Fil 241 Exam 1

Which of the following statements is incorrect?

. Capitalism is characterized by voluntary business interactions among people; there is no any role for government in this system. B. Statism is characterized by government interference in business transaction by using force or a threat of force. C. Developed countries today are mixed economies. D. Statism ideas became quite popular at the beginning of the 20th century not only in the U.S. but also in European and Asian countries. A. Capitalism is characterized by voluntary business interactions among people; there is no any role for government in this system.

Today, two economies have the same size (e.g., $1B). The growth rate for the first one is 3% and for the second, 6%. How many times the second economy will be larger than the first in 100 years?

A. 17.65. B. 10.32. C. 6.89. D. 2. A. 17.65.

Which of the following statements is correct?

A. About 10% of people are overoptimistic. B. When people are overoptimistic about one issue, they are overoptimistic about everything. C. Smarter people are less likely to be overoptimistic. D. Most people are overoptimistic. D.Most people are overoptimistic.

Which of the following statements is incorrect?

A. According to availability heuristic, we pay more attention to facts that are easy to recall. B. Frederic Bastiat described good economics as paying attention to all consequences and bad economics as paying attention only to the most visible immediate consequences. C. War stimulates economy. D. When examining economic issues people often forget not immediate effects of economic variables they examine. C. War stimulates economy.

Which of the following statements is not correct?

A. Companies sell new securities in primary markets. B. Secondary markets provide liquidity. C. A firm's securities are traded continuously in primary markets. D. Secondary markets allow the managers to see the market reaction to their actions. C. A firm's securities are traded continuously in primary markets.

Which of the following statements is incorrect?

A. People have a tendency to jump to conclusions they like, notice facts confirming these conclusions, and ignore facts that contradict their conclusions. B. Rationalizing is a form of rational thinking. C. Politicians like to believe that spending on consumption goods stimulates economy since they can use this as an excuse to give handouts to some groups to obtain their votes. D. Belief that more spending on consumption goods will stimulate economy is an example of rationalizing. B. Rationalizing is a form of rational thinking.

The period 1832-1914 can be described by the following statement(s):

A. People use gold and silver as currency. They also use IOUs of banks as currency when both parties agree. B. No central bank in the U.S. C. There were some fraud cases and some bankruptcies. D. a and c. E. All of the above. E. All of the above.

Which of the following is not associated with investment banking but associated with commercial banking?

A. Taking deposits. B. Marketing new issues of securities. C. Underwriting securities. D. Helping with regulatory paperwork and rendering advice about security issues. A. Taking deposits.

Yes or No. Can maximizing of shareholder wealth be consistent with ethical behavior?

A. Yes. B. No. A. Yes.

Direct finance is best exemplified by

A. buying life insurance. B. depositing money in a commercial bank. C. borrowing from a friend or relative. D. employee contributions to a pension fund. C. borrowing from a friend or relative.

Financial intermediaries transform financial claims by doing the following

A. changing maturity. B. changing denomination. C. changing risk. D. all of the above. D. all of the above.

Which sector has been most consistently in a surplus budget position?

A. federal government. B. local government. C. household. C. household

Denomination intermediation is best exemplified by

A. issuing insured deposits and making risky business loans. B. bringing together investors of different religions. C. issuing five $3,000 certificates of deposits and making one $15,000 loan using the money from deposits. D. promising liquidity to depositors while investing the funds long-term. C. issuing five $3,000 certificates of deposits and making one $15,000 loan using the money from deposits.

The Fed can increase money supply by

A. selling U.S. Treasury securities. B. reducing the discount rate. C. increasing the reserve requirements. D. all of the above. B. reducing the discount rate.

The Federal Reserve Act of 1913 aimed to establish

A. the monetary authority to control nations' money supply. B. the lender of last resort. C. vigorous bank supervision system to reduce bank failures. D. a and c. E. All of the above. E. All of the above

True or False. In direct financing, financial intermediaries buy financial claims with one set of characteristics and sell financial claims with a different set of characteristics.

False

True or False. It is easier to predict the impact on money supply when changing discount rates rather than performing open-market operations.

False

True or False. Maximizing our spending on consumption increases the growth of the economy.

False

True or False. Competition (or a threat of competition) in a financial system increases effectiveness and efficiency of the system.

True

True or False. Financial intermediaries make profit by borrowing at lower interest rates and lending at higher interest rates.

True

True or False. Open-market operations are the most important monetary policy tool.

True

True or False. Over-the-counter markets do not have a central physical location.

True

True or False. The New York Stock Exchange is an example of an organized exchange.

True

True or False. Without accumulation of capital we cannot have a developed economy.

True

Which of the following statements is incorrect?

A. Eliminating punishments in financial markets (e.g., bailing out failing companies) is likely to make it harder for people to learn what their abilities are. B. People can learn to be more precise (less overoptimistic) when they are given feedback about their performance and their performance is associated with rewards and punishments. C. Past success increases overoptimism. D. Overoptimism is a characteristic we are born with and cannot be corrected. D. Overoptimism is a characteristic we are born with and cannot be corrected.

Which of the following statements is incorrect?

A. Even without government interference, markets tend to fluctuate rather than to exhibit the same performance each year. B. People interest in investing more in real estate pushed real estate prices up in mid-2000s. C. Higher returns in the real estate market at the beginning of the real estate bubble attracted even more investors, further pushing up the real estate prices. D. The process as described in b and c cannot correct itself and requires government intervention. D. The process as described in b and c cannot correct itself and requires government intervention.

Inflation is harmful to the economy because of the following issues, except for the statement that

A. Inflation reduces the value of cash holdings by people and businesses. B. Inflation distorts asset prices. C. During inflation, all prices rise by the same percentage. D. Inflation can lead to wrong business decisions. C. During inflation, all prices rise by the same percentage.

Which of the following can be used to justify the maximization of shareholder wealth by corporations?

A. Moral justification: right to one's own life; right to the property one earns while participating in voluntary interactions with other people. B. Practical justification: it works to achieve maximum economic progress, to improve human life. C. a and b. D. none of the above. C. a and b.

Which of the following is an example of adverse selection:

A. Once people buy insurance, they engage in riskier activities. B. Companies that are not allowed to fail, engage in safer activities. C. People who are not planning to repay loans, try the hardest to obtain them. D. all of the above. C. People who are not planning to repay loans, try the hardest to obtain them.

Which of the following statements is incorrect?

A. People are irrational. B. People have high potential for learning. C. Sometimes it is optimal for people to use shortcuts that speed up decision making even though once in a while they lead to incorrect decisions. D. People are not omnipotent - they cannot process infinite amount of information instantaneously. A. People are irrational.

Which of the following statements is incorrect?

A. Public works usually have a negative effect on the economy because governments tend to employ people less efficiently than the private sector. B. Public works do not stimulate economy because money that are paid to people employed in public works are taken from other people in a form of taxes, devaluation of currency (printing more money), or borrowing. C. Broken window fallacy is an incorrect belief that breaking windows or destroying property in some other way would actually be beneficial to the economy. D. Public works stimulate economy because they employ unemployed people who now have income and can spent it on other goods. D. Public works stimulate economy because they employ unemployed people who now have income and can spent it on other goods.

Which of the following statements is incorrect?

A. Sometimes it is optimal for people to use shortcuts that speed up decision making even though once in a while they lead to incorrect decisions. B. The original U.S. Constitution with the Bill of Rights strictly limited the power of federal government as its writers understood that it is important to protect people from government. C. Government interference in the markets by helping failing companies or individuals usually makes people behave more rationally. D. Financial markets help people learn to correct their mistakes by providing feedback and associated rewards and punishments. C. Government interference in the markets by helping failing companies or individuals usually makes people behave more rationally.

Which of the following statements is incorrect?

A. The Fed chairman determines the Fed's monetary policy. B. The Federal Open Market Committee consists of the seven members of the Board of governors and five presidents of Federal Reserve banks. C. Federal Reserve Bank of New York implements monetary policy on day-to-day basis. D. The Federal Open Market Committee determines monetary policy. A. The Fed chairman determines the Fed's monetary policy.

Which of the following statements is incorrect?

A. The Fed is financially independent. B. The Fed does not have to report to any government body or public. C. The Fed's independence completely solves the problem of mixing monetary policy with politics. D. Independence of central banks tends to be negatively correlated with inflation. C. The Fed's independence completely solves the problem of mixing monetary policy with politics.

Which of the following statements is incorrect?

A. The Fed is the third central bank in the U.S. B. The Fed is a government protected monopoly. C. Only government protected monopolies do not need to worry about competition or a threat of competition. D. The Fed is the first central bank in the U.S. D. The Fed is the first central bank in the U.S.

Which of the following statements is correct?

A. The National Banking Acts (mid-1860s) aimed to help finance the Civil War and improve the soundness of money supply. B. The 1907 crash and the following recession were worse than the Great Depression or the current recession. C. During the 1907 crash and the following recession government stepped in to bail out failing banks. D. The 1907 crash was the first stock market crash after the creation of the Fed. A. The National Banking Acts (mid-1860s) aimed to help finance the Civil War and improve the soundness of money supply.

Which of the following statements is incorrect?

A. The creation of the Fed nationalized the monetary system of the U.S. B. There are 50 regional Federal Reserve Banks coordinated by a Board of Governors in Washington. C. The most authority in the Fed resides with the Board of Governors. D. The primary original function of the Fed is economic stabilization through management of money supply. B. There are 50 regional Federal Reserve Banks coordinated by a Board of Governors in Washington.

Which of the following statements is incorrect?

A. The former Fed's chairman Dr. Bernanke engaged in significantly more interference in economic activities than his predecessor. B. The former Fed's chairman Alan Greenspan served for 20 years and except in the last years of his service was highly respected for his work. C. The Fed's power increased significantly since Fed's creation because the Fed was able to significantly reduce the severity and the length of recessions. D. Historically the Fed was not successful in achieving its main goals. C. The Fed's power increased significantly since Fed's creation because the Fed was able to significantly reduce the severity and the length of recessions.

Which of the following statements is correct?

A. The main goal of financial intermediaries is maximization of stakeholders' wealth. B. The main goal of financial intermediaries is maximization of shareholders' wealth. C. The main goal of financial intermediaries is to improve distribution based on needs. D. all of the above. B. The main goal of financial intermediaries is maximization of shareholders' wealth.

Which of the following statements is incorrect?

A. The original U.S. Constitution does not allow a creation of a central bank. B. The right to force other human beings to do what you want them to do is not a human right. C. U.S. government interference in business increased significantly after the Civil War but it declined during the last 10 years. D. The U.S. was founded on the ideas of Enlightenment. C. U.S. government interference in business increased significantly after the Civil War but it declined during the last 10 years.

Which of the following statements is incorrect about the changes in the Fed's balance sheet from before the last financial crisis to after the crisis?

A. The total value of assets increased significantly. B. The Fed started buying significant amounts of mortgage backed securities. C. The Fed continued raising money primarily through printing money. D. The Fed started paying interest on depository institution reserves. C. The Fed continued raising money primarily through printing money.

Which of the following statements is incorrect?

A. The website of the Federal Reserve Bank of Saint Louis provides detailed economic data. B. The Fed is privately owned by commercial banks. C. The seven board governors are appointed by the president and approved by the Senate for 14-year overlapping terms. D. The Fed Chairman is chosen by the president for a 4-year term. B. The Fed is privately owned by commercial banks.

Which of the following statements is incorrect?

A. We should always try to delay the crash of an overvalued market as long as possible to avoid bankruptcies. B. Too high prices in a particular industry lead to too much investment in that industry and capital misallocation. C. Too much investment leads to more borrowing and higher interest rates, discouraging further investment. D. On average, financial markets reward participants who make good decisions and punish those who make wrong decisions, improving the efficiency of the markets. A. We should always try to delay the crash of an overvalued market as long as possible to avoid bankruptcies.

While ___________ merely bring buyers and sellers together and execute their trades, ____________ buy securities on their own account.

A. brokers; dealers. B. brokers; investment bankers. C. dealers; financial institutions. D. dealers; brokers. A. brokers; dealers.

Which of the following ways of capital allocation is common among developed countries today?

A. through financial markets (voluntary contracts - free market capitalism). B. through government regulations (statism). C. mixed. C. mixed

True or False. The purpose of the financial system is to bring savers and borrowers together.

True

True or False. When people purchase insurance, their behavior tends to change.

True

True or False. Mortgage backed securities are created by putting many mortgages in one pool and issuing securities that represent ownership of the fraction of this pool.

True.