Questions:
Question 1
Many economists believe
the Fed could have reduced the severity of the Great Depression by encouraging banks to make fewer loans to insolvent businesses.
bank failures increased the severity of the Great Depression.
the severity of the Great Depression and the policies of the Fed were unrelated.
the Fed could have reduced the severity of the Great Depression by raising interest rates.
Question 2
Geographic restrictions on banks
reduce the amount of local lending they undertake.
reduce their exposure to credit risk.
reduce their ability to take advantage of economies of scale.
raise the costs of their providing risk-sharing, liquidity, and information services.
Question 3
Noise traders
trade only when they have inside information.
tend to make higher returns than do "buy-and-hold" investors.
tend to lose money on stock trades, but help to stabilize the market.
create additional risk in the market.
Question 4
As of 2006, about how many banks were there in the United States?
7500
14,000
57
2000
Question 5
A specialist is
a tax lawyer at a securites firm.
a broker-dealer on the floor of the New York Stock Exchange.
a securities firm that deals in only one type of security.
an accountant trained in securities law.
Question 6
Financial intermediaries are able to exploit economies of scale since
they have special licenses needed to perform financial transactions.
they can reduce transactions cost, but not information costs.
financial markets fail to do so.
the equipment or expertise necessary for one transaction can be applied to other transactions.
Question 7
When interest rates in the bond market rise,
adverse selection problems increase.
moral hazard problems increase.
moral hazard problems are mitigated.
adverse selection problems are mitigated.
Question 8
SEC Rule 415
fixes the fees that may be charged by underwriters.
eliminates the requirement that short-term securities be underwritten.
allows firms to wait as long as two years before selling a newly registered security.
requires underwriters to invest their own funds in the firms whose securities they are underwriting.
Question 9
Savers cannot know the true health of banks because
banks have private information about their loan portfolios.
bank balance sheets are kept confidential for competitive reasons.
bank officials are barred by government regulation from divulging to the public details of their loan portfolios.
bank finance is too complicated for most savers to understand.
Question 10
A loan officer uses a credit scoring system to
keep track of the fraction of a bank's assets tied up in loans to a single individual or business.
match any particular loan with the deposits being used to fund it.
compare the interest rate on a loan to interest rates on other assets with comparable risk.
predict statistically whether an individual is likely to default on a loan.
Question 11
Electronic communications networks (ECNs) are
systems for communicating financial information to private investors over the Internet.
stock-trading systems that rely on computer software to match buy and sell orders.
systems for private investors to communicate buy and sell orders to their brokers.
systems by which the government is able to monitor securities trades for possibly fraudulent activities.
Question 12
The free-rider problem faced by private information-collection firms results in their
being plagued by lawsuits.
charging fees higher than can be justified by market conditions.
collecting less than all the available information about the firms they investigate.
usually going out of business within a few years.
Question 13
Economies of scale are
decreases in information costs that occur as transactions costs increase.
charges to savers and borrowers imposed by banks in exchange for reducing transactions costs.
the reduction in costs per unit that accompanies an increase in volume.
decreases in transactions costs that occur as information costs increase.
Question 14
The "lemons problem" in the used car market arises from
the reluctance of many car dealers to handle used cars.
the difficulty U.S. producers have in making reliable cars.
the tendency of buyers of used cars to pay for them with bad checks.
the difficulty buyers have in distinguishing good cars from lemons.
Question 15
The small-firm effect
shows that investments in the stocks of small firms would have earned a below-normal return during the period beginning in the mid-1920s.
may be the result of the low liquidity and high information costs of small-firm stock.
was stronger during the 1980s than in previous decades.
existed only during the 1970s and 1980s.
Question 16
When market participants have rational expectations,
they are less likely to make accurate forecasts than if they have adaptive expectations.
they only slowly adjust their expectations to news which could affect prices or returns.
they are able to forecast interest rates more accurately than inflation rates.
they use all information available to them.
Question 17
Unsecured loans between banks are called
federal funds.
repos.
repurchase agreements.
discount loans.
Question 18
During the 1980s banks lost loan business to
the commercial paper market.
the Eurodollar market.
the savings-and-loan industry.
the corporate bond market.
Question 19
Which of the following statements about branching restrictions on banks is true?
Restrictions on branching are greater currently than they were in the mid-1970s.
Restrictions on branching are much weaker currently than they were in the 1970s.
Superregional banks exist only in the West.
Several large banks now have branches in every state.
Question 20
An important private arrangement to deal with bank runs during the pre-Federal Reserve period was called
Check Clearing, Inc.
the Bank Loan Fund.
the New York Clearing House.
the Federal Funds Market.
Question 21
Historically, commercial banks have dominated the short-term credit market by issuing commercial paper.
being willing to pay whatever rate is necessary to attract deposits.
specializing in reducing information costs.
maintaining only short-term relationships with borrowers.
Question 22
Bank holding companies are supervised by
the Federal Reserve System.
the Office of Thrift Supervision.
state banking authorities in the state in which the holding company is chartered.
the Office of the Comptroller of the Currency.
Question 23
From 1863 to 1914, which banks issued bank notes?
Only Federal Reserve banks
Only national banks
Only state banks
Both state and national banks
Question 24
Evidence from the U.S. economy following the stock market crash of 1987 indicates that eliminating program trading has greatly decreased the volatility of the market.
specialists should no longer be allowed to control stock trading on the New York Stock Exchange.
futures trading significantly destabilizes the economy.
the crash had little impact on consumption or investment spending.
Question 25
Symmetric information
means that savers and borrowers have the same information.
is true only in efficient markets.
holds under the assumption of rational expectations.
is the same as perfect information.
Question 26
The Competitive Equality Banking Act of 1987
made bank holding companies illegal.
mandated that banks charge the same interest rate to all customers receiving a particular type of loan.
forbade the opening of additional nonbank banks.
made branching across state lines legal.
Question 27
For Japanese firms, since 1980 the share of external funds raised by bank borrowing has
remained the same.
risen until 1985 and fallen after 1985.
risen.
fallen.
Question 28
Concern for the health of banking institutions has focused on
reckless, but not fraudulent, investments by bank officers.
information problems and liquidity risk.
fraud by bank officers.
interest rate risk.
Question 29
The use of floating-rate debt will not entirely eliminate a bank's exposure to interest rate risk because
a rise in interest rates might increase the default risk of borrowers.
the value of the bank's liabilities will still be affected more than the value of the bank's assets by changes in interest rates.
Federal Reserve regulations limit the amount of floating-rate debt a bank may have.
the value of the bank's assets will still be affected more than the value of the bank's liabilities by changes in interest rates.
Question 30
If Pe is the expectation of an asset's price forecast and Pf is the optimal forecast of the asset's price, then if market participants have rational expectations
Pe > Pf.
Pe = Pf.
Pe < Pf.
There is no necessary relationship between Pe and Pf.
Question 31
The loss of business to the commercial paper market that banks have suffered has been particularly damaging because most of the lost business was from
high-quality borrowers.
foreign borrowers.
low-quality borrowers.
local municipalities.
Question 32
Which of the following will NOT result in an asset having a high price today in an efficient market?
It has a high interest rate.
It is not very risky.
It is expected to have high returns.
It is expected to rise in value in the future.
Question 33
Anticompetitive restrictions on banks generally result in
a passive attitude on the part of bank managers as they realize attempts to compete vigorously have been closed off.
the persistence of traditional ways of doing things.
a stifling of innovation.
an increase in innovation and competition.
Question 34
A national bank is subject to examination by which of the following?
Securities and Exchange Commission
Federal Reserve
Office of the Comptroller of the Currency
FDIC
Question 35
A firm's agents are its
management.
customers.
shareholders.
marketing department.
Question 36
During the early 1980s, Congress relaxed restrictions on the asset holdings of S&Ls by allowing them to hold all of the following EXCEPT
corporate stock.
junk bonds.
commercial mortgages.
direct real estate investments.
Question 37
SEC Rule 415
requires firms to sell an issue within two months of registering it with the SEC.
decreased competition among security underwriters.
led to underwriters taking positions in bonds on their own account.
requires firms to choose an underwriter before registering a security.
Question 38
What do many analysts see finance companies as having an advantage in?
In purchasing commercial paper
In charging consumers particularly low interest rates
In monitoring the value of collateral
In selling long-term securities
Question 39
States that restrict banks to having a single branch are said to require
nonbank banking.
unit banking.
mono banking.
semi-banking.
Question 40
Banks make use of the federal funds market in part to
deal with moral hazard.
pay their tax liabilities.
manage liquidity risk.
deal with adverse selection.
Question 41
When was the Free Banking Period?
1863-1914
1914-1990
1836-1863
1791-1836
Question 42
What percentage of commercial bank deposits are held by bank holding companies?
90%
75%
25%
5%
Question 43
The Federal Deposit Insurance Corporation Improvement Act of 1991
introduced a system of coinsurance for deposit insurance.
eliminated the too-big-to-fail doctrine.
abolished the FSLIC.
Authorized risk-based deposit insurance premiums.
Question 44
All of the following are examples of borrowings by a bank EXCEPT
commercial loans.
federal funds.
repurchase agreements.
discount loans.
Question 45
If traders in a market have rational expectations, then
they make use of less information than they would if they had adaptive expectations.
prices of riskier assets are higher than prices of less risky assets.
the price of an asset equals its fundamental value.
past prices of assets do not affect market participants' expectations of future asset prices.
Question 46
Which of the following is NOT a bank liability?
CDs
Checkable deposits
Borrowings from the Federal Reserve
Mortgage loans
Question 47
When market participants have rational expectations, the deviation of the expected price from the actual future price is
not predictable.
zero.
predictable, provided all relevant information is made use of.
predictable under certain circumstances, but not under others.
Question 48
If market participants rely only past stock prices to forecast future stock prices,
they will be better able to forecast future price decreases than future price increases.
they will be better able to forecast future price increases than future price decreases.
they have adaptive expectations.
they have rational expectations.
Question 49
Banks earn a profit by
holding large equity positions in major corporations.
publishing ratings of corporate bonds.
charging savers and borrowers fees for reducing transactions costs.
holding large equity positions in small firms.
Question 50
In an efficient market, the market price of an asset
In an efficient market, the market price of an asset
You Answered
reflects the returns the asset has been earning previously.
Correct Answer
equals the present value of expected future returns.
is largely determined on the demand side, because the supply of assets in such markets is generally fixed.
is fixed by federal regulators after a thorough consideration of all available information.