1) Federal deposit insurance covers deposits up to $250,000, but as part of a doctrine
called “too-big-to-fail” the FDIC sometimes ends up covering all deposits to avoid
disrupting the financial system. When the FDIC does this, it uses the
A) “payoff” method
B) “purchase and assumption” method
C) “inequity” method
D) “Basel” method
2) Bankers’ concerns regarding the optimal mix of excess reserves, secondary reserves,
borrowings from the Fed, and borrowings from other banks to deal with deposit
outflows is an example of
A) liability management
B) liquidity management
C) managing interest rate risk
D) managing credit risk
3) A well-capitalized financial institution has ________ to lose if it fails and thus is
________ likely to pursue risky activities.
A) more; more
B) more; less
C) less; more
D) less; less
4) First National Bank
If interest rates rise by 5 percentage points, say, from 10 to 15%, bank profits (measured
using gap analysis) will
A) decline by $0.5 million
B) decline by $1.5 million
C) decline by $2.5 million
D) increase by $1.5 million
5)
The steeply upward sloping yield curve in the figure above indicates that
A) short-term interest rates are expected to rise in the future
B) short-term interest rates are expected to fall moderately in the future
C) short-term interest rates are expected to fall sharply in the future
D) short-term interest rates are expected to remain unchanged in the future
6) Which of the following is true of life insurance companies?
A) Typically the type of assets that life insurance companies hold are corporate bonds,
commercial mortgages, and corporate stock
B) The two typical forms of life insurance polices that are held can be classified as
whole and variable life policies
C) The major risk that life insurance companies face is that payouts to policy holders
are very hard to predict
D) Life insurance companies have suffered from wide spread failures
7) Banks engage in regulatory arbitrage by
A) keeping high-risk assets on their books while removing low-risk assets with the
same capital requirement
B) keeping low-risk assets on their books while removing high-risk assets with the
same capital requirement
C) hiding risky assets from regulators
D) buying risky assets from arbitragers
8) The yield to maturity for a one-year discount bond equals the increase in price over
the year, divided by the
A) initial price
B) face value
C) interest rate
D) coupon rate
9) Financial innovations occur because of financial institutions search for
A) profits
B) fame
C) stability
D) recognition
10) What is the return on a 5 percent coupon bond that initially sells for $1,000 and
sells for $900 next year?
A) 5 percent
B) 10 percent
C) -5 percent
D) -10 percent
11) The factor accounting for the steepest rise in the currency ratio since 1892 is
A) taxes.
B) bank panics
C) illegal activity
D) an increase in wealth
12) If the required reserve ratio is equal to 10 percent, a single bank can increase its
loans up to a maximum amount equal to
A) its excess reserves
B) 10 times its excess reserves
C) 10 percent of its excess reserves
D) its total reserves
13) Government regulations designed to reduce the moral hazard problem include
A) laws that force firms to adhere to standard accounting principles
B) light sentences for those who commit the fraud of hiding and stealing profits
C) state verification subsidies
D) state licensing restrictions
14) ________ in the expected future domestic exchange rate causes the demand for
domestic assets to shift to the ________ and the domestic currency to appreciate,
everything else held constant.
A) An increase; right
B) An increase; left
C) A decrease; right
D) A decrease; left
15) If market participants notice that a variable behaves differently now than in the past,
then, according to rational expectations theory, we can expect market participants to
A) change the way they form expectations about future values of the variable
B) begin to make systematic mistakes
C) no longer pay close attention to movements in this variable
D) give up trying to forecast this variable
16) Everything else held constant, a balanced budget increase in government spending
(that is, an increase in government spending that is matched by an identical increase in
net taxes) will
A) increase aggregate demand, but not by as much as if just government spending
increases
B) increase aggregate demand by more than if just government spending increases
C) not affect aggregate demand
D) decrease aggregate demand
17) If the required reserve ratio is 10 percent, currency in circulation is $400 billion,
checkable deposits are $800 billion, and excess reserves total $0.8 billion, then the
monetary base is
A) $480 billion
B) $480.8 billion
C) $80 billion
D) $80.8 billion
18) Charging risk-based insurance premiums is a time-honored principle of insurance
management to reduce
A) moral hazard
B) adverse selection
C) free riding
D) principal-agent problems
19) Under the European System of Central Banks, the Executive Board is similar in
structure to the ________ of the Federal Reserve System.
A) Board of Governors
B) Federal Open Market Committee
C) Federal Reserve Banks
D) Federal Advisory Council
20) Demand-pull inflation can result when
A) policymakers set an unemployment target that is too high
B) a persistent budget deficit is financed by selling bonds to the public
C) a persistent budget deficit is financed by selling bonds to the central bank
D) workers get numerous wage increases
21) FDICIA ________ incentives for banks to hold capital and ________ incentives to
take on excessive risk.
A) increased; decreased
B) increased; increased
C) decreased; decreased
D) decreased; increased
22) Purchases and sales of government securities by the Federal Reserve are called
A) discount loans
B) federal fund transfers
C) open market operations
D) swap transactions
23) The fixed exchange rate regime established at a meeting in New Hampshire in 1944
has been known as the
A) General Agreement on Tariffs and Trade
B) Bretton Woods system
C) International Settlement Fund
D) Balance of Payments Compliance Accord
24) If borrowers with the most risky investment projects seek bank loans in higher
proportion to those borrowers with the safest investment projects, banks are said to face
the problem of
A) adverse credit risk
B) adverse selection
C) moral hazard
D) lemon lenders
25) A major difference between the United States and Japanese banking systems is that
A) American banks are allowed to hold substantial equity stakes in commercial firms,
whereas Japanese banks cannot
B) Japanese banks are allowed to hold substantial equity stakes in commercial firms,
whereas American banks cannot
C) bank holding companies are illegal in the United States
D) Japanese banks are usually organized as bank holding companies
26) A budget ________ occurs when government expenditures exceed tax revenues for
a particular time period.
A) deficit
B) surplus
C) surge
D) surfeit
27) Options on individual stocks are referred to as
A) stock options
B) futures options
C) American options
D) individual options
28) If you expect the inflation rate to be 15 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
A) 7 percent
B) 22 percent
C) -15 percent
D) -8 percent