1) The total amount of required reserves in the banking system is equal to the ________
the required reserve ratio and checkable deposits.
A) sum of
B) difference between
C) product of
D) ratio between
2) Members of Congress are able to influence monetary policy, albeit indirectly,
through their ability to
A) withhold appropriations from the Board of Governors
B) withhold appropriations from the Federal Open Market Committee
C) propose legislation that would force the Fed to submit budget requests to Congress,
as must other government agencies
D) instruct the General Accounting Office to audit the foreign exchange market
functions of the Federal Reserve
3) A major disruption in financial markets characterized by sharp declines in asset
prices and firm failures is called a
A) financial crisis
B) fiscal imbalance
C) free-rider problem
D) “lemons” problem
4) American companies can borrow funds
A) only in U.S. financial markets
B) only in foreign financial markets
C) in both U.S. and foreign financial markets
D) only from the U.S. government
5) The current supervisory practice toward risk management
A) focuses on the quality of a bank’s balance sheet
B) determines whether capital requirements have been met
C) evaluates the soundness of a bank’s risk-management process
D) focuses on eliminating all risk
6) To be considered well capitalized, a bank’s leverage ratio must exceed
A) 10%
B) 8%
C) 5%
D) 3%
7) The principal-agent problem that exists for bank trading activities can be reduced
through
A) creation of internal controls that combine trading activities with bookkeeping
B) creation of internal controls that separate trading activities from bookkeeping
C) elimination of regulation of banking
D) elimination of internal controls
8) In the 1950s the interest rate on three-month Treasury bills fluctuated between 1
percent and 3.5 percent; in the 1980s it fluctuated between ________ percent and
________ percent.
A) 5; 15
B) 4; 11.5
C) 4; 18
D) 5; 10
9) According to the liquidity premium theory, a yield curve that is flat means that
A) bond purchasers expect interest rates to rise in the future
B) bond purchasers expect interest rates to stay the same
C) bond purchasers expect interest rates to fall in the future
D) the yield curve has nothing to do with expectations of bond purchasers
10) If Treasury deposits at the Fed are predicted to fall, the manager of the trading desk
at the New York Fed bank will likely conduct ________ open market operations to
________ reserves.
A) defensive; inject
B) defensive; drain
C) dynamic; inject
D) dynamic; drain
11) An increase in the time to the promised future payment ________ the present value
of the payment.
A) decreases
B) increases
C) has no effect on
D) is irrelevant to
12) The evidence from banking crises in other countries indicates that
A) deposit insurance is to blame in each country
B) a government safety net for depositors need not increase moral hazard
C) regulatory forbearance never leads to problems
D) deregulation combined with poor regulatory supervision raises moral hazard
incentives
13) On January 25, 2009, one U.S. dollar traded on the foreign exchange market for
about 49.0 Indian rupees. Thus, one Indian rupee would have purchased about
________ U.S. dollars.
A) 0.02
B) 1.20
C) 7.00
D) 49.0
14) The management of money and interest rates is called ________ policy and is
conducted by a nation’s ________ bank.
A) monetary; superior
B) fiscal; superior
C) fiscal; central
D) monetary; central
15) Since they require less monitoring of firms, ________ contracts are used more
frequently than ________ contracts to raise capital.
A) debt; equity
B) equity; debt
C) debt; loan
D) equity; stock
16) U.S. banks have most of their 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
17) The theory of rational expectations, when applied to financial markets, is known as
A) monetarism
B) the efficient markets hypothesis
C) the theory of strict liability
D) the theory of impossibility
18) When compared to the Fed’s ________ anchor approach, ________ targeting can
make the institutional framework for the conduct of monetary policy more consistent
with democratic principles.
A) nominal; inflation
B) implicit; monetary
C) nominal; monetary
D) implicit; inflation
19) Foreign exchange rate stability is important because a decline in the value of the
domestic currency will ________ the inflation rate, and an increase in the value of the
domestic currency makes domestic industries ________ competitive with competing
foreign industries.
A) increase; more
B) increase; less
C) decrease; more
D) decrease; less
20) Adverse selection is a problem associated with equity and debt contracts arising
from
A) the lender’s relative lack of information about the borrower’s potential returns and
risks of his investment activities
B) the lender’s inability to legally require sufficient collateral to cover a 100% loss if
the borrower defaults
C) the borrower’s lack of incentive to seek a loan for highly risky investments
D) the borrower’s lack of good options for obtaining funds
21) The demand for Picasso paintings rises (holding everything else equal) when
A) stocks become easier to sell
B) people expect a boom in real estate prices
C) Treasury securities become riskier
D) people expect gold prices to rise
22) Everything else held constant, in the market for reserves, when the federal funds
rate is 3%, lowering the discount rate from 5% to 4%
A) lowers the federal funds rate
B) raises the federal funds rate
C) has no effect on the federal funds rate
D) has an indeterminate effect on the federal funds rate
23) What makes the Federal Reserve so unique compared to other central banks around
the world is its
A) centralized structure
B) decentralized structure
C) regulatory functions
D) monetary policy functions
24) Regarding central bank independence,
A) the Fed is more independent than the European Central Bank
B) the European Central Bank is more independent than the Fed
C) the trend in industrialized nations has been to reduce central bank independence
D) the Bank of England has the longest tradition of independence of any central bank in
the world
25) If the required reserve ratio is 15 percent, currency in circulation is $400 billion,
checkable deposits are $800 billion, and excess reserves total $0.8 billion, then the M1
money multiplier is
A) 2.5
B) 1.67
C) 2.3
D) 0.651
26) When talking about a coupon bond, face value and ________ mean the same thing.
A) par value
B) coupon value
C) amortized value
D) discount value
27) Banks face the problem of ________ in loan markets because bad credit risks are
the ones most likely to seek bank loans.
A) adverse selection
B) moral hazard
C) moral suasion
D) intentional fraud
28) ________ is the relative ease and speed with which an asset can be converted into a
medium of exchange.
A) Efficiency
B) Liquidity
C) Deflation
D) Specialization