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7) Banks in the U.S.
A) cannot hold common stocks.
B) can hold common stocks.
C) cannot hold common stocks of companies they do business with.
D) cannot hold common stocks of companies that have their headquarters in the same state.
E) can hold risky assets.
8) Banks in the U.S.
A) are prevented from holding assets that are "too risky."
B) are not prevented from holding assets that are "too risky."
C) are encouraged not to hold assets that are "too risky."
D) are not encouraged not to hold assets that are "too risky."
E) are encouraged to lend to a single private customer.
9) In the U.S., the following agencies have the right to examine the bank's books:
A) the Fed and the FDIC.
B) the FDIC and the Office of the Comptroller of the Currency.
C) the Fed and the Department of Commerce
D) the FDIC, Fed and the Office of the Comptroller of the Currency.
E) only the Fed.
10) In the U.S., banks
A) cannot be forced to sell assets that the bank examiner deems too risky.
B) can be forced to sell assets that the bank examiner deems too risky.
C) can be forced to sell assets that the bank examiner deems too risky only after a court order.
D) can be forced to sell assets that the bank examiner deems too risky only after both examiners
from the Fed and from the FDIC agree.
E) can be forced to trade assets that the bank examiner deems too risky.
11) In the U.S., banks
A) may not be forced by bank examiner to adjust their balance sheets by writing off loans the
examiner thinks will not be repaid.
B) may be forced by bank examiner to adjust their balance sheets by writing off loans the
examiner thinks will not be repaid.
C) may be forced by bank examiner to adjust their balance sheets by writing off loans the
examiner thinks will not be repaid only if the Fed and the FDIC examiners agree.
D) may be forced by bank examiner to adjust their balance sheets by writing off loans the
examiner thinks will not be repaid only if the Fed and the Office of the Comptroller of the
Currency examiners agree.
E) may be forced by bank examiner to adjust their balance sheets by paying off loans the
examiner thinks will not be repaid.
12) A bank faced with a large and sudden loss of deposits is likely to shut down despite a
fundamentally sound balance sheet. Why could this be?
A) Banks have accountants that are too optimistic.
B) Banks purposely lie about their balance sheets in order to attract more clients.
C) Many bank assets are illiquid and cannot be sold quickly to meet deposit obligations without
substantial loss to the bank.
D) Many banks operate on a budget that exceeds their actual reserves.
E) Many banks will shut down to preserve their interest profits.
13) Which statement is NOT true regarding emerging markets?
A) Emerging market financial institutions have generally proven to be weaker than those in
industrialized countries.
B) Emerging markets are the capital markets of poorer, developing countries that have
liberalized their financial system to allow private asset trade with foreigners.
C) Countries with emerging markets include Brazil, Mexico, and Thailand.
D) Countries with emerging markets have been unable to liberalize their financial systems to
allow private trade with foreigners.
E) Emerging market financial institutions contributed to the financial crisis of 1997-1999.
14) The main problem with securitization is that
A) governments are no longer able to repackage bank assets.
B) securitized banks grow too large and create oligopolies.
C) There is no problem. Governments can still get an accurate picture of global financial flows
by simply examining bank balance sheets.
D) governments are not able to monitor bank assets or to asses a bank's risk to the soundness of
the international banking system.
E) the bank assets are not marketable.
15) In the United States, which of the following safety precautions has the government NOT
taken to reduce Bank failures?
A) implemented deposits insurance
B) bank reserve requirements
C) capital requirements and asset restrictions
D) required bank examination
E) forcibly closing poorly run banks
16) The purpose of the Basel Committee was to
A) achieve a better coordination of the surveillance exercised by national authorities over the
international banking system.
B) achieve a better coordination of domestic banking systems.
C) achieve a better coordination between brokers and investment bankers.
D) achieve a better coordination between bond holder and bond issuers.
E) manipulate bank rates for more leverage profits.
17) The case where people purposely act in a careless way, for example, driving recklessly
because they are insured, is called
A) asymmetric information.
B) risk aversion.
C) moral hazard.
D) bounded rationality.
E) thrill-seeking.
18) Capital markets of poor developing countries that liberalized their financial systems to allow
private asset trade with foreigners are called
A) direct foreign markets.
B) foreign exchange markets.
C) stock & bond markets.
D) emerging markets.
E) fledgling financial markets.
19) U.S. reserve requirements
A) are rejected by half the banks operating in the United States.
B) show how regulatory asymmetries can operate to enhance the profitability of Eurocurrency
trading.
C) tend to harm the bank's business and decrease monetary aggregates.
D) force banks to hold a portion of its assets in a liquid form easily mobilized to meet sudden
deposit outflows.
E) remain in place, but capital requirements have begun defaulting.
20) What is a difficulty encountered in regulating international banking?
A) excessive deposit insurance rates on international banks
B) absence of reserve requirements
C) oppressive regulatory controls that reduce competitiveness
D) lack of funds and incentive to secure payments
E) variability in exchange rates
21) The Basel committee
A) takes advantages of loopholes in multinational banks
B) does not support regulatory agencies that monitor the assets of banks' foreign subsidiaries.
C) submitted its Concordat in 1975 and was then disbanded.
D) continues to be the major forum for cooperation in the regulation of international banking.
E) met for the first time in 1975.
22) What is an appropriate definition for "securitization"?
A) the repackaging of bank assets into readily marketable forms
B) the promise of a secure return on deposits in FDIC banks
C) the simplification of interest-bearing assets into their simplest derivative form
D) the unloading of derivative securities in response to a bank run
E) the reinforcement of an asset's worth through official certification
23) What caused a major economic shock in August 2007?
A) U.S. mortgage market
B) war in Iraq
C) U.S. bond market
D) technology stocks
E) misreporting from Asian markets
24) Many observers believe that the largely unregulated nature of global banking activity leaves
the world financial system vulnerable to bank failure on a massive scale. Is this a real threat? If
so, what measures have governments taken to reduce it?
25) "Bank failure may not be limited to banks that have mismanaged their assets." Explain why?
26) "It is in the interest of each depositor to withdraw her money from a bank if all other
depositors are doing the same, even when the bank's assets are sound." Discuss. As part of your
27) "There is evidence that the string of U.S. bank closings in the early 1930s helped start and
worsen the Great Depression." Discuss.
28) Describe the extensive "safety net" that has been set up in the United States in order to
reduce the risk of bank failure.
29) Explain why the FDIC is following a "too-big-to-fail" policy of fully protecting all
depositors at the largest banks.
30) Explain the issues involved with the Fed acting as a Lender of Last Resort (LLR).
31) Explain the difficulties in regulating international banking.
32) "The internationalization of banking has weakened national safeguards against banking
collapse, but at the same time it has made the need for effective safeguards more urgent."
Discuss.
33) What is securitization?
34) Who is the Basel Committee? Discuss both their involvement in the Concordat as well as the
role of the Concordat in international banking.
27
Copyright © 2018 Pearson Education, Inc.
20.4 How Well Have International Financial Markets Allocated Capital and Risk?
1) What are three things to measure for in evaluating the performance of the capital markets?
A) level of intertemporal trade, international trade, portfolio diversification
B) level of portfolio diversification, balanced capital accounts, global inflation
C) level of portfolio diversification, intertemporal trade, efficiency of foreign exchange
D) onshore-offshore interest rate parity, level of portfolio diversification, stability of
eurocurrency market
E) onshore-offshore interest rate parity, interest parity and foreign exchange, balanced capital
accounts
2) In the Interest Parity Condition, Rt - R t = ( - Et)/Et + xt, where Rt - R t is the interest
rate differential and ( - Et)/Et is the expected change in the exchange rate, what does xt
stand for if it potentially is a market efficient difference between the two?
A) market inefficiency
B) risk premium
C) forecast error
D) tracking error
E) excessive volatility
3) Why might a country's savings rate have a high positive correlation to its investment rate?
A) A country's gains from intertemporal trade may have been large.
B) governments' regulation to avoid inflation
C) A country's savings rate and investment rate are generally not positively correlated but rather
have negative correlation.
D) governments' regulation to avoid large current account balances
E) A government has not practiced sufficient fiscal regulation.
4) Large differences in interest rates between countries would indicate that
A) the global market is thriving.
B) there is good communication between countries about potential global investment
opportunities.
C) there are unrealized gains from trade.
D) the market is in danger of collapse.
E) the supply growth exceeds the aggregate demand.
5) Statistical studies of the relationship between interest rates and later depreciation rates show
that
A) the interest difference has been a very bad predictor in the large swings of exchange rates.
B) the interest difference has been an accurate predictor in the large swings of exchange rates.
C) the interest difference has correctly predicted the direction in which exchange rates would
change.
D) the interest difference has not yet been studied as a predictor in the large swings of exchange
rates.
E) the interest difference is unrelated to the large swings of exchange rates.
6) Which of the following is TRUE about exchange rates?
A) They should not be volatile because they will determine the economic climate.
B) They are generally more volatile than stock prices.
C) They are more volatile than several underlying factors that move them such as money
supplies and fiscal variables.
D) They should be volatile because to correct price signals they adjust quickly in response to
economic news, but they are generally less volatile than stock prices.
E) They never overreact to economic news.
7) Departures from interest parity
A) can be explained using theories of risk premium.
B) cannot be explained using theories of risk premium.
C) may or may not be able to be explained using theories of risk premium, more research is
needed.
D) are completely unrelated to risk premium.
E) occur when risk premium is over calculated.
8) A random walk model can more accurately predict exchange rates as compared to a
sophisticated forecast
A) always.
B) for forecasts up to a year away.
C) for forecasts longer than a year away.
D) never.
E) because of the predictability of exchange rates.
9) How well has the international capital market performed?
10) Explain why, according to Feldstein and Horioka, one should expect that domestic
investment rates diverge widely from saving rates.
11) Explain why large interest rate differences would be strong evidence of unrealized gains
from trade.
12) Discuss studies based on the interest parity conditions.
13) Explain the forecast error, ut+1, in terms of:
(1) Its equation (what it is equal to)
(2) How it is used
(3) Its accuracy
31
14) Does the interest rate parity hold in each of the following cases? In case it does not hold,
calculate the risk premium.
A. Rt = 5, = 3, Et = 5, = 7
B. Rt = 6, = 3, Et = 5, = 7
C. Rt = 7, = 3, Et = 5, = 7
D. Rt = 8, = 3, Et = 5, = 7
E. Rt = 5, = 4, Et = 5, = 7
F. Rt = 5, = 5, Et = 5, = 7
G. Rt = 5, = 6, Et = 5, = 7
H. Rt = 5, = 3, Et = 6, = 7
I. Rt = 5, = 3, Et = 7, = 7
J. Rt = 5, = 3, Et = 8, = 7
K. Rt = 5, = 3, Et = 5, = 8
L. Rt = 5, = 3, Et = 5, = 9
M. Rt = 5, = 3, Et = 5, = 10
32
Copyright © 2018 Pearson Education, Inc.
Answer:
Page Ref: 646
Difficulty: Moderate
33
15) Does the interest rate parity hold in each of the following cases? In case it does not hold,
calculate the risk premium.
N. Rt = 8, = 3, Et = 5, = 7
O. Rt = 7, = 4, Et = 6, = 8
P. Rt = 6, = 5, Et = 5, = 7
Q. Rt = 5, = 4, Et = 6, = 8
R. Rt = 8, = 6, Et = 5, = 7
S. Rt = 7, = 5, Et = 6, = 8
T. Rt = 6, = 4, Et = 5, = 7
U. Rt = 5, = 3, Et = 6, = 8
V. Rt = 8, = 5, Et = 6, = 8
W. Rt = 7, = 3, Et = 8, = 9
X. Rt = 6, = 7, Et = 7, = 8
Y. Rt = 5, = 6, Et = 5, = 9
Z. Rt = 4, = 3, Et = 5, = 10
34
Copyright © 2018 Pearson Education, Inc.
Answer:
Page Ref: 646
Difficulty: Difficult
16) Assume interest parity holds. Calculate for each of the following cases.
17) Assume interest parity holds. Calculate for each of the following cases.
36
18) Does the interest rate parity hold in each of the following cases by using the formula
Rt - Rt = (Ee+1 - Et)/Et? In case it does not hold, calculate the risk premium.
1. Rt = 5, = 3, Et = 5, = 17
2. Rt = 6, = 4, Et = 5, = 5
3. Rt = 7, = 5, Et = 5, = 8
4. Rt = 8, = 3, Et = 5, = 15
5. Rt = 5, = 4, Et = 6, = 6
6. Rt = 5, = 5, Et = 3, = 10
7. Rt = 5, = 6, Et = 2, = 8
8. Rt = 5, = 3, Et = 0, = 20
9. Rt = 5, = 9, Et = 7, = 3
10. Rt = 5, = 10, Et = 8, = 7
37
Copyright © 2018 Pearson Education, Inc.
Answer:
Page Ref: 646
Difficulty: Difficult
