1) According to Edward Kane, because the banking industry is one of the most
________ industries in America, it is an industry in which ________ is especially likely
to occur.
A) competitive; loophole mining
B) competitive; innovation
C) regulated; loophole mining
D) regulated; innovation
2) In the late 1990s and early 2000s, the Japanese economy has experienced
A) easy monetary policy as indicated by falling nominal interest rates
B) easy monetary policy as indicated by short-term interest rates near zero
C) tight monetary policy as indicated by falling asset prices
D) tight monetary policy as indicated by short-term interest rates near zero
3) Banks that suffered significant losses in the 1980s made the mistake of
A) holding too many liquid assets
B) minimizing default risk
C) failing to diversify their loan portfolio
D) holding only safe securities
4) Off-balance-sheet activities
A) generate fee income with no increase in risk
B) increase bank risk but do not increase income
C) generate fee income but increase a bank’s risk
D) generate fee income and reduce risk
5) 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
currency ratio is
A) 0.25
B) 0.50
C) 0.40
D) 0.05
6) Investment banks purchase new security issues in the hope of making a profit. This is
the act of
A) reinsuring
B) factoring
C) syndicating
D) underwriting
7) Prior to 1980, member banks left the Federal Reserve System due to
A) the high cost of discount loans
B) the high cost of required reserves
C) a desire to avoid interest rate regulations
D) a desire to avoid credit controls
8) Financial innovations that grew out of the bank branching restrictions were
A) bank holding companies and automatic teller machines
B) bank holding companies and securitization
C) automatic teller machines and sweep accounts
D) automatic teller machines and bank credit cards
9) Deposit insurance is only one type of government safety net. All of the following are
types of government support for troubled financial institutions except
A) forgiving tax debt
B) lending from the central bank
C) lending directly from the government’s treasury department
D) nationalizing and guaranteeing that all creditors will be repaid their loans in full
10) The price of one country’s currency in terms of another country’s currency is called
the
A) exchange rate
B) interest rate
C) Dow Jones industrial average
D) prime rate
11) Several features distinguish hedge funds from traditional mutual funds, including:
A) Mutual funds have a minimum investment requirement of $1,000 or more; hedge
funds have no minimum investment requirement
B) Hedge funds typically charge investors large fees relative to mutual funds
C) Hedge fund investors need not commit their money for more than a few weeks at a
time, explaining why they pay higher fees
D) Hedge funds are significantly less risky relative to mutual funds
12) Which set of goals can, at times, conflict in the short run?
A) High employment and economic growth
B) Interest rate stability and financial market stability
C) High employment and price level stability
D) Exchange rate stability and financial market stability
13) When the Federal Reserve calls in a discount loan from a bank, the monetary base
________ and reserves ________.
A) remains unchanged; decrease
B) remains unchanged; increase
C) decreases; decrease
D) decreases; remains unchanged
14) The Federal Reserve Act of 1913 required that
A) state banks be subject to the same regulations as national banks
B) national banks establish branches in the cities containing Federal Reserve banks
C) national banks join the Federal Reserve System
D) state banks could not join the Federal Reserve System
15) The equation of exchange is
A) M P = V Y
B) M + V = P + Y
C) M + Y = V + P
D) M V = P Y
16) Suppose that from a new checkable deposit, First National Bank holds two million
dollars in vault cash, eight million dollars on deposit with the Federal Reserve, and nine
million dollars in excess reserves. Given this information, we can say First National
Bank faces a required reserve ratio of ________ percent.
A) ten
B) twenty
C) eighty
D) ninety
17) Using the Gordon growth formula, if D1 is $2.00, ke is 12% or 0.12, and g is 10%
or 0.10, then the current stock price is
A) $20
B) $50
C) $100
D) $150
18) Bonds with relatively high risk of default are called
A) Brady bonds
B) junk bonds
C) zero coupon bonds
D) investment grade bonds
19) During the 1960s, 1970s, and early 1980s, traditional bank profitability declined
because of
A) financial innovation that increased competition from new financial institutions
B) a decrease in interest rates to fight the inflation problem
C) a decrease in deposit insurance
D) increased regulation that prohibited banks from making risky real estate loans
20) Financial crises generally develop along two basic paths:
A) mismanagement of financial liberalization/globalization and severe fiscal
imbalances
B) stock market declines and severe fiscal imbalances
C) mismanagement of financial liberalization/globalization and stock market declines
D) stock market declines and unanticipated declines in the value of the domestic
currency
21) Of money’s three functions, the one that distinguishes money from other assets is its
function as a
A) store of value
B) unit of account
C) standard of deferred payment
D) medium of exchange
22) Regulatory forbearance
A) meant delaying the closing of “zombie S&Ls” as their losses mounted during the
1980s
B) had the advantage of benefiting healthy S&Ls at the expense of “zombie S&Ls”, as
insolvent institutions lost deposits to health institutions
C) had the advantage of permitting many insolvent S&Ls the opportunity to return to
profitability, saving the FSLIC billions of dollars
D) increased adverse selection dramatically
23) Overseeing who operates banks and how they are operated is called
A) prudential supervision
B) hazard insurance
C) regulatory interference
D) loan loss reserves
24) A bank with insufficient reserves can increase its reserves by
A) lending federal funds
B) calling in loans
C) buying short-term Treasury securities
D) buying municipal bonds
25) Keynes’s model of the demand for money suggests that velocity is ________ related
to ________.
A) positively; interest rates
B) negatively; interest rates
C) positively; bond values
D) positively; stock prices
26) If a bank has more rate-sensitive assets than rate-sensitive liabilities
A) it reduces interest rate risk by swapping rate-sensitive income for fixed rate income
B) it reduces interest rate risk by swapping fixed rate income for rate-sensitive income
C) it increases interest rate risk by swapping rate-sensitive income for fixed rate income
D) it neutralizes interest rate risk by receiving and paying fixed-rate streams
27) Credit card debt is
A) secured debt
B) unsecured debt
C) restricted debt
D) unrestricted debt
28) Vesting refers to
A) the length of time an insurance company has been in business
B) the length of time that a person must be enrolled in a pension plan before being
entitled to receive benefits
C) the length of time until a CD matures
D) the premium required under term insurance
29) Excess reserves are equal to
A) total reserves minus discount loans
B) vault cash plus deposits with Federal Reserve banks minus required reserves
C) vault cash minus required reserves
D) deposits with the Fed minus vault cash plus required reserves
30) Which of the following is most likely to result from a stronger dollar?
A) U.S. goods exported aboard will cost less in foreign countries, and so foreigners will
buy more of them
B) U.S. goods exported aboard will cost more in foreign countries and so foreigners
will buy more of them
C) U.S. goods exported abroad will cost more in foreign countries, and so foreigners
will buy fewer of them
D) Americans will purchase fewer foreign goods
31) The declining cost of computer technology has made ________ a reality.
A) brick and mortar banking
B) commercial banking
C) virtual banking
D) investment banking
32) Suppose the economy is producing at the natural rate of output. An open market
purchase of bonds by the Fed will cause ________ in real GDP in the long run and
________ in inflation in the long run, everything else held constant.
A) an increase; an increase
B) a decrease; a decrease
C) no change; an increase
D) no change; a decrease
33) To prevent bank runs and the consequent bank failures, the United States
established the ________ in 1934 to provide deposit insurance.
A) FDIC
B) SEC
C) Federal Reserve
D) ATM
34) The implementation lag is
A) the time it takes for policy makers to obtain data indicating what is happening in the
economy
B) the time it takes for policy makers to be sure of what the data are signaling about the
future course of the economy
C) the time it takes to pass legislation to implement a particular policy
D) the time it takes for policy makers to change policy instruments once they have
decided on the new policy
E) the time it takes for the policy actually to have an impact on the economy
35) An increase in the liquidity of corporate bonds, other things being equal, shifts the
demand curve for corporate bonds to the ________ and the demand curve for Treasury
bonds shifts to the ________.
A) right; right
B) right; left
C) left; left
D) left; right
36) The ________ is below the coupon rate when the bond price is ________ its par
value.
A) yield to maturity; above
B) yield to maturity; below
C) discount rate; above
D) discount rate; below
37) With a 10 percent interest rate on dollar deposits, and an expected appreciation of 7
percent over the coming year, the expected return on dollar deposits in terms of the
dollar is
A) 3 percent
B) 10 percent
C) 13.5 percent
D) 17 percent
38) Which of the following can be described as involving direct finance?
A) A corporation takes out loans from a bank
B) People buy shares in a mutual fund
C) A corporation buys a short-term corporate security in a secondary market
D) People buy shares of common stock in the primary markets
39) Other things being equal, a decrease in the default risk of corporate bonds shifts the
demand curve for corporate bonds to the ________ and the demand curve for Treasury
bonds to the ________.
A) right; right
B) right; left
C) left; right
D) left; left
40) Corporations receive funds when their stock is sold in the primary market. Why do
corporations pay attention to what is happening to their stock in the secondary market?
41) How did the increase in the interest rates in the early 80s contribute to the S&L
crisis?
42) Explain the margin requirement for financial futures and how marking to market
affects the margin account.
43) Who are the voting members of the Federal Open Market Committee and why is
this committee important? Where does the power lie within this committee?
44) Make the case for and against an independent Federal Reserve.
45) What rights does ownership interest give stockholders?
46) Explain the traditional interest-rate channel for expansionary monetary policy.
Explain how a tight monetary policy affects the economy through this channel.
47) Distinguish between a foreign bond and a Eurobond.