1) Closing for a mortgage loan refers to the moment the loan is paid off.
2) Decreased transparency of the monetary policy strategy through communication with
the public and the markets about the plans and objectives of monetary policymakers is
an element of inflation targeting.
3) The 2007-2009 financial crisis illustrates that derivatives cannot be used to hedge —
financial institutions should be barred from using them in any form.
4) Economies of scale means that the percentage return on a financial transaction rises
as the size of the transaction rises.
5) Option premiums fall as the volatility of the underlying asset falls.
6) Electronic Communications Networks apply technology to make organized
exchanges more efficient and speedy.
7) Eurodollars are created when deposits in accounts in the United States are transferred
to a bank outside the country and are kept in the form of dollars.
8) In recent years, financial markets have become more stable and less risky.
9) An advantage of a graduated-payment mortgage is that borrowers will qualify for a
larger loan than if they requested a conventional mortgage.
10) Countries with more independent central banks have lower inflation rates, but these
have come at the expense of greater output fluctuations.
11) Venture capital firms reduce risk by investing in only a few companies which can be
carefully monitored and nurtured.
12) Loans
A) are the largest category of bank assets
B) provide most of the bank’s revenues
C) earn the highest return of all bank assets
D) do all of the above
E) are only A and B of the above
13) Insurance companies employ underwriters
A) as an alternative to higher deductibles
B) to control the risky behavior of their policyholders
C) to control the risk incurred on their behalf by agents
D) to encourage the loyalty of exclusive agents
E) to maintain the independence of independent agents
14) In the case of an insurance policy, ________ occurs when the existence of insurance
encourages the insured party to take risks that increase the likelihood of an insurance
payoff; ________ occurs when those most likely to get large insurance payoffs are the
ones who want to purchase insurance the most.
A) moral hazard; insurance market discrimination
B) moral hazard; insurance segregation
C) moral hazard; adverse selection
D) adverse selection; moral hazard
15) The supply curve for reserves is ________ when the federal funds rate is below the
discount rate and ________ when the federal funds rate is above the discount rate.
A) upward sloping; horizontal
B) upward sloping; vertical
C) vertical; horizontal
D) vertical; downward sloping
16) In an emerging market economy, bank regulators typically provide ________
supervision.
A) overbearing
B) adequate
C) weak
D) expert
17) A consol bond is a bond that
A) pays interest annually and its face value at maturity
B) pays interest in perpetuity and never matures
C) pays no interest but pays its face value at maturity
D) rises in value as its yield to maturity rises
18) If a country’s central bank eventually runs out of international reserves, it cannot
keep its currency from ________ and a ________ must occur in which the par
exchange value is reset at a ________ level.
A) appreciating; revaluation; higher
B) depreciating; revaluation; higher
C) depreciating; devaluation; lower
D) appreciating; devaluation; lower
19) Rising interest-rate risk ________ the ________ financial innovation.
A) increased; cost of
B) increased; demand for
C) reduced; cost of
D) reduced; demand for
20) During business cycle expansions when income and wealth are rising, the demand
for bonds ________ and the demand curve shifts to the ________.
A) falls; right
B) falls; left
C) rises; right
D) rises; left
21) Thrift institutions’ importance as a source of funds for borrowers
A) has shrunk from around 40 percent of total credit advanced in the late 1970s to
below 30 percent today
B) has shrunk from over 20 percent of total credit advanced in the late 1970s to below
10 percent today
C) has expanded dramatically, from around 15 percent of total credit advanced in the
late 1970s to above 25 percent today
D) has expanded dramatically, from around 15 percent of total credit advanced in the
late 1970s to above 30 percent today
22) The modern commercial banking system began in America when the
A) Bank of the United States was chartered in New York in 1801
B) Bank of North America was chartered in Philadelphia in 1782
C) Bank of the United States was chartered in Philadelphia in 1801
D) Bank of North America was chartered in New York in 1782
23) The federal regulatory agency responsible for regulating the activities of life
insurance companies is
A) the Federal Deposit Insurance Corporation
B) the Federal Reserve
C) the Federal Life Insurance Board
D) none of the above; there is no such federal regulatory agency
24) When stock prices become less volatile, the demand curve for bonds shifts to the
________ and the interest rate ________.
A) right; rises
B) right; falls
C) left; falls
D) left; rises
25) What factors are used in determining a person’s FICO score?
A) past payment history
B) outstanding debt
C) length of credit history
D) all of the above
26) Which of the following reasons explain why federal regulators adopted a policy of
regulatory forbearance toward insolvent financial institutions in the early 1980s?
A) The FSLIC lacked sufficient funds to cover insured deposits in the insolvent S&Ls
B) The regulators were reluctant to close the firms that justified their regulatory
existence
C) The Federal Home Loan Bank Board and the FSLIC were reluctant to admit that
they were in over their heads with problems
D) All of the above are reasons
E) Only A and B of the above are reasons
27) Since the stock market decline in 2000, the number of companies funded and the
total funds invested by venture capital firms have ________.
A) held steady
B) declined
C) increased slightly
D) increased sharply
28) Some automobile owners will drive faster knowing that they are covered by health
and automobile insurance. This behavior creates the problem of ________.
A) fraudulent claims
B) moral hazard
C) adverse selection
D) pecuniary purchases
29) An increase in the foreign interest rate shifts the expected return schedule for
________ deposits to the ________ and causes the domestic currency to depreciate.
A) domestic; right
B) domestic; left
C) foreign; right
D) foreign; left
30) If you buy an option to sell Treasury futures at 110, and at expiration the market
price is 115,
A) the call will be exercised
B) the put will be exercised
C) the call will not be exercised
D) the put will not be exercised
31) In which of the following situations would you prefer to be making a loan?
A) The interest rate is 9 percent and the expected inflation rate is 7 percent
B) The interest rate is 4 percent and the expected inflation rate is 1 percent
C) The interest rate is 13 percent and the expected inflation rate is 15 percent
D) The interest rate is 25 percent and the expected inflation rate is 50 percent
32) Futures differ from forwards because they are
A) used to hedge portfolios
B) used to hedge individual securities
C) used in both financial and foreign exchange markets
D) standardized contracts
33) A key finding of the economic analysis of financial structure is that
A) the existence of the free-rider problem for traded securities helps to explain why
banks play a predominant role in financing the activities of businesses
B) while free-rider problems limit the extent to which securities markets finance some
business activities, the majority of funds going to businesses are channeled through
securities markets
C) given the great extent to which securities markets are regulated, free-rider problems
are not of significant economic consequence in these markets
D) economists do not have a very good explanation for why securities markets are so
heavily regulated
34) The potential conflict of interest when a single accounting firm provides both
auditing and consulting services is that the firm can
A) charge higher fees to its audit clients and lower fees for its consulting services so it
can expand its consulting business
B) charge higher fees to its consulting clients and lower fees for its audit services so it
can expand its auditing business
C) provide unjustifiably favorable audit reviews for firms that are large clients for its
consulting services
D) pressure its clients into paying high fees for both auditing and consulting services
35) An advantage of providing multiple financial services within one financial
institution is that it
A) lowers information costs
B) develops broader long-term relationships with customers
C) both A and B of the above
D) none of the above
36) Which of the following statements concerning the mutual form of ownership of
savings banks are true?
A) The mutual form of ownership accentuates the principal-agent problem that exists in
corporations
B) More capital is available, contributing to the safety of mutual savings banks
compared to other banking organizations
C) Managers of mutual savings banks are more risk averse than in the corporate form,
because the value of their ownership does not increase if the firm does well
D) All of the above are true
E) Only A and B of the above are true
37) 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) all of the above be done
38) American firms became less competitive compared to foreign firms during the
1980s because
A) the quality and productivity of American workers declined
B) foreign firms were younger than American firms and as a result had more modern
facilities that made use of the latest technology
C) the U.S. dollar became worth more in terms of foreign currencies
D) the U.S. dollar became worth less in terms of foreign currencies
39) Savings and loan associations
A) were established by Congress to encourage home ownership
B) initially were not permitted to accept demand deposits
C) held about 85 percent of their assets in the form of mortgages prior to the Great
Depression
D) are all of the above
E) are only A and B of the above
40) An investor who puts all her funds into one asset ________ her portfolio’s
________.
A) increases; diversification
B) decreases; diversification
C) increases; average return
D) decreases; average return
41) Stock prices since the 1980s have been
A) relatively stable, trending upward at a steady pace
B) relatively stable, trending downward at a moderate rate
C) extremely volatile
D) unstable, trending downward at a moderate rate