1) (I) Banks are financial intermediaries that accept deposits and make loans.
(II) The term “banks” includes firms such as commercial banks, savings and loan
associations, mutual savings banks, credit unions, insurance companies, and pension
funds.
A) (I) is true, (II) false
B) (I) is false, (II) true
C) Both are true
D) Both are false
2) Equity funds can be placed in which class according to the Investment Company
Institute?
A) capital appreciation funds
B) world funds
C) total return funds
D) all of the above
3) In the absence of regulation, banks would probably hold
A) too much capital, reducing the efficiency of the payments system
B) too much capital, reducing the profitability of banks
C) too little capital, increasing the return on equity
D) none of the above
4) What does the “twin crises” in an emerging market financial crisis refer to?
A) both the currency crisis and the financial crisis
B) both the fiscal crisis and the banking crisis
C) both the inflation crisis and the asset bubble crisis
D) both the fiscal crisis and political crisis
5) The chartering process is especially designed to deal with the ________ problem,
and regular bank examinations help to reduce the ________ problem.
A) adverse selection; adverse selection
B) adverse selection; moral hazard
C) moral hazard; adverse selection
D) moral hazard; moral hazard
6) Which of the following is not one of the eight basic facts about financial structure?
A) The financial system is among the most heavily regulated sectors of the economy
B) Issuing marketable securities is the primary way businesses finance their operations
C) Indirect finance, which involves the activities of financial intermediaries, is many
times more important than direct finance in which businesses raise funds directly from
lenders in financial markets
D) Financial intermediaries is the most important source of external funds to finance
businesses
7) The Bretton Woods agreement set up the ________, which currently provides
long-term loans to assist developing countries to build dams, roads, and other physical
capital that contributes to economic development.
A) International Monetary Fund
B) World Bank
C) Central Settlements Bank
D) Bank of International Settlements
E) European Exchange Rate Mechanism (ERM)
8) The higher the standard deviation of returns on an asset, the ________ the asset’s
________.
A) greater; risk
B) smaller; risk
C) greater; expected return
D) smaller; expected return
9) According to the January effect, stock prices
A) experience an abnormal price rise from December to January
B) experience an abnormal price decline from December to January
C) follow a random walk during January
D) set the pattern for the entire year in January
10) The 2001 terrorist attacks and the Enron financial scandal caused anticipated
dividend growth to ________, investors’ required return on equity to ________, and
stock prices to ________.
A) decrease; increase; decrease
B) decrease; increase; increase
C) increase; decrease; decrease
D) increase; decrease; increase
11) Factors that cause the demand curve for bonds to shift to the left include
A) an increase in the inflation rate
B) an increase in the liquidity of stocks
C) a decrease in the volatility of stock prices
D) all of the above
E) none of the above
12) Mutual funds offer investors all of the following except
A) greater-than-average returns
B) diversified portfolios
C) lower transaction costs
D) professional investment management
13) (I) If a corporate bond becomes less liquid, the demand for the bond will fall,
causing the interest rate to rise.
(II) If a corporate bond becomes less liquid, the demand for Treasury bonds does not
change.
A) (I) is true, (II) false
B) (I) is false, (II) true
C) Both are true
D) Both are false
14) When the exchange rate for the euro changes from $1.20 to $1.00, then, holding
everything else constant, the euro has
A) appreciated and German cars sold in the United States become more expensive
B) appreciated and German cars sold in the United States become less expensive
C) depreciated and American wheat sold in Germany becomes more expensive
D) depreciated and American wheat sold in Germany becomes less expensive
15) The primary function of investment banks is
A) the bundling of deposits into loans
B) extending long-term credit to other financial institutions
C) helping corporations raise funds
D) providing credit to firms engaged in international trade
16) Savings and loans associations
A) initially were allowed to attract funds by offering savings accounts that paid a
slightly higher interest rate than that offered by commercial banks
B) held about 85 percent of their total assets as mortgages prior to the Great Depression
C) did not weather the Great Depression well, as thousands of S&Ls failed in the 1930s
D) are all of the above
E) are only A and B of the above
17) Which of the following is true of mortgage interest rates?
A) Longer-term mortgages have higher interest rates than shorter-term mortgages
B) In exchange for points, lenders reduce interest rates on mortgage loans
C) Mortgage rates are lower than Treasury bond rates because of the tax deductibility of
mortgage interest payments
D) All of the above are true
E) Only A and B of the above are true
18) Just prior to the 2007 financial crisis, mortgage loans known as NINJA loans were
issued to borrowers. What is a NINJA loan?
A) A loan issued by a Japanese bank, thus avoiding U.S. regulation
B) A loan document originated by a mortgage banker named Bruce Lee
C) A loan issued to borrowers with no income, employment, nor assets to speak of
D) A loan issued with a “martial arts” clause
19) Which of the following statements is true?
A) A bank’s assets are its uses of funds
B) A bank’s assets are its sources of funds
C) A bank’s liabilities are its uses of funds
D) Only B and C of the above are true
20) The weakness of the dollar in the late 1970s and the strength of the dollar in the
early 1980s can be explained by movements in
A) real interest rates, but not nominal interest rates
B) nominal interest rates, but not real interest rates
C) relative price levels, but not real interest rates
D) none of the above
21) Which theory of the term structure proposes that bonds of different maturities are
not substitutes for one another?
A) market segmentation theory
B) expectations theory
C) liquidity premium theory
D) separable markets theory
22) The theory of bureaucratic behavior suggests that the objective of a bureaucracy is
to maximize
A) the public’s welfare
B) its own welfare
C) profits
D) conflict between the executive and legislative branches of government
23) When the exchange rate changes from 1.0 euros to the dollar to 0.8 euros to the
dollar, the euro has ________ and the dollar has ________.
A) appreciated; appreciated
B) depreciated; appreciated
C) appreciated; depreciated
D) depreciated; depreciated
24) The Depository Institutions Deregulation and Monetary Control Act of 1980
A) approved NOW accounts nationwide
B) imposed uniform reserve requirements
C) mandated the phase out of interest-rate ceilings on deposits
D) did all of the above
E) did only A and B of the above
25) The certainty equivalent for risk-averse people who buy insurance is the
A) maximum loss they may sustain
B) expected loss they may sustain
C) insurance premium they pay
D) profit the insurance company earns
26) ________ were once the most common type of nontransaction deposit.
A) Checking accounts
B) Time deposits
C) Savings accounts
D) none of the above
27) The monetary base consists of
A) currency in circulation and reserves
B) government securities held by the Fed and discount loans
C) government securities held by the Fed and currency in circulation
D) discount loans and reserves
28) In recent years, commercial banks have been allowed to
A) invest in real estate
B) enter certain insurance markets
C) underwrite stocks
D) do all of the above
E) do only A and B of the above
29) Which of the following are true of mortgages?
A) More than 80 percent of mortgage loans finance residential home purchases
B) The National Banking Act of 1863 rewarded banks that increased mortgage lending
C) Most mortgages during the 1920s and 1930s were balloon loans
D) All of the above are true
E) Only A and C of the above are true
30) An argument that supports a regulated minimum capital requirement is that banks
that hold too little capital
A) are unprofitable
B) impose costs on other banks because they are more likely to fail
C) have an unfair competitive advantage over savings and loans
D) includes all of the above
31) Under dollarization, a country
A) backs its currency 100 percent with foreign reserves
B) earns seigniorage because it no longer bears the cost of issuing its own currency
C) abandons its own currency and adopts the money of another country
D) must worry about a speculative attack on its currency
32) On average, finance companies have a capital-to-total-asset ratio that is ________
than that of banks and savings and loans.
A) lower
B) the same as
C) higher
D) None of the above are correct. Finance companies do not have a
capital-to-total-asset ratio.
33) An impact of the Garn-St. Germain Act of 1982 has been to
A) put savings and loans at a competitive disadvantage
B) make the banking system more competitive
C) give money market mutual funds a competitive advantage
D) do both A and B of the above
E) do both A and C of the above
34) Federal funds are
A) usually overnight investments
B) borrowed by banks that have a deficit of reserves
C) lent by banks that have an excess of reserves
D) all of the above
E) only A and B of the above
35) What is a credit boom?
A) an explosion in a credit cycle, which can increase or decrease lending in the
short-run
B) essentially a lending spree on the part of banks and other financial institutions
C) when credit card receivables rise due to low initial interest rates
D) the signal of the end of a credit spree, with credit contracting rapidly
36) The common bond membership requirement makes it difficult for ________ to
diversify their loans.
A) savings and loan associations
B) credit unions
C) banks
D) mutual savings banks
37) By selling short a futures contract of $100,000 at a price of 115, you are agreeing to
deliver ________ face value securities for ________.
A) $100,000; $115,000
B) $115,000; $110,000
C) $100,000; $100,000
D) $115,000; $115,000