ECON 343 - Assignment 12

19) The Federal Board of Governors has_________ members. A) 7 B) 12 C) 17 D) 5

A) 7

15) Which of the following is one of the eight basic puzzles about financial structure? A) Indirect finance, which involves the activities of financial intermediaries, is many times more important than direct finance, in which businesses raise funds directly from lenders in financial markets. B) Issuing marketable securities is the primary way businesses finance their operations. C) Banks are not the most important source of external funds to finance businesses. D) Stocks are the most important source of finance for American businesses.

A) Indirect finance, which involves the activities of financial intermediaries, is many times more important than direct finance, in which businesses raise funds directly from lenders in financial markets.

42) The current chairman of the Federal Reserve System is A) Janet Yellen B) Ben Bernanke. C) John Keynes. D) Milton Friedman. E) Alan Greenspan.

A) Janet Yellen

17) Which of the following would be utilizing asset management? A) Purchase securities with high returns and low risk B) Increasing saving account deposits. C) Increasing (selling) more certificates of deposit. D) All of the above E) None of the above

A) Purchase securities with high returns and low risk

11) Insolvent banks that were allowed to operate in the 1980s by banking authorities were called: A) Zombie banks. B) Go-for-broke banks. C) dead-on-arrival banks. D) skeleton banks.

A) Zombie banks.

30) If bad credit risks are the ones who most actively seek loans then financial intermediaries face the problem of A) adverse selection. B) costly state verification. C) free-riding. D) moral hazard.

A) adverse selection.

34) A sharp depreciation of the domestic currency after a currency crisis leads to A) higher inflation. B) lower interest rates. C) decrease in the value of foreign currency-denominated liabilities. D) lower import prices.

A) higher inflation.

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

A) net worth; less

21) The most important tool of the FED is: A) open market operations. B) discount window. C) frowns. D) reserve requirement.

A) open market operations.

10) Which method of shutting down a bank has the greatest moral hazard? A) purchase and assumption B) payoff method C) both A and B have equal moral hazard D) neither A or B have any moral hazard.

A) purchase and assumption

35) During times of financial crisis, mark-to-market accounting A) requires that a financial firmsʹ assets be marked down in value which can worsen the lending crisis. B) leads to an increase in financial firmsʹ lending. C) results in financial firmsʹ assets increasing in value. D) leads to an increase in the financial firmsʹ balance sheets since they can now get assets at bargain prices.

A) requires that a financial firmsʹ assets be marked down in value which can worsen the lending crisis.

7) The legislation overturning the Glass-Steagall Act (i.e. part of the Banking Acts of 1933-1935 ) that separated commercial banking from investment banking is A) the Gramm-Leach-Bliley Act (Banking Act of 1999). B) the Riegle-Neal Act (Banking Act of 1994). C) DIDMCA and the Garn-St. Germain Act (Banking Acts of 1980-82). D) the McFadden Act (Banking Act of 1927).

A) the Gramm-Leach-Bliley Act (Banking Act of 1999).

8) The recent legislation that overturned the prohibition on interstate banking is A) the Riegle-Neal Act (Banking Act of 1994) B) the McFadden Act (Bankig Act of 1927). C) the Gramm-Leach-Bliley Act (Banking Act of 1999). D) the Glass-Steagall Act (Part of the Banking Acts of 1933-1935)

A) the Riegle-Neal Act (Banking Act of 1994)

47) The leverage ratio is the ratio of a bankʹs A) assets divided by its liabilities. B) capital divided by its total liabilities. C) capital divided by its total assets. D) income divided by its assets.

C) capital divided by its total assets.

38) Because of asymmetric information, the failure of one bank can lead to runs on other banks. This is the A) adverse selection problem. B) moral hazard problem. C) contagion effect. D) too-big-to-fail effect.

C) contagion effect.

6) The McFadden Act of 1927 A) required that banks maintain bank capital equal to at least 6 percent of their assets. B) separated the commercial banks and investment banks. C) effectively prohibited banks from branching across state lines. D) effectively required that banks maintain a correspondent relationship with large money center banks.

C) effectively prohibited banks from branching across state lines.

3) Because banks engage in regulatory arbitrage, the Basel Accord on risk-based capital requirements may result in A) reduced risk taking by banks. B) increased fraudulent behavior by banks. C) increased risk taking by banks. D) reduced supervision of banks by regulators.

C) increased risk taking by banks.

45) The formula for the M1 money multiplier is A) M = 1/(r + e + c). B) m = [1/(r + e + c)] × MB. C) m = (1 + c)/(r + e + c). D) M = (1 + c)/(r + e + c).

C) m = (1 + c)/(r + e + c).

12) 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. A) collateralized debt B) democratization of credit C) principal-agent D) debt deflation

C) principal-agent

33) One reason financial systems in developing and transition countries are underdeveloped is A) they make loans only to nonprofit entities. B) the accounting standards are too stringent for the banks to meet. C) the legal system may be poor making it difficult to enforce restrictive covenants. D) they have weak links to their governments.

C) the legal system may be poor making it difficult to enforce restrictive covenants.

44) Everything else held constant, an increase in the required reserve ratio on checkable deposits will cause A) the money supply to remain constant. B) checkable deposits to rise. C) the money supply to fall. D) the money supply to rise.

C) the money supply to fall.

16) Which of the following would be utilizing liquidity management? A) Security sales or loan rollovers B) Borrowing funds from the discount window or the federal funds market C) Increasing excess reserves. D) All of the above E) None of the above

D) All of the above

13) Which of the following are types of conflict of interest in the financial markets? A) Auditing and consulting in accounting firms B) Credit rating agencies sources of payments and services C) Underwriting and research in investment banking D) All of the answers in this question E) None of the above

D) All of the answers in this question

29) The 3-6-3 rule: A) be on he golf course by 3 pm B) charge 6% on loans C) pay 3% on savings accounts D) all of he above are true. E) the ratio of assets, liabilities,and capital a bank is required to hold.

D) all of he above are true.

48) The leverage ratio is the ratio of a bankʹs A) capital divided by its total liabilities. B) income divided by its assets. C) assets divided by its liabilities. D) capital divided by its total assets.

D) capital divided by its total assets.

24) The interest rate the Fed charges banks borrowing from the Fed is the A) federal funds rate. B) prime rate. C) Treasury bill rate. D) discount rate.

D) discount rate.

40) Total reserves are the sum of ________ and ________. A) required reserves; currency in circulation B) vault cash; excess reserves C) excess reserves; borrowed reserves D) excess reserves; required reserves

D) excess reserves; required reserves

2) Off-balance-sheet activities A) generate fee income with no increase in risk. B) generate fee income and reduce risk. C) increase bank risk but do not increase income. D) generate fee income but increase a bankʹs risk.

D) generate fee income but increase a bankʹs risk.

4) Banks will be examined at least once a year and given a CAMELS rating by examiners. The L stands for A) leverage. B) liabilities. C) loans. D) liquidity.

D) liquidity.

27) The Federal Open Market Committee (FOMC) is composed of A) representatives from the governors of all 50 states. B) the Board of Governors, the Vice-President of the United States, and the Secretary of Treasury for the United States. C) the 12 Presidents of the Federal Reserve regional banks. D) presidents of 5 Federal Reserve regional banks and the seven Board of Governors.

D) presidents of 5 Federal Reserve regional banks and the seven Board of Governors.

22) To increase the money supply, the FED can: A) raise the reserve requirement. B) raise the discount rate. C) sell bonds. D) purchase bonds.

D) purchase bonds.

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

D) securities; loans to financial institutions

18) The national banking ERA was from: A) 1836-1863. B) 1933-1980. C) 1792-1836. D) 1989-1994. E) 1864-1914.

E) 1864-1914.

9) What are the major causal factors of all modern U.S. financial crises? A) lax oversight by existing banking authorities B) deregulation C) financial innovation D) speculative bubbles E) all of the above

E) all of the above

28) Depositors lack of information about the quality of bank assets can lead to ________. A) bank booms B) bank panics C) asset transformation D) sequencing

B) bank panics

1) Depositors lack of information about the quality of bank assets can lead to A) sequencing. B) bank panics. C) asset transformation. D) bank booms.

B) bank panics.

23) A liability on a commercial bankʹs balance sheet is A) discount loans. B) checkable deposits. C) securities. D) loans.

B) checkable deposits.

50) Today the United States has a dual banking system in which banks supervised by the ________ and by the ________ operate side by side. A) federal government; municipalities B) federal government; states C) municipalities; states D) state governments; municipalities

B) federal government; states

31) Risk that is related to the uncertainty about interest rate movements is called A) default risk. B) interest-rate risk. C) the problem of moral hazard. D) security risk.

B) interest-rate risk.

46) The formula for the M1 money multiplier is A) M = (1 + c)/(r + e + c). B) m = (1 + c)/(r + e + c). C) M = 1/(r + e + c). D) m = [1/(r + e + c)] × MB.

B) m = (1 + c)/(r + e + c).

49) The practice of keeping high-risk assets on a bankʹs books while removing low-risk assets with the same capital requirement is known as A) depositor supervision. B) regulatory arbitrage. C) competition in laxity. D) a dual banking system.

B) regulatory arbitrage.

32) The Basel Accord, an international agreement, requires banks to hold capital based on A) deposits. B) risk-weighted assets. C) the total value of assets. D) liabilities.

B) risk-weighted assets.

43) Recent research indicates that inflation performance (low inflation) has been found to be best in countries with A) a policy of always keeping interest rates low. B) the most independent central banks. C) political control of monetary policy. D) money financing of budget deficits.

B) the most independent central banks.

37) With a 20% reserve requirement ratio, a $100 deposit into New Bank means that the maximum amount New Bank could lend is A) $90. B) $100. C) $80. D) $110.

C) $80.

20) The Federal Open Market Committee has_________ members. A) 7 B) 5 C) 12 D) 17

C) 12

14) The free banking ERA was from: A) 1989-1994. B) 1863-1914. C) 1836-1864. D) 1792-1836. E) 1933-1980.

C) 1836-1864

41) The cost of financial crises around the world ranged from ___________ to ___________ as a percent of GDP A) 1% to 92% B) 17% to 75% C) 3% to 55% D) 1% to 5%

C) 3% to 55%

5) The legislation that deregulated energy futures markets and credit default swaps was the: A) Banking Act of 1991 (FDICIA). B) Banking Acts of 2002 (Sarbanes Oxley) . C) Banking Act of 2000. D) banking Act of 1989 (FIRREA). E) Banking Act of 1999.

C) Banking Act of 2000.

36) Which of the following is true: A) Monetary base = currency in circulation plus bank checking deposits. B) Monetary base = currency in circulation plus savings accounts balances. C) Monetary base = currency in circulation plus bank reserves. D) None of the above.

C) Monetary base = currency in circulation plus bank reserves.

26) ________ is a process of bundling together smaller loans (like mortgages) into standard debt securities. A) Origination B) Debt deflation C) Securitization D) Distribution

C) Securitization