1) Bank failure is less likely to occur when a bank
A) holds less in U.S. government securities
B) suffers large deposit outflows
C) holds more excess reserves
D) has less bank capital
2) Member commercial banks have purchased stock in their district Fed banks; the
dividend paid by that stock is limited to
A) four percent annually
B) five percent annually
C) six percent annually
D) eight percent annually
3) (I) The total cost of carrying out a transaction in financial markets increases
proportionally with the size of the transaction.
(II) Financial intermediaries facilitate diversification when an investor has only a small
sum to invest.
A) (I) is true; (II) false
B) (I) is false; (II) true
C) Both (I) and (II) are true
D) Both (I) and (II) are false
4) Evidence in favor of market efficiency includes
A) performance of investment analysts and mutual funds
B) whether stock prices reflect publicly available information
C) the random-walk behavior of stock prices
D) all of the above
5) The theory of purchasing power parity is a theory of how exchange rates are
determined in
A) the long run
B) the short run
C) both A and B of the above
D) none of the above
6) If your noncompetitive bid for a Treasury bill is successful, then you will
A) certainly pay less than if you had submitted a competitive bid
B) certainly pay more than if you had submitted a competitive bid
C) pay the average of prices offered in other noncompetitive bids
D) pay the same as other successful noncompetitive bidders
7) If a bank has a duration gap of 2 years, then a rise in interest rates from 6 percent to 9
percent will lead to
A) a rise in the market value of its net worth of 5.66 percent
B) a rise in net interest income of 5.66 percent
C) a fall in the market value of its net worth of 5.66 percent
D) a fall in net interest income of 5.66 percent
E) an unknown change
8) The theory of purchasing power parity cannot fully explain exchange rate
movements because
A) not all goods are identical in different countries
B) monetary policy differs across countries
C) some goods are not traded between countries
D) both A and C of the above
E) both B and C of the above
9) The free-rider problem
A) occurs when people who do not pay for information take advantage of the
information other people have to pay for
B) suggests that the private sale of information will only be a partial solution to the
lemons problem
C) prevents the private market from producing enough information to eliminate all the
asymmetric information that leads to adverse selection
D) all of the above
10) The legislation that separated commercial banking from the securities industry is
known as the ________.
A) National Bank Act
B) Federal Reserve Act
C) Glass-Steagall Act
D) McFadden Act
11) Ways in which bank regulations reduce the adverse selection and moral hazard
problems in banking include
A) a chartering process designed to prevent crooks from getting control of a bank
B) restrictions that prevent banks from acquiring certain risky assets, such as common
stocks
C) high bank capital requirements to increase the cost of bank failure to the owners
D) all of the above
E) only A and B of the above
12) According to the expectations theory of the term structure,
A) the interest rate on long-term bonds will exceed the average of expected future
short-term interest rates
B) interest rates on bonds of different maturities move together over time
C) buyers of bonds prefer short-term to long-term bonds
D) all of the above
E) only A and B of the above
13) Which of the following statements about Treasury inflation-indexed bonds is not
true?
A) The principal amount used to compute the interest payment varies with the
consumer price index
B) The interest payment rises when inflation occurs
C) The interest rate rises when inflation occurs
D) At maturity, the securities pay the greater of face value or inflation-adjusted
principal
14) A bank fails when the value of its ________ falls below the value of ________,
causing the bank to become insolvent.
A) reserves; required reserves
B) loans; secondary reserves
C) securities; deposit liabilities
D) assets; liabilities
15) Which of the following is not an entity of the Federal Reserve System?
A) Federal Reserve banks
B) The FDIC
C) The Board of Governors
D) The Federal Advisory Council
E) Member commercial banks
16) The riskiest capital market security is
A) preferred stock
B) common stock
C) corporate bonds
D) Treasury bonds
17) The sources of venture capital funding have
A) shifted from wealthy individuals to pension funds and corporations
B) shifted from pension funds and corporations to wealthy individuals
C) decreased since 1990
D) done none of the above
18) When the potential borrowers who are the most likely to default are the ones most
actively seeking a loan, ________ is said to exist.
A) asymmetric information
B) adverse selection
C) moral hazard
D) fraud
19) Financial intermediaries can substantially reduce transaction costs per dollar of
transactions because their large size allows them to take advantage of
A) poorly informed consumers
B) standardization
C) economies of scale
D) their market power
20) Adverse selection and moral hazard problems increased in magnitude during the
early years of the Great Depression as
A) stock prices declined to 10 percent of their levels in 1929
B) banks failed
C) the aggregate price level declined
D) a result of all of the above
E) a result of A and B of the above
21) The main center of the Eurodollar market is ________.
A) London
B) Basel
C) Paris
D) New York
22) The purpose of diversification is to
A) reduce the volatility of a portfolio’s return
B) raise the volatility of a portfolio’s return
C) reduce the average return on a portfolio
D) raise the average return on a portfolio
23) Which is the least costly way for a bank to handle deposit outflows?
A) Hold excess reserves
B) Borrow from other banks
C) Sell securities
D) Call in loans
24) According to the liquidity premium theory of the term structure,
A) the interest rate on long-term bonds will equal an average of short-term interest rates
that people expect to occur over the life of the long-term bonds plus a liquidity
premium
B) buyers of bonds may prefer bonds of one maturity over another, yet interest rates on
bonds of different maturities move together over time
C) even with a positive liquidity premium, if future short-term interest rates are
expected to fall significantly, then the yield curve will be downward-sloping
D) all of the above
E) only A and B of the above
25) Which of the following are true statements about the Bretton Woods system?
A) The Bretton Woods system was a flexible exchange rate regime, in which central
banks allowed their currencies to float within a wide trading band
B) The U.S. dollar was called a reserve currency because it was used to denominate the
securities central banks held as international reserves
C) The Bretton Woods agreement broke down in 1945
D) Only A and B of the above are true
26) When the federal government’s budget deficit decreases, the ________ curve for
bonds shifts to the ________.
A) demand; right
B) demand; left
C) supply; left
D) supply; right
27) The newest central bank, which began operations in January 1999, is the
A) European Central Bank
B) Bank of Argentina
C) Bank of Korea
D) Bank of New Zealand
28) The increased integration of financial markets across countries and the need to
make the playing field equal for banks from different countries led to the Basel Accord
agreement to
A) standardize bank capital requirements internationally
B) reduce, across the board, bank capital requirements in all countries
C) sever the link between risk and capital requirements
D) do all of the above
29) A central bank sale of ________ to purchase ________ in the foreign exchange
market results in an equal rise in its international reserves and the monetary base.
A) foreign assets; domestic currency
B) foreign assets; foreign currency
C) domestic currency; foreign assets
D) domestic currency; domestic currency
30) When the inflation rate is expected to increase, the real cost of borrowing declines
at any given interest rate; as a result, the ________ bonds increases and the ________
curve shifts to the right.
A) demand for; demand
B) demand for; supply
C) supply of; demand
D) supply of; supply