FIN 321 Test 3
A stress test of banks, such as that undertaken in the Spring of 2009, is designed to: A. gauge how well banks would fare if the economy worsens B. ensure that banks have followed proper accounting standards C. estimate the impact of a bank panic on the overall economy D. make sure that banks are properly managed
A
As a part of the Dodd-Frank Act of 2010, Congress amended a portion of the Federal Reserve Act so the Fed could A. no longer make loans to individual companies. B. no longer make any loans to private corporations. C. now make loans to individual companies. D. only make loans to commercial banks.
A
Compared to the depositors of 1930, do depositors today face similar fears? A. Because FDIC insurance did not exist in the early 1930s, depositors today do not face similar fears. B. Depositors face the same fears now as in the early 1930s. C. Because TARP insurance did not exist in the early 1930s, depositors today do not face similar fears. D. It is impossible to compare problems depositors face now and those in the early 1930s.
A
Disintermediation refers to the A. movement of savers and borrowers from banks to financial markets. B. failure of financial intermediaries due to moral hazard problems. C. removal of government regulations of financial intermediaries. D. failure of financial intermediaries due to adverse selection problems.
A
In October 2008, the Fed cut its target for the federal funds rate to A. less than 1%. B. 1.75% C. 2.25%. D. 2.75%.
A
In describing the bank panic that occurred in the fall of 1930, Milton Friedman and Anna Schwartz wrote: A contagion of fear spread among depositors, starting from the agricultural areas, which had experienced the heaviest impact of bank failures in the twenties. But such contagion knows no geographical limits. Source: Milton Friedman and Anna Schwartz, A Monetary History of the United States, 1867-1960, Princeton, NJ: Princeton University Press, 1963, p. 308. What do the authors mean by a "contagion of fear"? A. A bank run that is fueled by fear of bank failure. B. The bankruptcy of depositors. C. The fear of bad weather, which causes an increase in the prices of agricultural goods. D. A recession.
A
Most of the Fed's earnings come from A. interest on the securities it holds. B. congressional appropriations. C. interest on discount loans. D. fees charged to financial institutions for check clearing.
A
Negotiable certificates of deposit were developed in order to A. circumvent interest rate regulations on deposits. B. circumvent reserve requirements. C. increase assets that were acceptable as collateral for discount loans. D. compete for loan business that had been going to the commercial paper market.
A
Sovereign debt refers to A. bonds issued by the government. B. debt owned by the government. C. debt owed to the government. D. debt only issued by nations with kings or queens.
A
The classic account of bank panics was published in 1879 by Walter Bagehot, editor of the Economist, in his book Lombard Street: open double quoteIn wild periods of alarm, one failure makes many, and the best way to prevent the derivative failures is to arrest the primary failure which causes them.close double quote Source: Walter Bagehot, Lombard Street: A Description of the Money Market, New York: John Wiley, 1999 (first published 1873), p. 51. All of the following are reasons why one bank failure might lead to many bank failures, except: A. If multiple banks have to sell the same assets, the prices of those assets are likely to rise. B. Depositors have an incentive to withdraw their money from their banks to avoid losing it should their banks be forced to close. C. Depositors of other banks may become concerned that their banks might also have problems. D. Banks will be forced to sell loans and securities to raise money to pay off depositors.
A
The creation of a lender of last resort in the United States A. occurred in response to banking panics. B. has been recommended by the Treasury in its report of late 1992. C. was mandated in the U.S. Constitution. D. occurred in response to the S&L crisis of the 1980s.
A
The first stage in the regulatory process is A. a crisis. B. regulation. C. response by the financial system. D. regulatory response.
A
The issue of Fed independence is most often raised by A. the public's negative reaction to Fed policy. B. disagreement over the role the Fed should play in managing monetary policy. C. the Fed's refusal to carry out the wishes of Congress. D. the Fed's refusal to carry out the wishes of the president.
A
The main argument in favor of Fed independence is that A. monetary policy is too important and too technical to be determined in the political arena. B. the Constitution requires it. C. interest rates would probably be lower if Congress controlled the Fed, thus hurting savers. D. congressional control of the Fed was tried during the 1960s and did not work well.
A
The original intent of the Federal Reserve Act of 1913 was to provide the Fed with what role? A. lender of last resort B. regulator of the banking system C. maintain a balanced budget D. manage the exchange rate
A
The principal-agent view of Fed motivation predicts that the Fed acts A. in order to increase its power, influence, and prestige. B. to promote the interests of the general public. C. to promote the interests of the Fed's principallong dashthe President of the United States. D. in order to make sure its agents commercial banks carry out its wishes.
A
The process in which a cycle of falling asset prices and falling prices of goods and services can increase the severity of an economic downturn is called a A. debt-deflation process. B. sovereign debt crisis. C. bank run. D. financial crisis.
A
The public interest view of Fed motivation holds that the Fed acts in the interest of A. the general public. B. banks. C. Congress. D. itself.
A
To conduct open market operations, the FOMC issues a directive to A. the Open Market Desk at the Federal Reserve Bank of New York. B. the Board of Governors in Washington, D.C. C. the presidents of the district banks. D. the chairman of the New York Stock Exchange.
A
What did bank depositors have to fear in the early 1930s? A. If a bank failed, then depositors would potentially lose all their money. B. Depositors had fear of hyperinflation. C. Depositors had fear of a reduction of interest rates. D. Depositors had fear of the nationalization of commercial banks.
A
What do the authors mean that "such contagion knows no geographical limits"? A. Bank panics may start in an isolated area, but the fear they engender quickly spreads to banks elsewhere. B. Bank panics always start in agricultural area banks, then spread to urban area banks. C. Bank panics produce a contagion that spreads from country to country. D. None of the above.
A
What does it mean for a money market mutual fund to "break the buck"? A. The value of its share declines below $1. B. It is unable to meet the demand for withdrawals by investors. C. It increases its fees to more than 1% of net asset value. D. It incurs losses on its investments.
A
Which best describes the Federal Reserve district banks? A. They are private-government joint ventures. B. They are private ventures. C. Some are private while others are government. D. They are government ventures.
A
Which of the following banned most proprietary trading by commercial banks? A. Volcker Rule B. Greenspan Rule C. Consumer Financial Protection Bureau D. Regulation Q
A
Who owns the Federal Reserve banks? A. The private commercial banks in each district which are members of the Federal Reserve System. B. The governments of the states in which the banks are located. C. Those households which have purchased stock in Federal Reserve System. D. The federal government
A
What are the changes to the Fed under the Dodd-Frank Act? (Check all that apply.) A. Making the Fed a member of the new Financial Stability Oversight Council. B. Designating a Fed vice chairman for regulatory supervision. C. Ordering the Government Accountability Office to audit the emergency lending programs the Fed carried out during the financial crisis. D. Requiring class A directors of the Federal Reserve banks to participate in the election of bank presidents. E. Requiring the Fed to be more transparent about its monetary policy targets.
A,B,C
During World War II A. the Fed was not allowed to make discount loans. B. the Fed agreed to hold interest rates on short-term Treasury securities at low levels. C. the Fed agreed not to buy Treasury securities. D. the Board of Governors was temporarily disbanded.
B
Financial crisis typically results in a recession for all of the following reasons EXCEPT? A. Firms have trouble financing day-to-day activities. B. The government is unwilling to intervene during a financial crisis. C. Firms struggle to fund long-term investments in new factories, machinery, and equipment. D. Households borrow less to finance purchases of goods and services. E. The flow of funds from lenders to borrowers becomes disrupted.
B
How does the Fed reach its target for the federal funds rate? A. by changing reserve requirements B. by buying and selling Treasury securities C. by directly setting the federal funds rate D. by changing the discount rate
B
In 1971, money market mutual funds were introduced as an alternative to A. Treasury bills. B. bank deposits. C. commercial paper. D. repurchase agreements.
B
Most of the TARP funds were used to A. finance the operations of the Federal Reserve. B. make direct purchases of preferred stock in banks to increase their capital. C. fund a stimulus package. D. pay for losses incurred by Fannie Mae and Freddie Mac.
B
Regulation Q A. broadened the basis on which the Fed could make discount loans. B. placed ceilings on allowable interest rates on time and savings deposits. C. prohibited interstate banking. D. required all banks to hold reserves against demand deposits.
B
Regulation Q was intended to A. increase the reserves banks would hold against demand deposits. B. maintain banks' profitability by limiting competition for funds. C. increase the reserves banks would hold against time deposits. D. eliminate the need for discount loans.
B
The Beige Book is prepared by A. the Board of Governors. B. district banks. C. FOMC staff members. D. the Commerce Department.
B
The Fed does not have to go through the normal congressional appropriations process because A. it was given enough funds at the time of its founding to provide for its expenses indefinitely. B. it is self financing. C. it is not part of the legislative branch of the federal government. D. its expenses are very small.
B
The main argument against Fed independence is that A. congressional control was tried during the 1960s and it worked well. B. in a democracy, elected officials should make public policy. C. the Fed has proven irresponsible on many occasions. D. monetary and fiscal policy would be easier to coordinate if the Fed were not independent.
B
The second stage in the regulatory process is A. a crisis. B. regulation. C. regulatory response. D. response by the financial system.
B
The second stage in the regulatory process is A. a crisis. B. regulation. C. response by the financial system. D. regulatory response.
B
The third stage in the regulatory process is A. regulatory response. B. response by the financial system. C. regulation. D. a crisis.
B
To conduct open market operations, the FOMC issues a directive to A. the chairman of the New York Stock Exchange. B. the Open Market Desk at the Federal Reserve Bank of New York. C. the presidents of the district banks. D. the Board of Governors in Washington, D.C.
B
What are the two main ways in which the government can keep one bank failure from leading to a bank panic? A. A central bank can act as a borrower of last resort, and the government can insure deposits. B. A central bank can act as a lender of last resort, and the government can insure deposits. C. A central bank can act as a borrower of last resort and insure deposits. D. A central bank can act as a lender of last resort and insure deposits.
B
What is the length of a term for the Chairman of the Board of Governors? A. 14 years B. Four years C. One year D. 28 years
B
What percentage of all commercial banks in the United States belong to the Federal Reserve System? A. 5% B. 34% C. 75% D. 90%
B
When did the Federal Reserve Act become law? A. 1836 B. 1913 C. 1936 D. 1951
B
Which of the following is NOT an accurate description of the recession that accompanied the financial crisis of 2007-2009? A. It lasted just under twice as long as the typical recession. B. Inflation rose at nearly twice the rate as the average recession. C. GDP declined by more than twice the rate of the average recession. D. Peak unemployment was about one-third higher than usual.
B
Who was effectively in charge of the Fed during the early 1930s? A. Head of the Federal Reserve Bank of New York B. no one C. Secretary of Treasury D. Comptroller of the Currency
B
Federal Reserve district banks perform all of the following roles EXCEPT A. managing check clearing in the payments system. B. managing currency in circulation by issuing new Federal Reserve notes. C. setting the federal funds rate. D. performing regulatory functions.
C
In the early post-war years, the Fed was reluctant to continue its wartime agreement with the Treasury because it believed the result would be A. higher taxes. B. lower taxes. C. inflation. D. recession
C
Most of the Fed's earnings come from A. fees charged to financial institutions for check clearing. B. interest on discount loans. C. interest on the securities it holds. D. congressional appropriations.
C
The first stage in the regulatory process is A. regulation. B. regulatory response. C. a crisis. D. response by the financial system.
C
The national economic forecast for the next two years prepared by the staff of the Board of Governors is published in the A. Beige Book. B. Blue Book. C. Green Book. D. Fed Book.
C
The political business cycle theory predicts that A. political factors over which the Fed has no control are most important in explaining the business cycle. B. the Fed acts to promote the interests of the general public. C. the Fed acts to stimulate economic activity before an election. D. the president's appointments to the Board of Governors will usually be politicians.
C
The primary motive for financial innovation during the regulatory process is A. adherence to the new regulations. B. increase coordination with other financial institutions. C. profit. D. return to the way business was conducted prior to the new regulations.
C
The usual response of the banking system to new government regulations is A. bankruptcy. B. strict compliance. C. an attempt to circumvent the regulations through financial innovation. D. evasion through whatever means are necessary.
C
The usual response of the banking system to new government regulations is A. strict compliance. B. evasion through whatever means are necessary. C. an attempt to circumvent the regulations through financial innovation. D. bankruptcy.
C
What is the main reason the Fed operates in a political arena? A. The members of the Board of Governors must run for reelection every fourteen years. B. It is under the direct control of Congress. C. It lacks a constitutional mandate. D. The members of the Board of Governors are typically prominent politicians.
C
When did Regulation Q finally disappear? A. 1934 B. 1945 C. 1986 D. 2000
C
Which investment bank avoided bankruptcy by being purchased by JP Morgan Chase in March 2008? A. Morgan Stanley B. Merril Lynch C. Bear Stearns D. Lehman Brothers
C
Which of the following is NOT an activity carried out by Federal Reserve district banks? A. examining state member banks B. making discount loans C. open market operations D. issuing new Federal Reserve Notes
C
Who had served as a de facto lender of last resort during the 1907 panic? A. John D. Rockefeller B. The U.S. Treasury C. J. P. Morgan D. Henry Ford
C
Countries with the most independent central banks have the lowest inflation rates. T/F
T
All of the following were actions taken by the government or the Fed in response to the financial crisis of 2007-2009 EXCEPT A. effective nationalization of Fannie Mae and Freddie Mac. B. reducing the federal funds rate to near zero. C. insuring deposits in money market mutual funds. D. purchasing of most toxic assets such as mortgage-backed securities.
D
In September 2008, the Fed and the U.S. Treasury A. saved Lehman Brothers, but not AIG, from bankruptcy. B. saved both Lehman Brothers and AIG from bankruptcy. C. saved neither Lehman Brothers nor AIG from bankruptcy. D. saved AIG, but not Lehman Brothers, from bankruptcy.
D
Losses in which holding resulted in BNP Paribas not allowing investors to redeem shares from three of its investment funds? A. real estate investment trusts B. Lehman Brothers C. Bear Stearns D. mortgage-backed securities
D
Many economists believe A. the Fed could have reduced the severity of the Great Depression by encouraging banks to make fewer loans to insolvent businesses. B. the Fed could have reduced the severity of the Great Depression by raising interest rates. C. the severity of the Great Depression and the policies of the Fed were unrelated. D. bank failures increased the severity of the Great Depression.
D
Members of the Board of Governors A. serve for life or good behavior. B. may serve no more than three consecutive four-year terms. C. must resign when the President who has appointed them leaves office. D. serve one nonrenewable fourteen-year term.
D
Members of the Board of Governors are A. elected by the district bank presidents. B. appointed by the Securities and Exchange Commission, subject to congressional veto. C. appointed by the National Monetary Commission. D. appointed by the President of the United States, subject to confirmation by the Senate.
D
NOW accounts were developed in order to A. provide banks with a checkable deposit on which they did not have to pay interest. B. provide banks with a liquid, interestminusearning asset. C. provide banks with a means of earning interest on the funds in their reserve accounts with the Fed. D. circumvent Regulation Q.
D
The Beige Book is prepared by A. the Board of Governors. B. FOMC staff members. C. the Commerce Department. D. district banks.
D
The European Central Bank is responsible for the monetary policy of A. the 5 largest European economies. B. all countries on the continent of Europe. C. all 28 countries in the European Union. D. the 19 sovereign countries that use the euro as their currency.
D
The Fed does not have to go through the normal congressional appropriations process because A. it was given enough funds at the time of its founding to provide for its expenses indefinitely. B. it is not part of the legislative branch of the federal government. C. its expenses are very small. D. it is self financing.
D
The fourth stage in the regulatory process is A. regulation. B. response by the financial system. C. a crisis. D. regulatory response.
D
The fourth stage in the regulatory process is A. response by the financial system. B. regulation. C. a crisis. D. regulatory response.
D
The issue of Fed independence is most often raised by A. the Fed's refusal to carry out the wishes of Congress. B. disagreement over the role the Fed should play in managing monetary policy. C. the Fed's refusal to carry out the wishes of the president. D. the public's negative reaction to Fed policy.
D
The movement to set up a central bank in the United States was spurred by the financial panic that occurred in A. 1987. B. 1816. C. 1929. D. 1907.
D
The third stage in the regulatory process is A. a crisis. B. regulation. C. regulatory response. D. response by the financial system
D
Which country was least supportive of expansionary policy by the European Central Bank during the Financial Crisis of 2007-2009? A. Spain B. Portugal C. Greece D. Germany
D
Which of the following is NOT considered one of the four groups in the Federal Reserve System? A. Board of Governors B. Federal Reserve banks C. Federal Open Market Committee D. Federal Deposit Insurance Corporation
D
Which of the following is the mandate of the European Central Bank? A. a fixed exchange rate B. high economic growth C. low unemployment D. price stability
D
Which of the following statements is correct? A. The Fed is fully insulated from external pressures because it does not need to go through the normal congressional appropriations process. B. The Fed is fully insulated from external pressures due to the long terms that members of the Board of Governors serve. C. The Fed is fully insulated from external pressures because it has a constitutional mandate. D. The Fed is only partially insulated from external pressures.
D
