Money, Banking, and Financial Markets Final Exam Review
If a bank has $10 million of checkable deposits, a required reserve ratio of 10 percent, and it holds $2 million in reserves, then it will not have enough reserves to support a deposit outflow of A) $1.2 million. B) $1.1 million. C) $1 million. D) $900,000.
$1.2 million
Purchase price of a consul(perpetuity) that provides an annual payment of $200 at 8% rate of interest is
$2500
If the reserve ratio is 10%, Cash is the economy is $50 mn, Excess Reserves are $30 mn and Deposits are $1500 mn, the general money multiplier is ....
(1+50/1500)/(.1+50/1500+30/1500)
Treasury sells a Bond for $100 mn to the Public. The impact on the monetary base is ........ and money supply is ......;
0, and 0
The one period interest rates during the next four years are forecast as 1%, 2%, 1% and 3%. According to Expections Theory, the interest rate of a 3 year bond is
1.33%
If the reserve ration is 10%, the simple money multiplier is......
10
Treasury sells a bond for $100 mn to the Federal Reserve, and deposits cash in a bank. The impact on the monetary base is..... and money supply is......
100 , and 100/reserve ratio
If the bond yields 8% at maturity, what is the purchase price?
1083
There are.... Federal Reserve Banks throughout USA
12
What is the yield to maturity of the following coupon bond? C= $100, F= $1000, P= $900, N=5
12.63%
The US Federal Reserve System was established in
1913
A Bank gets a Discount Loan from the Federal Reserve of $100 mn. The impact on the monetary base is...... and money supply is....
200, and 100/reseve ratio
An adequately capitalized bank in USA has a capital adequacy ratio of....
4%
f the money supply is $500 and nominal income is $3,000, the velocity of money is MV =PY P is price level; and Y is real income PY is nominal income MV=3000 V = 3000/M = 3000/500 = 6 A) 1/60. B) 1/6. C) 6. D) 60.
6
The BASEL requirement for capital adequacy is... of risk weighted assets
8%
If you lend $100 this year and receive $120 after 2 years, the yield to maturity is
9.5%
The present value of $120 you would receive after two years at 10% discount rate is
99.2
Which of the following can be described as involving direct finance
A corporation issues new shares of stock
Which of the following can be described as involving indirect finance
A corporation takes out loans from a bank
The Federal Reserve System is
A decentralized system
Which of the following are duties of the Board of Governors of the Federal Reserve System A) Setting margin requirements, the fraction of the purchase price of the securities that has to be paid for with cash. B) Setting the maximum interest rates payable on certain types of time deposits under Regulation Q. C) Regulating credit with the approval of the president under the Credit Control Act of 1969. D) All governors advise the president of the United States on economic policy.
A) Setting margin requirements, the fraction of the purchase price of the securities that has to be paid for with cash.
If expectations of the future inflation rate are formed solely on the basis of a weighted average of past inflation rates, then economists would say that expectation formation is
Adaptive
If bad credit risks are the ones who most actively seek loans and, therefore, receive them from financial intermediaries, then financial intermediaries face the problem of
Adverse selection
Which of the following is NOT an element of inflation targeting? A) A public announcement of medium-term numerical targets for inflation B) An institutional commitment to price stability as the primary long-run goal C) An information-inclusive approach in which only monetary aggregates are used in making decisions about monetary policy D) Increased accountability of the central bank for attaining its inflation objectives
An information-inclusive approach in which only monetary aggregates are used in making decisions about monetary policy
base money
Another name for high powered money, the sum of cash held by public and reserves of the banking system, and reserve money
Which of the following statements are true? A) An increase in tax rates will increase the demand for Treasury bonds, lowering their interest rates. B) Because the tax-exempt status of municipal bonds was of little benefit to bond holders when tax rates were low, they had higher interest rates than U.S. government bonds before World War II. C) Interest rates on municipal bonds will be higher than comparable bonds without the tax exemption. D) Because coupon payments on municipal bonds are exempt from federal income tax, the expected after-tax return on them will be higher for individuals in lower income tax brackets.
B) Because the tax-exempt status of municipal bonds was of little benefit to bond holders when tax rates were low, they had higher interest rates than U.S. government bonds before World War II.
Which of the following statements is false?
Bank capital is recorded as an asset on the bank balance sheet
If a US government bond with $1000 face value, 5 year maturity, and 10% coupon rate purchased at $900 in 2018 sells at $850 in 2019, which of the following statements is true i. The rate of return on the bond is 5.6% ii. The market interest rate has increased in 2019
Both I and ii are correct
M1 is defined as
Cash held by public + demand deposits
Which of the following are bank liabilities
Checkable deposits
A credit market instrument that pays the owner a fixed coupon payment every year until the maturity date and then repays the face value is called a
Coupon Bond
If the First National Bank has a gap equal to a negative $30 million, then a 5 percentage point increase in interest rates will cause profits to
Decline by $1.5 million
The risk that interest payments will not be made, or that the face value of a bond is not repaid when a bond matures is
Default risk
U.S. Treasury bills pay no interest but are sold at a _, i.e., you will pay a lower purchase price than the amount you receive at maturity
Discount
Periodic payments of net earnings to shareholders are known as
Dividends
The Federal Open Market Committee usually meets_____ times a year
Eight
The present value of an expected future payment _ as the interest rate increases
Falls
The operating target of the US Federal Reserve is
Federal Funds Rate
The ability of a central bank to set monetary policy goals is
Goal independence
Banking is a.... industry
Imperfectly competitive
If wealth increases, the demand for stocks _ and demand for long-term bonds _, everything else held constant
Increases, increases
A business cycle expansion.... the demand for bonds,.... the supply of bonds and..... the price of bonds
Increases; increases; lowers
Everything else held constant, an increase in marginal tax rates would likely have the effect of _ the demand for municipal bonds, and _ the demand for U.S. government bonds
Increasing; Decreasing
US government bonds have a.... risk, but do not have a.... risk
Interest rate, default
An example of the Goal Independence of a Central Bank is
Its ability to choose an inflation target
When you deposit a $50 bill in the Security Pacific National Bank
Its assets increase by $50
Of the four effects on interest rates from an increase in the money supply, the one that works in the opposite direction of the other three is the
Liquidity effect
If an individual moves money from a savings deposit account to a demand deposit account
M1 increases and M2 stays the same
The quantity Theory of Money is based on the following Equation of Exchange
MV=PY
If the money supply grows at 12%, and real output grows at 4%, the inflation rate is a. 3% b. 0.33% c. 8% d. 16%
MV=PY. DM/M+0=DP/P+DY/Y. 12=?+4. ?=8. A=8
If the relationship between the monetary aggregate and the goal variable is weak, then
Monetary aggregate targeting will not work
To an economist, ________ is anything that is generally accepted in payment for goods and services or in the repayment of debt.
Money
If a borrower misuses funds then financial intermediaries face the problem of
Moral Hazard
An example of a fixed payment loan is
Mortgage Loan
Which of the following instruments are traded in a debt market
Municipal Bonds, Treasury Bonds, and Repurchase agreements
The Federal Reserve Bank of_____ houses the open market desk
New York
The first country to adopt inflation targeting was
New Zealand
The view that velocity is constant in the short run transforms the equation of exchange into the quantity theory of money. According to the quantity theory of money, when the money supply doubles
Nominal income doubles
Each governor on the Board of Governors can serve
One full nonrenewable fourteen-year term plus part of another term
Independence of the Fed is important because
People form expectations based on the credibility of the Fed, and independence enhances credibility and The Fed can choose any goal of monetary policy
The type of monetary policy regime that the Federal Reserve has been following in recent years can best be described as
Policy with an implicit nominal anchor
If the purchase price is above the face value, the bond is purchased at... and yield to maturity is... than the coupon rate
Premium, below
The primary goal of the European Central Bank is
Price stability
A candidate for a measure of Core inflation is an index containing
Prices of consumer goods and services excluding food items
One purpose of regulation of financial markets is to
Promote the provision of information to shareholders, depositors, and the public
An increase in the expected rate of inflation will_ the demand for bonds and _ the supply of bonds.... the price of the bond
Reduce, Increase Lowering
Quantitative Easing is increasing........ when....... is no longer an effective policy tool
Reserve money; interest rate
Financial Markets promote greater economic efficiency by channeling funds from_ to _
Savers; borrowers
The additional incentive that the purchaser of a Treasury security requires to buy a long-term security rather than a short-term security is called the
Term or Liquidity Premium
Which of the following is an entity of the Federal Reserve System
The FOMC
In rational expectations theory, the term " optimal forecast" is essentially. synonymous with
The best guess
Because the quantity theory of money tells us how much money is held for a given amount of aggregate income, it is also a theory of
The demand for money
In the one-period valuation model, the current stock price increases if
The expected sales price increases
The monetary policy strategy that provides the least accountability is
The implicit nominal anchor
Which of the following is a potential operating instrument for the central bank?
The monetary base
Which of the following instruments are traded in a capital market
U.S. Government Treasury Bonds
Which of the following instruments are traded in a money market
U.S. Treasury bills
Which of the following bonds are considered to be default-risk free?
U.S. Treasury bonds
Another way to state the efficient markets condition is: in an efficient market,
Unexpected profit opportunities will be quickly eliminated
The average number of times that a dollar is spent in buying the total amount of final goods and services produced during a given time period is known as
Velocity
An assumption made in arriving at the answer to the above question is a. Velocity grows at 1% b. Velocity is constant c. Velocity is immaterial d. Velocity is negative
Velocity is constant
The concept of adverse selection helps to explain all of the following except
Why direct finance is more important that indirect finance as a source of business finance
The decision by inflation targets to choose inflation targets________ zero reflects the concern of monetary policymakers that particularly______ inflation can have substantial negative effects on real economic activity.
above; low
If a bank's liabilities are more sensitive to interest rate fluctuations than are its assets, then _____ in interest rates will_______ bank profits
an increase; reduce
Discount Rate is an effective monetary policy tool if it is...... the Fed Funds rate
below
If the Fed requires the Fed Funds rate to be 1.75% and if the rate increases as a result of increasing demand, the Fed undertakes...... open market operations, by undertaking an open market...... of a bond
defensive; purchase
f the Fed requires the Fed Funds rate to be 1.75%, and if the rate increases as a result of increasing demand, the Fed undertakes ............... (defensive/dynamic) open market operations, by undertaking an open market ........... (sale/purchase) of a bond.;
defensive; purchase
f the Fed requires the Fed Funds rate to increase from 1.75% to 2%, the Fed undertakes ............... (defensive/dynamic) open market operations, by undertaking an open market ........... (sale/purchase) of a bond.
dynamic; sale
The_ interest rate is the.... interest rate adjusted for expected inflation.
ex ante real, nominal
What is the impact on Federal Funds rate if the reserve ratio is increased
increase
A business cycle expansion increases income, causing money demand to_____ and interest rates to _____, everything else held constant
increase; increase
The large number of banks in the United States is an indication of
lack of competition within the banking industry.
The most common definition that monetary policymakers use for price stability is
low and stable inflation
The dual mandate of the Federal Reserve is
price stability and high employment
The Federal Reserve Banks are ________ institutions since they are owned by the ________.
quasi-public; private commercial banks in the district where the Reserve Bank is located
If the desired intermediate target is a monetary aggregate, then the preferred policy instrument will be a ________ variable like the ________.
reserve aggregate; monetary base
According to Expectations Theory the steeply upward sloping yield curve indicates that
short-term interest rates are expected to rise in the future
Both ________ and ________ were financial innovations that occurred because of loophole mining.
sweep accounts; money market mutual funds
Which of the following are bank assets
the building owned by the bank
According to the liquidity premium theory of the term structure
the interest rate on long-term bonds will equal an average of short-term interest rates that people expect to occur over the life of the long-term bonds plus a term premium