Exam About Money and Banking Answer Key

Exam Name___________________________________ MULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers the question. 1) The Bank of the United States, chartered at 1791 by the congress was set up as a 1) _______ A) Public enterprise funded by the federal government. B) Public enterprise funded by selling Treasury bonds. C) Private corporation funded by stocks sold only to financial institutions. D) Private corporation funded by stocks sold to the general public. 2) The presence of transaction costs and information costs will _______ A) decreases the expected return to investors. B) lower the cost of raising funds for firms. C) decreases the interest rate that household pay on mortgages. D) result in some funds not being lent at all. 3) Daniel has recently decided to invest $10000 by finding borrowers himself, however he can not determine the default-risk associated with each of the borrowers to distinguish the high-risk from low-risk borrowers. This is an example of .... and Daniel would not have such a problem in a market with .... information. 3) _______ A) moral hazard, asymmetric B) moral hazard, symmetric C) adverse selection, asymmetric D) adverse selection, symmetric 4) Which of the following is an example of adverse selection? 4) _______ A) A homeowner buys a large fire insurance policy and stops checking the wiring in the house. B) A woman buys insurance for her smartphone and decides not to buy the screen protection and protecting case for the phone. C) A man with a bad heart condition buys a large life insurance policy. D) An in-law borrowing $5000 from you to pay for enrollment expenses but goes to the casino and gambles it. 5) A decrease in the interest rates in bond market would ... 5) _______ A) increase the adverse selection problem B) mitigate the adverse selection problem C) increase the moral hazard problem D) mitigate the moral hazard problem 6) Equity contracts are subject to less moral hazard than are debt contracts. 6) _______ A) False B) True 7) Which of the following is NOT a commercial bank liability? 7) _______ A) CDs B) Checkable deposits C) Discount loans D) Mortgage loans 8) Which of the following is not considered a cash item by banks? 8) _______ A) U.S. Treasury bills B) Deposits at other banks C) Deposits at the Federal Reserve D) Vault Cash 9) Which asset is sometimes referred to as a bank's secondary reserve? 9) _______ A) Vault Cash B) Repurchase agreements C) U.S government securities D) Federal Funds 10) Suppose that according to its balance sheet, Wells Fargo have $40 billion in reserves, and the value of its total assets equal $400 billion. Furthermore, value of the deposits at the bank sums up to $200 billion and the net worth of the bank is $100 billion. What is the banks leverage ratio? 10) ______ A) 0.15 B) 0.20 C) 0.10 D) 0.25 11) Suppose that required reserve ratio is 20%, and you deposit $1000 in your bank. The immediate impact of this on your bank's balance sheet will be 11) ______ A) $200 increase in the banks total reserves and $800 increase in the value of banks total assets B) $800 increase in the banks total reserves and $800 increase in the value of the banks total assets C) $800 increase in the banks excess reserves and $1000 increase in the value of the banks total assets D) $200 increase in the banks excess reserves and $1000 increase in the value of the banks total assets 12) By limiting the number of loans they make, banks can reduce 12) ______ A) liquidity risk B) adverse selection problem C) interest-rate risk D) credit risk 13) Suppose that a banks leverage ratio is 0.20, and it's return on assets is 3%, what is the return on equity for this bank? 13) ______ A) 6% B) 24% C) 15% D) 60% 14) If a bank has a positive gap and a positive duration gap, then a decrease in the market interest rates will .... the banks capital and .... the banks profit. 14) ______ A) increase, decrease B) decrease, increase C) increase, increase D) decrease, decrease 15) Which of the following is NOT an example of an off balance sheet lending? 15) ______ A) a swap B) a standby letter of credit C) a loan commitment D) a loan sale 16) The fact that shadow banks rely on ... rather than .... increases their exposure to ... . 16) ______ A) retail funding, wholesale funding, individual risk B) retail funding, wholesale funding, systemic risk C) wholesale funding, retail funding, individual risk D) wholesale funding, retail funding, systemic risk 17) The margin requirement set by the Federal Reserve regards the ... . 17) ______ A) proportion of the purchase price of a security that an investor must pay in cash. B) same thing as the required reserve ratio on deposits C) difference banks must maintain between the value of their assets and the value of their liabilities D) difference between the interest rate banks may charge on loans and the interest rate they receive from deposits 18) Majority of members of board of directors of federal reserve banks are ... . 18) ______ A) elected by bankers B) elected by board of governors C) elected by the president D) appointed by the Fed chairman 19) According to ..... theory of central banking, we should expect a political business cycle because of actions of Fed to ..... . 19) ______ A) principal-agent, reduce conflict B) principal-agent, increase prestige C) public interest, reduce conflict D) public interest, increase public interest 20) The Dodd-Frank Act removed which group from voting in the election of the presidents of Federal Reserve banks? 20) ______ A) Group A directors B) Group B directors C) Group C directors D) Board of Governors 21) Members of ....... votes to set target for federal funds rate which is determined ........ . 21) ______ A) FOMC, through a domestic policy B) FOMC, administratively C) Board of Governors, through domestic policy D) Board of Governors, administratively 22) Which of the followings is part of the Fed's dual mandate? 22) ______ A) Foreign Exchange Market Stability B) Interest Rate Stability C) Economic Growth D) Price Stability 23) Which of the following statements is true? 23) ______ A) If commercial banks hold more total reserve than their checkable deposits, the value of money supply will be lower than the monetary base of the economy. B) If commercial banks do not make loans in an economy, an open market sale would have not change the money supply. C) Federal reserve has no control over the realistic money multiplier. D) A reduction in the tendency of nonbank public to hold cash relatice to their deposits would reduce the money supply in the economy. 24) Suppose the currency-to-checkable deposit ratio decreases while, at the same time, the excess reserve-tocheckable deposit ratio increases. Everything else held constant, these changes would______the money supply. 24) ______ A) increase B) decrease C) have no effect on D) have an ambiguous effect on 25) Reserve deposits are 25) ______ A) liabilities for depository institutions, but assets for the Fed. B) liabilities for both depository institutions and the Fed. C) assets for both depository institutions and the Fed. D) assets for depository institutions, but liabilities for the Fed. 26) The difference between the average interest rate banks receive on their assets and the average interest rate they pay on their liabilities is called ___ . 26) ______ A) Bank's spread B) Bank's leverage C) Net interest margin D) Return on assets 27) Suppose, while cleaning out its closet, an employee at the Federal Reserve Branch Bank in New York discovers a painting that used to grace the walls of the conference room . Suppose further that, at a public auction, the Bank sells the painting in exchange for currency. Everything else held constant, this sale, immediately, will cause________ in the Fed's liabilities and _______ in checkable deposit account balances. 27) ______ A) a decrease; an increase B) an increase; no change C) a decrease; no change D) no change; an increase 28) Which of the following would cause the realistic money multiplier to increase? 28) ______ A) A increase in the required reserve ratio. B) An decrease in excess reserves relative to deposits. C) An decrease in the discount rate. D) A increase in the currency-deposit ratio. 29) The Federal Reserve can expand the money supply by conducting an open market ________ or by_________the required reserve ratio, everything else held constant. 29) ______ A) sale; increasing B) purchase; increasing C) purchase; decreasing D) sale; decreasing 30) Suppose that a bank assumes $4 of debt in its investments for every dollar invested through its shareholders' equity. If the bank's return on equity is 2%, then what is the bank's return on assets? 30) ______ A) 0.4% B) 0.25% C) 10% D) 8% 1) D 2) D 3) D 4) C 5) B 6) A 7) D 8) A 9) C 10) D 11) C 12) D 13) C 14) A 15) A 16) D 17) A 18) A 19) A 20) A 21) A 22) D 23) A 24) D 25) D 26) A 27) C 28) B 29) C 30) A