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1) A financial crisis occurs when an increase in asymmetric information from a
disruption in the financial system
A) causes severe adverse selection and moral hazard problems that make financial
markets incapable of channeling funds efficiently
B) allows for a more efficient use of funds
C) increases economic activity
D) reduces uncertainty in the economy and increases market efficiency
2) If interest rates rise by 5 percentage points, say, from 10 to 15%, bank profits
(measured using gap analysis) will
A) decline by $05 million
B) decline by $15 million
C) decline by $25 million
D) increase by $15 million
3) From before the financial crisis began in September of 2007 to when the crisis was
over at the end of 2009, the huge expansion in the Fed's balance sheet and the monetary
base did not result in a large increase in monetary supply because
A) most of it just flowed into holdings of excess reserve
B) the Fed also increased the required reserve ratio
C) the Fed also conducted open market sales
D) the discount loan decreased
4) If the banking system has a large amount of reserves, many banks will have excess
reserves to lend and the federal funds rate will probably ________; if the level of
reserves is low, few banks will have excess reserves to lend and the federal funds rate
will probably ________
A) fall; fall
B) fall; rise
C) rise; fall
D) rise; rise
5) In which of the following situations would you prefer to be the lender?
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
6) The riskiness of an asset's returns due to changes in interest rates is
A) exchange-rate risk
B) price risk
C) asset risk
D) interest-rate risk
7) Newly-issued high-yield bonds rated below investment grade by the bond-rating
agencies are frequently referred to as
A) municipal bonds
B) Yankee bonds
C) "fallen angels"
D) junk bonds
8) If the Japanese yen appreciates from $001 per yen to $002 per yen, the US dollar
depreciates from ________ per dollar to ________ per dollar
A) 100; 50
B) 10; 5
C) 5; 10
D) 50; 100
9) The theory of bureaucratic behavior suggests that the objective of a bureaucracy is to
maximize
A) the public's welfare
B) profits
C) its own welfare
D) conflict with the executive and legislative branches of government
10) The financing of government spending by issuing debt
A) causes both reserves and the monetary base to rise
B) causes both reserves and the monetary base to decline
C) causes reserves to rise, but the monetary base to decline
D) has no net effect on the monetary base
11) Which of the following is a depository institution?
A) A life insurance company
B) A credit union
C) A pension fund
D) A mutual fund
12) One reason China has been able to grow so rapidly even though its financial
development is still in its early stages is
A) the high savings rate of around 40%
B) the shift of labor to the agricultural sector
C) the stringent enforcement of financial contracts
D) the ease of obtaining high-quality information about creditors
13) Of the four sources of external funding for nonfinancial businesses, the least often
used in the US is
A) bank loans
B) nonbank loans
C) bonds
D) stock
14) A capital ________ can promote financial instability in an emerging-market country
because it is what forces a country to ________ its currency
A) inflow; devalue
B) inflow; revalue
C) outflow; devalue
D) outflow; revalue
