1) If the dollar depreciates relative to the Swiss franc,
A) Swiss chocolate will become more expensive in the United States
B) American computers will become less expensive in Switzerland
C) Swiss chocolate will become cheaper in the United States
D) both A and B of the above will happen
2) An instruction to a securities agent to sell a stock when it reaches a specific price is a
________.
A) short sell
B) market order
C) limit order
D) stop loss order
3) An important financial institution that assists in the initial sale of securities in the
primary market is the
A) investment bank
B) commercial bank
C) stock exchange
D) brokerage house
4) An open market purchase of securities by the Fed will
A) increase assets of the nonbank public and increase assets of the banking system
B) decrease assets of the nonbank public and increase assets of the Fed
C) decrease assets of the banking system and increase assets of the Fed
D) have no effect on assets of the nonbank public but increase assets of the Fed
E) increase assets of the banking system and decrease assets of the Fed
5) An argument that supports the view that the world needs an international lender of
last resort such as the IMF is that
A) central banks in emerging-market countries lack credibility as inflation fighters
B) an international lender of last resort creates a safety net that protects bank depositors
C) the IMF is slow to lend, which ultimately reduces the amount that must be borrowed
D) the IMF imposes requirements that borrowing countries must enact microeconomic
policies to reform their financial systems
6) The possibility that the failure of one bank can hasten the failure of other banks is
called the
A) bank run effect
B) moral hazard effect
C) contagion effect
D) adverse selection effect
7) Negotiable certificates of deposit
A) are bearer instruments because their holders earn the interest and principal at
maturity
B) typically have a maturity of one to four months
C) are usually denominated at $100,000
D) are all of the above
E) are only A and B of the above
8) Which of the following statements are true of Treasury bills?
A) The market for Treasury bills is extremely deep and liquid
B) Occasionally, investors find that earnings on T-bills do not compensate them for
changes in purchasing power due to inflation
C) By volume, most Treasury bills are sold to individuals who submit noncompetitive
bids
D) All of the above are true
E) Only A and B of the above are true
9) If the Fed uses nonborrowed reserves, a reserve aggregate, as a target, fluctuations in
the reserves demand curve will cause ________ to fluctuate.
A) nonborrowed reserves
B) the federal funds interest rate
C) monetary aggregates
D) the inflation rate
10) What is the return on a 5 percent coupon bond that initially sells for $1,000 and
sells for $1,200 one year later?
A) 5 percent
B) 10 percent
C) -5 percent
D) 25 percent
E) None of the above
11) If the Fed’s strategy for conducting monetary policy is thought of as a game plan
that proceeds in stages, then the game plan can be summarized as follows:
A) The Fed selects its policy goals, then the intermediate targets consistent with
achieving its policy goals, then the operating targets consistent with its intermediate
targets. Finally, it adjusts its policy tools to effect the desired targets and goals
B) The Fed selects its policy goals, then the operating targets consistent with achieving
its policy goals, then the intermediate targets consistent with its operating targets.
Finally, it adjusts its policy tools to effect the desired targets and goals
C) The Fed selects its policy goals, then the intermediate targets consistent with
achieving its policy goals, then the policy tools consistent with its intermediate targets.
Finally, it adjusts its operating targets to effect the desired targets and tools
D) The Fed selects its policy tools, then the operating targets consistent with achieving
its policy tools, then the intermediate targets consistent with its operating targets.
Finally, it adjusts its policy goals to effect the desired targets and tools
E) None of the above
12) A central bank ________ of domestic currency and corresponding ________ of
foreign assets in the foreign exchange market leads to an equal ________ in its
international reserves and the monetary base.
A) sale; purchase; decline
B) sale; sale; increase
C) purchase; sale; increase
D) purchase; sale; decline
13) U.S. banks have most of their foreign branches in
A) Latin America, the Far East, the Caribbean, and London
B) Latin America, the Middle East, the Caribbean, and London
C) Mexico, the Middle East, the Caribbean, and London
D) South America, the Middle East, the Caribbean, and Canada
14) U.S. dollars deposited in foreign banks outside the United States or in foreign
branches of U.S. are referred to as
A) Eurodollars
B) Eurocurrencies
C) Eurobonds
D) foreign bonds
15) Banks’ attempts to solve adverse selection and moral hazard problems help explain
loan management principles such as
A) screening and monitoring of loan applicants
B) collateral and compensating balances
C) credit rationing
D) all of the above
E) only A and B of the above
16) (I) The primary issuers of capital market securities are financial institutions.
(II) The largest purchasers of capital market securities are corporations.
A) (I) is true, (II) false
B) (I) is false, (II) true
C) Both are true
D) Both are false
17) The buyers of private placement issues are most likely to be ________.
A) insurance companies
B) pension funds
C) investment banks
D) all of the above
E) only A and B of the above
18) Regulators attempt to reduce the riskiness of banks’ asset portfolios by
A) limiting the amount of loans in particular categories or to individual borrowers
B) prohibiting banks from holding risky assets such as common stocks
C) establishing a minimum interest rate floor that banks can earn on certain assets
D) doing all of the above
E) doing only A and B of the above
19) The primary reason that individuals and firms choose to borrow long-term is to
reduce the risk that interest rates will ________ before they pay off their debt.
A) rise
B) fall
C) become more volatile
D) become more stable
20) The theory of purchasing power parity cannot fully explain exchange rate
movements because
A) all goods are identical even if produced in different countries
B) monetary policy differs across countries
C) some goods are not traded between countries
D) fiscal policy differs across countries
21) Because managers (________) have less incentive to maximize profits than the
stockholders-owners (________) do, stockholders find it costly to monitor managers;
thus, stockholders are reluctant to purchase equities.
A) principals; agents
B) principals; principals
C) agents; agents
D) agents; principals
22) The most important developments that have reduced banks’ income advantages in
the past twenty years include
A) the growth of the commercial paper market
B) the growth of the junk bond market
C) the growth of securitization
D) all of the above
E) only A and B of the above
23) When bad drivers line up to purchase collision insurance, automobile insurers are
subject to the
A) moral hazard problem
B) adverse selection problem
C) assigned risk problem
D) ill queue problem
24) Net profit after taxes per dollar of equity capital is a basic measure of bank
profitability called
A) return on assets
B) return after taxes
C) return on equity
D) equity multiplier
25) Which of the following is not true regarding the Basel 2 proposal to reform the
original 1988 Basel Accord?
A) It attempts to link capital requirements more closely to actual risk by expanding the
number of risk categories
B) It focuses on assessing the quality of risk management in banking institutions
C) It attempts to improve market discipline by requiring increased disclosure of
pertinent information about banks
D) It has been well received by banks and national regulatory agencies
26) If income tax rates rise, then
A) the prices of municipal bonds will fall
B) the prices of Treasury bonds will rise
C) the interest rate on Treasury bonds will rise
D) the interest rate on municipal bonds will rise
27) Which of the following are true statements concerning bank holding companies?
A) Bank holding companies own almost all large banks
B) Bank holding companies have experienced dramatic growth in the past twenty-five
years
C) Through a loophole in the McFadden Act, bank holding companies have
successfully evaded interstate branching restrictions
D) All of the above are true
E) Only A and B of the above are true
28) Consumer finance companies typically make loans to consumers who
A) prefer to avoid the regulatory environment at a bank
B) cannot obtain credit otherwise due to low income or poor credit
C) Both A and B of the above are correct
D) Neither A nor B of the above are correct
29) What is the bookkeeping system for recording all receipts and payments that have a
direct bearing on the movement of funds between a nation and foreign countries?
A) current account
B) capital account
C) balance of payments
D) trade balance
30) If a corporation begins to suffer large losses, then the default risk on its bonds will
________ and the equilibrium interest rate on these bonds will ________.
A) increase; decrease
B) decrease; increase
C) increase; increase
D) decrease; decrease
31) Which of the following categories is not part of the Dodd-Frank legislation of
2010?
A) capital requirements
B) consumer protection
C) “Volcker Rule”
D) derivatives
32) When a reserve currency country runs a balance of payments deficit and a
nonreserve currency country buys the reserve currency to finance the reserve country’s
deficits, the monetary base in the nonreserve country ________ and the monetary base
in the reserve country ________.
A) increases; decreases
B) increases; does not change
C) decreases; does not change
D) decreases; increases
33) Which bank regulatory agency has the sole regulatory authority over bank holding
companies?
A) the Federal Deposit Insurance Corporation
B) the Comptroller of the Currency
C) the Federal Bank Holding Company Agency
D) the Federal Reserve System
34) The return on a 10 percent coupon bond that initially sells for $1,000 and sells for
$900 one year later is
A) -10 percent
B) -5 percent
C) 0 percent
D) 5 percent
35) If the interest rates on all bonds rise from 5 to 6 percent over the course of the year,
which bond would you prefer to have been holding?
A) A bond with one year to maturity
B) A bond with five years to maturity
C) A bond with ten years to maturity
D) A bond with twenty years to maturity