the elections, the bad effects of these policies (for example, ________ ) have to be counteracted with ________ policies. expansionary; higher unemployment; contractionary contractionary; a higher inflation rate; expansionary contractionary; higher unemployment; expansionary expansionary; a higher inflation rate; contractionary
D
The spectacular growth in international banking can be explained by the collapse of the Bretton Woods system. the creation of the World Trade Organization. the 1988 Basel Agreement. the rapid growth in international trade.
D
The theory of portfolio choice suggests that the most important factor affecting the demand for domestic and foreign assets is the ________ on these assets relative to one another. interest rate liquidity risk expected return
D
Thrift institutions importance as a source of funds for borrowers has shrunk from around 40 percent of total credit advanced in the late 1970s to below 30 percent by 2014. has expanded dramatically, from around 15 percent of total credit advanced in the late 1970s to above 25 percent by 2014. has expanded dramatically, from around 15 percent of total credit advanced in the late 1970s to above 30 percent by 2014. has shrunk from over 20 percent of total credit advanced in the late 1970s to around 3 percent by 2014.
D
Tobin's model of the speculative demand for money shows that people hold money as a ________ as a way of reducing ________. medium of exchange; transaction costs store of wealth; transaction costs medium of exchange; risk store of wealth; risk
D
When the Fed wants to raise interest rates after banks have accumulated large amounts of excess reserves, it would increase discount rate. conduct massive open market purchase. increase the required reserve ratio. increase the interest rate paid on excess reserves.
D
When the effects of the global financial crisis started to spread more quickly throughout the rest of the world, the U.S. dollar ________ because demand for U.S. assets ________. depreciated; increased appreciated; decreased depreciated; decreased appreciated; increased
D
Which of the following is an entity of the Federal Reserve System? the U.S. Treasury Secretary the Comptroller of the Currency the FDIC the FOMC
D
________ in the expected future domestic exchange rate causes the demand for domestic assets to ________ and the domestic currency to appreciate, everything else held constant. A decrease; decrease A decrease; increase An increase; decrease An increase; increase
D
________ is a process of bundling together smaller loans (like mortgages) into standard debt securities. Origination Distribution Debt deflation Securitization
D
When the Federal Reserve engages in a repurchase agreement to offset a withdrawal of Treasury funds from the Federal Reserve, the open market operation is said to be offensive. dynamic. defensive. reactionary.
Defensive
Which of the following are reported as liabilities on a bank's balance sheet? discount loans real estate loans reserves U.S. Treasury securities
Discount loans
A phenomenon closely related to market overreaction is the random walk. the small-firm effect. excessive volatility. the January effect.
Excessive volitility
According to rational expectations expectations will not differ from optimal forecasts using all available information. expectations of inflation are viewed as being an average of past inflation rates. expectations formation indicates that changes in expectations occur slowly over time as past data change. expectations of inflation are viewed as being an average of expected future inflation rates.
Expectations will not differ from optimal forecasts
State banks that are not members of the Federal Reserve System are most likely to be examined by the FDIC. FHLBS. Federal Reserve System. Comptroller of the Currency.
FDIC
A reason why rogue traders have bankrupt their banks is due to accounting errors. the separation of trading activities from the bookkeepers. stringent supervision of trading activities by bank management. a failure to maintain proper internal controls.
Failure to maintain prop internal control
If the banking system has a large amount of reserves, many banks will have excess reserves to lend and the federal funds rate will probably ________; if the level of reserves is low, few banks will have excess reserves to lend and the federal funds rate will probably ________. rise; fall fall; rise rise; rise fall; fall
Fall, rise
Unlike banks, ________ have been allowed to branch statewide since 1980. state-chartered S&Ls financially troubled S&Ls technically insolvent S&Ls federally-chartered S&Ls
Fed charted
The new Consumer Financial Protection Bureau is an independent agency but is funded and housed within the SEC. the IRS. the Federal Reserve. the Treasury Department.
Fed reserve
This method of financing government spending is frequently called printing money because high-powered money (the monetary base) is created in the process. financing government spending by selling bonds to the public, which pays for the bonds with currency financing government spending by selling bonds to the public, which pays for the bonds with checks financing government spending through a Treasury sale of bonds that are then purchased by the Fed financing government spending with taxes
Financing through a treasury sale of bonds
According to the efficient markets hypothesis, the current price of a financial security: is the discounted net present value of future interest payments. is determined by the lowest successful bidder. fully reflects all available relevant information. is a result of none of these.
Fully reflects all available relavant info
The ________ that required separation of commercial and investment banking was repealed in 1999. the Federal Reserve Act. the Monetary Control Act. the Glass-Steagall Act. the bank holding company act
Glass steagle
Because of their ________ liquidity, ________ U.S. government securities are called secondary reserves. high; short-term high; long-term low; long-term low; short-term
High, ST
Modern liability management has resulted in: failure by banks to coordinate management of assets and liabilities. reduced borrowing by banks in the overnight loan market. increased sales of negotiable CDs to raise funds. increase importance of deposits as a source of funds.
Increased sales of negotionable CDs
Which of the following types of information most likely allows the exploitation of a profit opportunity? insider information hot tips from a stockbroker technical analysis financial analysts' published recommendations
Insider info
In the Gordon Growth Model, the growth rate is assumed to be ________ the required return on equity. greater than equal to proportional to less than
Less than
Regulators attempt to reduce the riskiness of banks' asset portfolios by: requiring collateral for all loans. encouraging banks to hold risky assets such as common stocks. limiting the amount of loans in particular categories or to individual borrowers.
Limiting the amount of loans in particular
Banks will be examined at least once a year and given a CAMELS rating by examiners. The L stands for loans. leverage. liabilities. liquidity.
Liquidity
The most important category of assets on a bank's balance sheet is other assets. loans. securities. cash items in the process of collection.
Loans
The legislation that effectively prohibited banks from branching across state lines and forced all national banks to conform to the branching regulations in the state in which they reside is the Glass-Steagall Act. National Bank Act. Garn-St.Germain Act. McFadden Act.
MCfadden
If a mutual fund outperforms the market in one period, evidence suggests that this fund is: likely to under-perform the market in subsequent periods to average its overall returns. not likely to outperform the market in any subsequent period. not likely to consistently outperform the market in subsequent periods. highly likely to consistently outperform the market in subsequent periods due to its superior investment strategy.
Not likely to consistently outpreform
The ________ states that exchange rates between any two currencies will adjust to reflect changes in the price levels of the two countries. quantity theory of money theory of purchasing power parity theory of money neutrality law of one price
PPP
In the Keynesian framework, as long as output is below the equilibrium level, unplanned inventory investment will remain negative, firms will continue to ________ production, and output will continue to ________. raise; fall raise; rise lower; fall lower; rise
Raise raise
If a forecast is made using all available information, then economists say that the expectation formation is adaptive. irrational. rational. reasonable.
Rational
If the Brazilian demand for American exports rises at the same time that U.S. productivity rises relative to Brazilian productivity, then, in the long run, ________, everything else held constant. there is no effect on the Brazilian real relative to the U.S. dollar the Brazilian real will either appreciate, depreciate, or remain constant relative to the U.S. dollar the Brazilian real will depreciate relative to the U.S. dollar the Brazilian real will appreciate relative to the U.S. dollar
Real will depreciate
Banks earn profits from off-balance sheet loan sales by selling the loans at discounted prices. by foreclosing on delinquent accounts. by selling existing loans for more than the original loan amount. by calling-in loans before the maturity date.
Selling existing loans at disc prices
In asset markets, an asset's price is set equal to the highest price a seller will accept. set by the buyer willing to pay the highest price. set equal to the highest price a buyer is willing to pay. set equal to the lowest price a seller is willing to accept.
Set by the buyer willing to pay the highest price
Excessive volatility refers to the fact that stock returns display mean reversion. stock price tend to rise in the month of January. stock prices can be slow to react to new information. stock prices fluctuate more than is justified by dividend fluctuations.
Stock prices fluctate more than is justified
Mean reversion refers to the fact that stock prices fluctuate more than is justified by fundamentals. stocks that have had low returns in the past are more likely to do well in the future. stock returns are high during the month of January. small firms have higher than average returns.
Stocks that have had low returns in the past are more likely to do well in the future
Because of securitization, a new class of residential mortgages offered to borrowers with less-than-stellar credit records developed. These mortgages are known as bundled mortgages. adjustable-rate mortgages. subprime mortgages. risk-enhanced mortgages.
Subprime mortgages
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 share draft account. stockman account. removed-repo account. sweep account.
Sweep acct
The government passed the Economic Recovery Act in October 2008 to prevent the financial crisis from continuing to worsen. A controversial component of this act was the borrowing of $150 million from AIG. sale of new subprime mortgage assets. Troubled Asset Relief Program (TARP). temporary decrease in the federal deposit insurance limit.
TARP
A change in perceived risk of a stock changes the expected dividend growth rate. the required rate of return. the current dividend. the expected sales price.
The RRR
Using the Gordon growth model, a stock's current price will increase if the dividend growth rate increases. the growth rate of dividends falls. the expected sales price rises. the required rate of return on equity rises.
The div growth rate increases
Examples of off-balance-sheet activities include selling negotiable CDs. extending loans to depositors. trading activities. borrowing from other banks.
Trading activities
Which of the following is NOT part of the shadow banking system? the distributor the transformer the servicer the bundler
Transformer
The largest percentage of banks' holdings of securities consist of Treasury and government agency securities. state and local government securities. corporate securities. tax-exempt municipal securities.
Treasury and govt agencies
Bank reserves include vault cash and deposits at the Fed. deposits at the Fed and short-term treasury securities. vault cash and short-term Treasury securities. deposits at other banks and deposits at the Fed.
Vault cash and deposits at the fed
Based on the Net Interest Margin the poor bank performance in the late 1980s was not the result of interest-rate movements. resulted from a narrowing of the gap between interest earned on assets and inters paid on liabilities. resulted from a huge decrease in provisions for loan losses. was not the result of risky loans made in the early 1980s.
Was not the result of int rate movements
Rules used to predict movements in stock prices based on past patterns are, according to the efficient markets hypothesis a waste of time. profitably employed by all financial analysts. consistent with the random walk hypothesis. the most efficient rules to employ.
Waste of time
When using rational expectations, forecast errors will, on average, be ________ and ________ be predicted ahead of time. zero; cannot negative; can positive; can positive; cannot
Zero, cannot
The First Bank of the United States was disbanded in 1811 when its charter was not renewed. had its charter renewal vetoed in 1832. was fundamental in helping the Federal Government finance the War of 1812. None of these.
a
Collateral requirements lessen the consequences of ________ because the collateral reduces the lender's losses in the case of a loan default and it reduces ________ because the borrower has more to lose from a default. adverse selection; moral hazard diversification; moral hazard moral hazard; adverse selection adverse selection; diversification
adverse selection, moral hazard
The chartering process is especially designed to deal with the ________ problem, and regular bank examinations help to reduce the ________ problem. adverse selection; adverse selection moral hazard; moral hazard adverse selection; moral hazard moral hazard; adverse selection
adverse, moral hazard
The efficient markets hypothesis implies that prices in the stock market are more likely to go up than down. are unpredictable. always undervalue the true assets of a corporation. follow a definite pattern.
are unpredictable
When a bank suspects that a $1 million loan might prove to be bad debt that will have to be written off in the future the bank reduces its assets immediately by $1 million, even though it has not yet lost the $1 million. reduces its reported earnings by $1, even though it has not yet actually lost the $1 million. can set aside $1 million of its earnings in its loan loss reserves account. reduces its reserves by $1 million, so that they can use those funds later.
can set aside a milly
If young business professionals in America suddenly decide that driving German-made cars is an important status symbol, net exports will tend to ________ causing aggregate demand to ________, everything else held constant. fall; rise rise; rise fall; fall rise; fall
fall fall
________ quantity theory of money suggests that the demand for money is purely a function of income, and interest rates have no effect on the demand for money. Keynes's Fisher's Friedman's Tobin's
fisher
In the Baumol-Tobin analysis of transactions demand for money, either an increase in ________ or a decrease in ________ increases money demand. interest rate; income income; interest rate interest rates; brokerage fees brokerage fees; income
income, int rate
According to the quantity theory of money demand an increase in money will cause the demand for money to fall. interest rates have no effect on the demand for money. an increase in interest rates will cause the demand for money to fall. a decrease in interest rates will cause the demand for money to increase.
int rates have no effect on demand for money
Most of a bank's operating income results from fees from standby lines of credit. service charges on deposit accounts. off-balance-sheet activities. interest on assets.
interest on assets
Consumer protection legislation includes legislation to: require banks to make loans to everyone who applies. reduce discrimination in credit markets. reduce the amount of interest that bank's can charge on loans. require banks to make periodic reports to the Better Business Bureau.
reduce discrimination
Everything else held constant, if aggregate output is to the ________ of the IS curve, then there is an excess ________ of goods which will cause aggregate output to fall. right; demand right; supply left; supply left; demand
right supply
The Basel Accord, an international agreement, requires banks to hold capital based on the total value of assets. liabilities. risk-weighted assets. deposits.
risk weighted assets
All of the following are operating expenses for a bank EXCEPT service charges on deposit accounts. salaries and employee benefits. rent on buildings. servicing costs of equipment such as computers.
service charges on deposit accounts
Keynes argued that the precautionary component of the demand for money was primarily determined by the level of people's ________, which he believed were proportional to ________. incomes; wealth transactions; income incomes; age transactions; age
transactions, income