1) Agency theory focuses on how government agencies regulate financial
intermediaries and markets.
2) Issuing marketable securities is the primary way businesses finance their operations.
3) Unlike commercial banks, S&Ls can only be chartered by the federal government.
4) Since a bank’s assets exceed its equity capital, the return on assets always exceeds
the return on equity.
5) The main purpose of federal funds is to provide banks with an immediate infusion of
reserves should they be short.
6) Announcing the FOMC’s policy decision immediately after the FOMC meeting is an
example of how Fed policymaking has become more transparent.
7) The interest rates on bonds of different maturities tend to move together over time.
8) Mortgage-backed securities are marketable securities collateralized by a pool of
mortgages.
9) Restrictions on commercial banks’ securities and insurance activities put American
banks at a competitive disadvantage relative to foreign banks.
10) Finance companies face much stricter regulations than commercial banks.
11) In general, money market instruments are low-risk, high-yield securities.
12) The current yield is the best measure of an investor’s return from holding a bond.
13) Since their introduction in 1961, negotiable CDs have become an important source
of bank funds.
14) When the exchange rate for the euro changes from $0.90 to $0.85, then holding
everything else constant, the euro has depreciated and American wheat sold in Germany
becomes more expensive.
15) In the 1980s, regulators engaged in bureaucratic gambling when they allowed
insolvent S&Ls to continue operating.
16) Since firms issuing new securities pay to have these securities rated, the
credit-rating agencies have incentive to ________ to attract more business.
A) give favorable ratings
B) give impartial ratings
C) lower the fees they charge
D) practice spinning
17) Which of the following causes an appreciation of the domestic currency?
A) A lower domestic interest rate due to a lower expected inflation rate
B) A decline in the domestic real interest rate
C) An increase in the domestic money supply
D) All of the above
18) According to the theory of bureaucratic behavior,
A) the objective of a bureaucracy is to maximize its own welfare, meaning that it seeks
additional power and prestige
B) the bureaucracy will fight vigorously to preserve its autonomy; thus, it will attempt
to avoid conflict with the president and Congress
C) the bureaucracy will support legislation that gives it additional regulatory power
D) all of the above describe bureaucratic behavior
19) Because other countries hold dollars as international reserves, a U.S. official reserve
transactions deficit can be financed by
A) an increase in U.S. international reserves
B) an increase in foreign holdings of dollars
C) a decrease in foreign holdings of dollars
D) only A and B of the above
20) Dollars received in the future are worth ________ than dollars received today. The
process of calculating what dollars received in the future are worth today is called
________.
A) more; discounting
B) less; discounting
C) more; inflating
D) less; inflating
21) A discount loan by the Fed to a bank causes a(n) ________ in reserves in the
banking system and a(n) ________ in the monetary base.
A) increase; decrease
B) decrease; decrease
C) decrease; increase
D) increase; increase
22) Which of the following central banks has the greatest degree of independence?
A) Bank of England
B) European Central Bank
C) Bank of Japan
D) Federal Reserve System
23) Which of the following are generally true of all bonds?
A) The longer a bond’s maturity, the lower is the rate of return that occurs as a result of
the increase in the interest rate
B) Even though a bond has a substantial initial interest rate, its return can turn out to be
negative if interest rates rise
C) Prices and returns for long-term bonds are more volatile than those for shorter-term
bonds
D) All of the above are true
E) Only A and B of the above are true
24) All ________ are required to be members of the Fed.
A) state-chartered banks
B) nationally chartered banks
C) banks with more than $100 million in assets
D) banks with more than $500 million in assets
25) As a result of shared electronic banking facilities,
A) barriers to branching have become less burdensome
B) banking has become less competitive
C) both of the above have occurred
D) neither of the above has occurred
26) A dirty float is
A) when the value of a currency is pegged relative to the value of one other currency
B) when the value of a currency is allowed to fluctuate against all other currencies
C) when countries intervene in foreign exchange markets in an attempt to influence
their exchange rates by buying and selling foreign assets
D) when the value of a currency is pegged relative to an anchor currency
27) By selling short a futures contract of $100,000 at a price of 96, you are agreeing to
deliver ________ face value securities for ________.
A) $100,000; $104,167
B) $96,000; $100,000
C) $100,000; $96,000
D) $100,000; $100,000
28) Yield curves can be classified as
A) upward-sloping
B) downward-sloping
C) flat
D) all of the above
E) only A and B of the above
29) State banks that are not members of the Federal Reserve System are most likely to
be examined by the
A) Federal Reserve System
B) Federal Deposit Insurance Corporation
C) Federal Home Loan Bank System
D) Comptroller of the Currency
30) An electronic machine that allows customers to make deposits, get cash, transfer
funds from one account to another, and check balances is
A) an automated banking machine
B) the virtual bank
C) an automated teller machine
D) a smart card
31) The most widely traded stock index future is on the
A) Dow Jones 1000 index
B) S&P 500 index
C) NASDAQ index
D) Dow Jones 30 index
32) Investment banks are guilty of conflict of interest when they
A) pressure their analysts to produce research favorable to their client firms
B) permit executives of client firms to alter analysts’ research on their firms
C) prohibit analysts from making negative or controversial comments about client firms
D) all of the above
33) 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
E) none of the above
34) Argentina’s 2001-2002 financial crisis was precipitated by
A) a weak and poorly supervised banking system
B) a lending boom that fueled a stock market bubble
C) difficulty financing a large budget deficit
D) a decline in interest rates
35) If you sell a short futures contract, you hope that bond prices will ________.
A) rise
B) fall
C) not change
D) fluctuate
36) Because of the adverse selection problem,
A) good credit risks are more likely to seek loans, causing lenders to make a
disproportionate amount of loans to good credit risks
B) lenders may refuse loans to individuals with high net worth, because of their greater
proclivity to ‘skip town”
C) lenders are reluctant to make loans that are not secured by collateral
D) all of the above
37) If the Fed wants to permanently lower interest rates, then it should raise the rate of
money growth if
A) there is fast adjustment of expected inflation
B) there is slow adjustment of expected inflation
C) the liquidity effect is smaller than the expected inflation effect
D) the liquidity effect is larger than the other effects
38) Banks do not want to hold too much capital because
A) they do not bear fully the costs of bank failures
B) higher returns on equity are earned when bank capital is smaller, all else equal
C) higher capital levels attract the scrutiny of regulators
D) all of the above
E) only A and B of the above
39) The starting point for understanding how exchange rates are determined is a simple
idea called ________, which states that if two countries produce an identical good, the
price of the good should be the same throughout the world no matter which country
produces it.
A) Gresham’s law
B) the law of one price
C) purchasing power parity
D) arbitrage
40) If the domestic currency is initially undervalued, that is below par, the central bank
must intervene to sell the ________ currency by purchasing ________ assets.
A) domestic; foreign
B) domestic; domestic
C) foreign; foreign
D) foreign; domestic
41) Which of the following features of Treasury bond futures contracts were not
designed to increase liquidity?
A) standardized contracts
B) traded up until maturity
C) not tied to one specific type of bond
D) can be closed with offsetting trade
42) To act in the taxpayer’s interest and lower costs to the deposit insurance agency,
regulators must
A) set tight restrictions on holding assets that are too risky
B) impose high capital requirements
C) not adopt a stance of regulatory forbearance
D) do all of the above
43) All insurance is subject to several basic principles, including all of the following
except that
A) the insured must provide full and accurate information to the insurance company
B) the insured is to profit as a result of insurance coverage
C) the loss must be quantifiable
D) there must be a relationship between the insured and the beneficiary
44) It now appears that the predominant delivery system for banking services in the
future will be
A) Internet-only banks
B) traditional banks
C) traditional banks supplemented with online services
D) none of the above
45) Adverse selection
A) is a problem created by asymmetrical information after the transaction
B) can be solved by eliminating asymmetrical information
C) occurs when people who do not pay for information take advantage of the
information other people have to pay for
D) all of the above
46) Mutual savings banks
A) are heavily concentrated in mortgages
B) have more flexibility in their investing practices
C) are both A and B of the above
D) are neither A nor B of the above