Final Exam Review - Multiple Choice

Question 1

Which of the following can be described as direct finance?

You take out a mortgage from your local bank.
You borrow $2,500 from a friend.
You buy shares of common stock in the secondary market.
You buy shares in a mutual fund.

Answer 1

You borrow $2,500 from a friend.

Question 2

Securities are ___ for the person who buys them, but are ___ for the
individual or firm that issues them.

Answer 2

assets; liabilities

Question 3

U.S. Treasury bills are traded in the _____ market

Answer 3

money

Question 4

Collateral is ___ the lender receives if the borrower does not pay back the loan.

Answer 4

an asset

Question 5

The components of the U.S. Ml money supply are demand deposits and other checkable
deposits plus…

Answer 5

…currency plus travelers checks

Question 6

If wealth increases, the demand for stocks ___ and that of long-term bonds ____, everything else held constant.

Answer 6

increases; increases

Question 7

Which of the following are TRUE of fixed payment loans?

The borrower repays both the principal and interest at the maturity date.
Installment loans and mortgages are frequently of the fixed payment type.
The borrower pays interest periodically and the principal at the maturity date.
Commercial loans to businesses are often of this type.

Answer 7

Installment loans and mortgages are frequently of the fixed payment type.

Question 8

A corporation acquires new funds only when its securities are sold in the…

Answer 8

…primary market by an investment bank

Question 9

A __ is bought at a price below its face value, and the __ value is repaid at the maturity
date.

Answer 9

discount bond; discount

Question 10

If a $10,000 coupon bond has a coupon rate of 8 percent, then the coupon payment every year is…

Answer 10

$800

Question 11

High interest rates might ___ purchasing a house or car but at the same time high interest rates might ___ saving.

Answer 11

discourage; encourage

Question 12

Diversification is beneficial because:

it makes a person’s portfolio of securities, more liquid.
it raises the expected return on a person’s portfolio of securities.
it can reduce a person’s risk.
it increases a person’s wealth.

Answer 12

it can reduce a person’s risk.

Question 13

Which of the following is not a depository institution?

A savings and loan association.
A commercial bank.
A credit union.
A finance company.
None of the above.

Answer 13

A finance company.

Question 14

Compared to interest rates on long-term U.S. government bonds, interest rates on three-month Treasury bills fluctuate ___ and are ___ on average.

Answer 14

more; lower

Question 15

What is the return on a 7 percent bond that initially sells for $1,000 and sells for $860 next year?

Answer 15

-7 percent

Question 16

Of the following measures of interest rates, which is considered by economists to be the
most accurate?

the yield to maturity
the coupon rate
the current yield
the yield on a discount basis

Answer 16

the yield to maturity

Question 17

If you expect the inflation rate to be 12 percent next year and a one-year bond has a yield to maturity of 7 percent, then the real interest rate on this bond is…

Answer 17

-5%

Question 18

Sustained downward movements in the business cycle are referred to as…

Answer 18

Recessions

Question 19

If the expected return on NBC stock rises from 5 to 10 percent and the expected return on CBS stock rises from 12 to 18 percent, then the expected return of holding CBS stock _____ relative to NBC stock and the quantity demanded of CBS stock _____.

Answer 19

rises; rises

Question 20

The stock market is…

where interest rates are determined.
the most widely followed financial market in the United States.
where foreign exchange rates are determined.
the market where most borrowers get their funds.

Answer 20

the most widely followed financial market in the United States.

Question 21

The second bank of the United States was denied a new charter by…

Answer 21

President Andrew Jackson

Question 22

A major controversy involving the banking industry in its early years was…

…whether banks should both accept deposits and make loans or whether these functions should be separated into different institutions.
…whether the federal government or the states should charter banks.
…what percent of deposits banks should hold as fractional reserves.
…whether banks should be allowed to issue their own bank notes.

Answer 22

…whether the federal government or the states should charter banks.

Question 23

A debit card differs from a credit card in that…

Answer 23

…a credit card is a loan while for a debit card purchase, payment is made immediately.

Question 24

In 1977, he pioneered the concept of selling new public issues of junk bonds for companies that had not yet achieved investment-grade status.

Answer 24

Michael Milken

Question 25

National banks were created and chartered under…

Answer 25

…the National Currency Act of 1863 and/or the National Banking Act of 1864

Question 26

Because borrowers, once they have a loan, are more likely to invest in high-risk investment projects, banks face the…

Answer 26

…moral hazard problem

Question 27

Federal deposit insurance was created under the…

Answer 27

…Glass-Steagall (Banking) Act of 1933

Question 28

Which of the following are reported as liabilities on a bank’s balance sheet?

reserves
checkable deposits
consumer loans
deposits with other banks

Answer 28

checkable deposits

Question 29

Because checking accounts are ___ liquid for the depositor than savings accounts, they earn ___ interest rates.

Answer 29

more; lower

Question 30

Bank reserves include…

Answer 30

vault cash and deposits at the Fed.

Question 31

Secondary reserves are called so because…

Answer 31

they can be converted into cash with low transactions costs.

Question 32

In general, banks make profits by selling _____ liabilities and buying _____ assets.

Answer 32

short-term; longer-term

Question 33

When Jane Brown writes a $100 check to her nephew and he cashes the check, Ms. Brown’s bank _____ assets of $100 and _____ liabilities of $100

Answer 33

loses; loses

Question 34

The primary difference between the “payoff” and the “purchase and assumption” methods of handling failed banks is…

Answer 34

that the FDIC guarantees all deposits when it uses the “purchase and assumption” method.

Question 35

If, after a deposit outflow, a bank needs an additional $3 million to meet its reserve requirements, the bank can…

reduce deposits by $3 million.
increase loans by $3 million.
sell $3 million of securities that the bank currently owns.
repay its discount loans from the Fed.

Answer 35

sell $3 million of securities that the bank currently owns.

Question 36

_____ may antagonize customers and thus can be a very costly way of acquiring funds to meet an unexpected deposit outflow.

Answer 36

Calling in loans

Question 37

Banks face the problem of _____ in loan markets because bad credit risks are the ones most likely to seek bank loans.

Answer 37

adverse selection

Question 38

In May 1991, the FDIC announced that it would sell the government’s final 26% stake in Continental Illinois, ending government ownership of the bank that it had rescued in 1984. The FDIC took control of the bank, rather than liquidate it, because it believed that Continental Illinois…

Answer 38

…was too big to fail

Question 39

A bank failure is less likely to occur when…

a bank holds less U.S. government securities.
a bank suffers large deposit outflows.
a bank holds fewer excess reserves.
a bank has more bank capital.

Answer 39

a bank has more bank capital.

Question 40

The Basel Accord requires banks to hold as capital an amount that is at least _____ of their risk-weighted assets.

Answer 40

8%

Question 41

The monetary liabilities of the Federal Reserve include…

government securities and discount loans.
currency in circulation and reserves.
government securities and reserves.
currency in circulation and discount loans.

Answer 41

currency in circulation and reserves.

Question 42

The exchange rate is…

Answer 42

…the price of one currency relative to another.

Question 43

In the FOMC’s “Statement on Long-Run Goals and Monetary Policy Strategy,” the FOMC agreed to a single numerical value of the inflation objective, 2% on the _____.

Answer 43

PCE deflator

Question 44

The interest rate charged on overnight loans of reserves between banks is the…

Answer 44

…federal funds rate

Question 45

Everything else held constant, in the market for reserves, when the federal funds rate equals the discount rate, lowering the discount rate…

increases the federal funds rate.
has no effect on the federal funds rate.
decreases the federal funds rate.
has an indeterminant effect upon the federal funds rate.

Answer 45

decreases the federal funds rate.

Question 46

The actual execution of open market operations is done at..

Answer 46

the Federal Reserve Bank of New York.

Question 47

When the Federal Reserve purchases a government bond in the open market,

reserves in the banking system increase.
reserves in the banking system decline.
Federal Reserve liabilities remain unchanged.
Federal Reserve liabilities decline.
both b and d of the above occur.

Answer 47

reserves in the banking system increase.

Question 48

When the Fed wants to increase the level of reserves in the banking system, it can…

purchase government bonds.
sell government bonds.
extend discount loans to banks.
do both a and c.
do both b and c.

Answer 48

do both a and c

Question 49

When the value of the dollar changes from £0.75 to £0.5, then the British pound has _____ and the U.S. dollar has _____.

Answer 49

appreciated; depreciated

Question 50

If a bank has excess reserves of $10,000 and demand deposit liabilities of $80,000, and if the reserve requirement is 20 percent, then the bank has total reserves of…

Answer 50

$26,000

Question 51

At its inception, the Federal Reserve was intended to be…

Answer 51

a lender-of-last-resort

Question 52

The theory of PPP suggests that if one country’s price level rises relative to another’s, its currency should..

Answer 52

depreciate

Question 53

If banks issue only transaction deposits, reserve requirements are 20 percent, banks want to hold excess reserves equal to 8 percent of their deposits, and the public wants to hold currency in an amount equal to 32 percent of deposits, the money multiplier will be…

Answer 53

2.2

Question 54

If reserves in the banking system increase by $100, then checkable deposits will increase by $2,000 in the simple model of deposit creation when the required reserve ratio is

Answer 54

0.05

Question 55

The sum of currency in circulation and total reserves is called

Answer 55

the monetary base.

Question 56

If a bank chooses to purchase securities rather than extend loans with its excess reserves,

the expansion of deposits in the banking system will be dampened.
the effect on deposits will be the same as if the bank had held its excess reserves in vault cash.
the effect on deposits will be the same as if the bank had extended loans.
all of the above.
only a and b of the above.

Answer 56

the effect on deposits will be the same as if the bank had extended loans.

Question 57

An increase in productivity in a county will cause its currency to _____ because it can produce goods at a _____ price, everything else held constant.

Answer 57

appreciate; lower

Question 58

There are _____ members of the Board of Governors with _____ year terms, one being appointed every 2 years by the _____ and confirmed by the _____.

Answer 58

7; 14; President; Senate

Question 59

If a member of the nonbank public sells a government bond to the Federal Reserve in exchange for currency, the monetary base will…

remain unchanged but reserves will fall.
remain unchanged but reserves will rise.
rise but currency in circulation will remain unchanged.
rise but reserves will remain unchanged.

Answer 59

rise but reserves will remain unchanged.

Question 60

The effect of an open market purchase on reserves differs depending on how the seller of the bonds keeps the proceeds. If the proceeds are kept in _____, the open market purchase has no effect on reserves; if the proceeds are kept as _____, reserves increase by the amount of the open market purchase.

Answer 60

currency; deposits