1. A plot of the interest rates on default-free government bonds with different terms to maturity is called
(a) a yield curve
(b) a default-free curve
(c) an interest-rate curve
(d) A risk-structure-curve
2. The higher a securities price in the secondary market the ________ funds a firm can raise by selling securities in the ________ market.
(a) More; secondary
(b) Less ; secondary
(c) Less ; primary
(d) More ; primary
3. The U.S. banking system is considered to be a dual system because
(a) banks offer both checking and savings accounts
(b) It actually includes both banks and thrift institutions.
(c) It was established before the Civil War, requiring separate regulatory bodies for the North and South.
(d) It is regulated by both state and federal governments.
4. Keynes titled his famous book The General Theory of Employment, Interest and Money, suggesting that the case of an economy reaching long-term equilibrium at full-employment was just a special case that could incorporated into his general theory. He argued that it is possible for the economy to reach a long-run equilibrium at less than full employment, as occurred in the US in the 1930s. His theory, as it relates to countercyclical fiscal policy is controversial to this day. Interest in Keynes' theory was rekindled in the wake of the financial crisis of 2008. Discuss the US policy response to the 2008 financial crisis in terms of Keynesian theory, and how the US experience of The Great Depression informed the Fed's response in 2008-current. You may wish to include a discussion of fiscal policy as well.
5. The amount of assets per dollar of equity capital is called the
(a) equity ratio
(b) Equity multiplier
(c) Asset multiplier.
(d) Asset ratio.
6. Financial markets have the basic function of
(a) Assuring that the swings in the business cycle are less pronounced.
(b) Assuring that governments need never resort to printing money.
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(c) Getting people with funds to lend together with people who want to borrow funds.
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(d) Providing a risk-free repository of spending power.
7. When the interest rate is ________, ________ investments in physical capital will earn more than the cost of borrowed funds, so planned investment spending is ________.
(a) low; few; high
(b) high ; many ; high
(c) low ; many ; low
(d) high ; few ; low
(e) high ; few high
8. Which of the following would a bank not hold as insurance against the highest cost of deposit outflow-bank failure?
(a) Bank capital
(b) Mortgages
(c) Secondary reserves
(d) Excess reserves
9. Which of the following are true concerning the distinction between interest rates and returns?
(a) The return can be expressed as the sum of the discount yield and the rate of capital gains.
(b) The rate of return will be greater than the interest rate when the price of the bond falls between time t and time t + 1.
(c) The return can be expressed as the difference between the current yield and the rate of capital gains.
(d) The rate of return on a bond will not necessarily equal the interest rate on that bond.
10. According to the expectations theory of the term structure, the interest rate on a long-term bond will equal the ________ of the short-term interest rates that people expect to occur over the life of the long-term bond.
(a) Sum
(b) Difference
(c) Average
(d) multiple
11. Banks that actively manage liabilities will most likely meet a reserve shortfall by
(a) Calling in loans.
(b) Seeking new deposits.
(c) Borrowing federal funds
(d) Selling municipal bonds
12. Your bank has the following balance sheet: Assets Liabilities Reserves $ 50 million Checkable deposits $200 million Securities 50 million Loans 150 million Bank capital 50 million If the required reserve ratio is 10%, what actions should the bank manager take if there is an unexpected deposit outflow of $50 million?
13. If borrowers with the most risky investment projects seek bank loans in higher proportion to those borrowers with the safest investment projects, banks are said to face the problem of
(a) Adverse selection
(b) moral hazard
(c) Lemon lenders.
(d) Adverse credit risk.
14. The ________ traces out the points for which total quantity of goods produced equals total quantity of goods demanded.
(a) investment schedule
(b) IS curve
(c) LM curve
(d) consumption function
15. As the costs associated with deposit outflows ________, the banks willingness to hold excess reserves will ________.
(a) decrease; increase
(b) increase; increase
(c) increase; decrease
(d) decrease; not be affected
16. Of the following, which would be the first choice for a bank facing a reserve deficiency?
(a) Call in loans
(b) Borrow from the Fed
(c) Sell securities
(d) Borrow from other banks
17. Throughout the course it has been stressed that depository institutions, primarily banks. are especially important to the financial health of the communities they serve and that bank failures can have a major detrimental effect on local economies. This fact has formed the basis for the development of many US banking laws and regulations. One such regulation, the development of the FDIC is particularly important. Discuss some of the events that led to the FDIC and how it has affected the management of banks, the implementation of monetary policy and the issue of "moral hazard"
18. According to the liquidity premium theory of the term structure
(a) because buyers of bonds may prefer bonds of one maturity over another, interest rates on bonds of different maturities do not move together over time
(b) Because of the positive term premium, the yield curve will not be observed to be downward sloping.
(c) 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 term premium.
(d) The interest rate for each maturity bond is determined by supply and demand for that maturity bond.
19. Which of the following would not be a way to increase the return on equity?
(a) Buy back bank stock
(b) Acquire new funds by selling negotiable CDs and increase assets with them
(c) Sell more bank stock
(d) Pay higher dividends
20. A serious consequence of a financial crisis is
(a) a contraction in economic activity
(b) an increase in asset prices
(c) financial globalization
(d) financial engineering
21. If a bank has excess reserves greater than the amount of a deposit outflow, the outflow will result in equal reductions in
(a) Deposits and loans.
(b) deposits and reserves
(c) capital and reserves
(d) capital and loans
22. The classical economists' conclusion that nominal income is determined by movements in the money supply rested on their belief that ________ could be treated as ________ in the short run
(a) money; variable
(b) money; constant
(c) velocity; variable
(d) velocity; constant
23. A bond with default risk will always have a ________ risk premium and an increase in its default risk will ________ the risk premium.
(a) negative; raise
(b) negative; lower
(c) positive; raise
(d) positive; lower
24. Empirical evidence shows that the quantity theory of money is a good theory of inflation
(a) in the short run, but not in the long run
(b) in both the long run and the short run
(c) not in either the long run nor the short run
(d) in the long run, but not in the short run
25. Asset transformation can be described as
(a) borrowing short and lending long
(b) borrowing and lending for the long term
(c) borrowing long and lending short
(d) borrowing and lending only for the short term
26. Keynes hypothesized that the speculative component of money demand was primarily determined by the level of
(a) stock market prices
(b) income
(c) interest rates
(d) velocity
27. Conditions that likely contributed to a credit crunch during the global financial crisis include:
(a) increases in reserve requirements
(b) falling interest rates that raised interest rate risk, causing banks to choose to hold more capital
(c) capital shortfalls caused in part by falling real estate prices
(d) Regulated hikes in bank capital requirements.
28. 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) the discount loan decreased
(b) most of it just flowed into holdings of excess reserve
(c) the Fed also increased the required reserve ratio
(d) the Fed also conducted open market sales
29. Explain the Keynesian theory of money demand. What motives did Keynes think determined money demand? What are the two reasons why Keynes thought velocity could not be treated as a constant?
30. The ________ of a coupon bond and the yield to maturity are inversely related
(a) Term
(b) par value
(c) price
(d) maturity date
31. When bad storms slow the check-clearing process, float tends to ________ causing the Fed to initiate ________ open market ________.
(a) decrease; defensive; sales
(b) increase; defensive; sales
(c) increase; dynamic; purchases
(d) decrease; dynamic; purchases
32. From before the financial crisis began in September of 2007 to when the crisis was over at the end of 2009, amount of Federal Reserve assets rose, leading to
(a) a huge expansion of the money supply
(b) a high inflation
(c) a huge increase in the monetary base
(d) an economic expansion
33. Monetary aggregates are
(a) never redefined since "money" never changes
(b) measures of the money supply reported by the Federal Reserve
(c) measures of the wealth of individuals.
(d) reported by the Treasury Department annuallyIn the early 1930s, the currency ratio rose, as did the level of excess reserves. Money supply analysis predicts that, everything else held constant, the money supply should have
34.
(a) Fallen
(b) remain unchanged
(c) risen
(d) either risen, fallen, or remain unchanged
35. The Keynesian theory of money demand predicts that people will increase their money holdings if they believe that
(a) bond prices are about to rise
(b) interest rates are about to fall
(c) bond prices are about to fall
(d) expected inflation is about to fall