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Unformatted text preview: Please choose the best answer of the choices presented in the multiple choice questions. 1. One of the results of the ReigleNeal Interstate Banking and Branching Efficiency Act of 1994 was: A. An increase in the number of banks in the U.S B. A decrease in commercial banks but an increase in the number of savings and loans and savings banks C. A decrease in the average size of banks D. An increase in efficiency of the banking system 2. The GrammLeachBliley Act: A. Repealed the GlassSteagall Act's prohibition of mergers between commercial banks and insurance or securities firms B. Reinforced the GlassSteagall Act's limitation on commercial banks' availability to merge with insurance or securities firms by increasing the penalties for doing so C. Repealed the McFadden Act's restriction on bank branching D. Repealed the ReigleNeal Interstate Banking and Branching Efficiency Act 3. The London Interbank Offered Rate is often higher than U.S. bank deposits for all of the following reasons except: A. The bank does not have to pay deposit insurance premiums on these deposits B. Eurodollar deposits are not subject to U.S. reserve requirements C. Taxes on the profits at foreign banks may be lower than those for U.S. banks, allowing for higher returns D. Regulatory compliance may be more costly for a foreign bank than a U.S. bank 4. Which of the following is an example of the economies of scope argument for increased profits for large financial holding companies? A. Financial holding companies need only one CEO, one Board of Directors, and one accounting system regardless of size B. Financial holding companies are well diversified so risk is reduced C. Financial holding companies offer a wide array of services under one name D. The profitability of financial holding companies does not rely on one particular line of business 5. Which of the following is an example that can help explain increased profits for large financial holding companies? A. Financial holding companies offer a wide array of services under many brand names B. Financial holding companies are exempt from having to pay for FDIC insurance C. Financial holding companies are not well diversified and receive a higher return for the higher risk D. Financial holding companies need only one CEO, one Board of Directors, and one computer system regardless of size 6. Insurance companies perform all of the following functions performed by financial intermediaries except: A. Pooling the resources of small savers B. Supplying liquidity C. Pooling risk D. Screening and monitoring of policyholders 1 7. Vesting can A. All of the above B. make job changes costly C. make job changes less costly D. have no affect on the opportunity cost of changing jobs 8. Finance companies perform all of the following functions, except: A. Take deposits B. Screening and monitoring borrowers C. Lease equipment to firms D. Issue commercial paper and securities 9. The federal government is concerned about the health of the banking system for many reasons, the most important of which may be: A. Banks are where government bonds are traded B. Many people earn the majority of their income from interest on bank deposits C. A significant number of people are employed in the banking industry D. Banks are of great importance in enabling the economy to operate efficiently 10. The reason that a run on a single bank can turn into a bank panic that threatens the entire financial system is: A. Information asymmetries B. The lack of regulation C. Moral hazard D. The increased reliance on webbased funds transfers 11. Bank panics have often begun as a result of: A. Rumors only B. Real economic events only C. Both rumors and real economic events D. Neither rumors nor economic events 12. Recession can cause widespread bank crises for all of the following reasons except: A. Bank capital increases B. The negative effect on banks' balance sheets C. Borrowers' default rates increase D. There is less business investment as banks make fewer loans 13. The government regulates bank mergers, sometimes denying the proposed merger. Often the reason given for the denial is to protect small investors. What are small investors being protected from? A. With a larger bank the bank is likely to take greater risk and may fail B. Mergers can increase the monopoly power of banks and the bank may seek to exploit this power by raising prices and earning unwarranted profits C. Bank runs hurt larger banks more than smaller banks D. In order to pay for the merger, the bank may seek higher returns putting the depositors' funds at greater risk 2 14. The financial system is inherently more unstable than most other industries due to the fact that: A. While in most other industries customers disappear at a faster rate, in banking they disappear slowly so the damage is done before the real problem is identified B. Banks deal in paper profits, not in real profits C. There is less competition than in other industries D. A single firm failing in banking can bring down the entire system; this isn't true in most other industries 15. The best way for a government to stop the failure of one bank from turning into a bank panic is to: A. Make sure solvent institutions can meet the withdrawal demands of depositors B. Declare a bank holiday until solvent banks can acquire adequate liquidity C. Provide zerointerest rate loans to all banks regardless of net worth D. Limit the withdrawals of depositors 16. A moral hazard situation arises in the lender of last resort function because: A. A central bank finds it difficult to distinguish illiquid from insolvent banks B. A central bank usually undervalues the assets of a bank in a crisis C. A central bank usually will only make a loan to a bank after it becomes insolvent D. The central bank is the first place a bank facing a crisis will turn 17. When the Federal Reserve was unable to stem the bank panics of the 1930s, Congress responded by: A. Ordering the printing of tens of billions of dollars of additional currency B. Creating the FDIC and offering deposit insurance C. Taking over the lender of last resort function and assigning this function to the U.S. Treasury D. Declaring a bank holiday and closing banks for 30 days 18. All of the following are true about deposit insurance except: A. It has not been successful in eliminating bank runs and financial crises B. Depositors do not need to involve themselves with the risk taking by bank managers C. There is a creation of potential moral hazard by bank managers D. The deposits of a bank customer are insured up to some stated maximum value 19. Under the purchaseandassumption method, the FDIC usually finds it: A. Can sell the bank at a price equaling the value of the failed banks assets B. Has to sell the bank at a negative price since the bank is insolvent C. Can sell the failed bank for more than the bank is actually worth D. Cannot sell the bank and almost always has to revert to the payoff method for dealing with a failed bank 20. The moral hazard problem caused by government safety nets: A. Is greater for larger banks B. Only exists for banks with high leverage ratios C. Is pretty constant across banks of all sizes D. Is greater for smaller banks 3 21. The government's toobigtofail policy: A. Reduces the moral hazard problem of insuring large banks B. Reduces the risk faced by depositors with accounts less than $100,000 C. Increases the scrutiny of the bank's risk by large corporate depositors D. Reduces the risk faced by depositors with accounts exceeding $100,000 22. The purpose of the government's safety net for banks is to do each of the following, except: A. Eliminate all risk that investors face B. Stop bank panics C. Improve the efficiency of the economy D. Protect the integrity of the financial system 23. Bank mergers require government approval because banking officials want to make sure that: A. If a merger has a small community bank taken over by a larger regional bank, that the customers of the small town will still be wellserved B. The merger will not create a monopoly in any geographic region C. The merger will not result in regulatory competition D. The merger will create a larger bank 24. Which of the following statements is most correct? A. Financial regulators work to prevent monopolies but also work to prevent strong competition in banking B. Financial regulators do everything possible to encourage competition in banking C. Financial regulators prefer banks to have monopoly power in their geographic markets D. Financial regulators discourage competition in banking 25. The interest rate decisions made by the Federal Open Market Committee: A. Cannot be overridden by anyone outside of the Federal Reserve B. Can be overridden by the U.S. Senate by a twothirds majority C. Can be overridden by the President D. Can be overridden by the Secretary of the Treasury 26. To be independent, a central bank must have: A. Control of its own budget B. The chairperson serve as a member of the President's cabinet C. The board members appointed for very short terms D. Its policies overturned only by the president 27. Most economists agree that a welldesigned central bank would: A. Be accountable only to other banks B. Be run by one key policy maker C. Be independent of political pressure D. Make its policy actions difficult to interpret 4 28. Compared to an independent central bank, elected officials are likely to: A. Favor longrun stability over shortterm prosperity B. Favor shortterm prosperity over shortrun stability C. Choose monetary policies that are overly accommodative D. Prefer interest rates to vary more often 29. In the United States, one problem with central bank independence is: A. The United States is a democracy and having an independent central bank is inconsistent with a representative democracy B. The central bank can control policy, but the U.S. Treasury issues currency C. It is almost impossible to oBLOOMSain because Congress controls the budget of the Federal Reserve D. Central bank independence has not produced favorable results 30. Setting an explicit numerical inflation target is most associated with the goal(s) of: A. Both transparency and accountability B. Accountability C. Neither transparency nor accountability; it's about moral hazard D. Transparency 31. Member banks of the Federal Reserve System include: A. All state chartered banks with assets exceeding $100 million B. Only nationally chartered banks C. Nationally chartered banks and all state chartered banks D. Nationally chartered banks and state chartered banks that decide to join 32. The three branches of the Federal Reserve System include each of the following, except: A. The Federal Deposit Insurance Corporation B. The Board of Governors C. The Federal Open Market Committee D. The twelve regional Federal Reserve Banks 33. Currently the requirement of holding a noninterestbearing reserve account at the Fed must be met by: A. Member banks and nonmember banks over $100 million in assets B. Only nationally chartered banks C. All banks, member or not D. Only member banks 34. The Reserve Banks of the Federal Reserve System are owned by: A. The commercial banks in their districts B. The taxpayers in their districts C. The U.S. Treasury D. The Board of Governors 5 35. Which of the following is a false statement about the structure of the Federal Reserve System? A. Exporter and importer interests are reflected B. Banker and business interests are reflected C. State and regional interests are reflected D. Government (public) and private interests are reflected 36. The federal funds rate is the interest rate: A. The Fed charges banks who borrow from it B. The FDIC charges banks who need to borrow from it to meet depositor demands C. Banks charge each other for overnight loans on their excess deposits at the Fed D. The U.S. Treasury charges banks that need emergency funds 37. One valuable lesson investors should learn from the stock market behavior during the late 1990s and early 2000s is that the Fed: A. Can eliminate the risk from investing B. Can reduce the idiosyncratic risk of investing but not the systematic risk C. Cannot prevent a stock market decline D. Can control the stock market 38. Which of the following statements is most correct? A. Reserves are assets of the commercial banks and liabilities of the central bank B. Reserves are assets of the central bank and liabilities of the U.S. Treasury C. Reserves are assets of the central bank and liabilities of the commercial banks D. Reserves are liabilities of the commercial banks and assets of the U.S. Treasury 39. The monetary base is the sum of: A. Currency in the hands of the public M1 B. Currency in the hands of the public and M2 C. Reserves and M2 D. Reserves and currency in the hands of the public 40. An open market sale of U.S. Treasury securities by the Fed will cause the Banking System's balance sheet to show: A. No net change in assets or liabilities, only a change in the composition of assets with securities increasing and reserves decreasing B. Only a decrease in assets C. No net change in assets or liabilities, only a change in the composition of assets with securities decreasing and reserves increasing D. Only an increase in liabilities 6 41. The Fed purchases German bonds from commercial banks. Which of the following best describes the impact on the Fed's and the Banking System's balance sheets resulting from this transaction? A. The Fed's assets and liabilities increase, the banking systems assets and liabilities decrease B. The Fed's assets increase and its liabilities increase, for the banking system, the value of assets and liabilities do not change, only the composition of assets changes C. The Fed's assets and liabilities do not change, only the compositions of the assets change. For the banking system, assets and liabilities increase D. The Fed's assets increase and its liabilities decrease, for the banking system, the value of assets and liabilities do not change, only the composition of assets changes 42. When the Fed makes a discount loan, the impact on the Banking System's balance sheet will reflect: A. An increase in assets and a decrease in liabilities B. An increase in liabilities with no change in assets C. A decrease in assets and an increase in liabilities D. An increase in assets and liabilities 43. Excess reserves are equal to: A. The most a bank could lend at any time without altering its assets B. Reserves C. Checkable deposits D. Net worth 44. If the Fed were to increase the required reserve rate from ten percent to twenty percent, the simple deposit expansion multiplier would: A. Be half as large as it was before the increase B. Decrease by a factor of ten C. Double D. Increase by 10 percent 45. The simple deposit expansion multiplier is really too simple for understanding the link between changes in a central bank's balance sheet and the quantity of money in the economy because it: A. Ignores changes in vault cash B. Ignores how central banks could change their balance sheet C. Assumes banks loan hold no excess reserves D. Ignores the fact people might change their currency holdings 46. If M = the quantity of money, m the money multiplier, MB the Monetary Base, C = Currency, D = Deposits, R = Reserves, RR = required reserves, and ER = Excess reserves, then C + R would equal: A. ER B. R C. M D. MB 7 47. If M = the quantity of money, m the money multiplier, MB the Monetary Base, C = Currency, D = Deposits, R = Reserves, RR equals required reserves, rD = the required reserve rate and ER = Excess reserves, then ER/D would equal the: A. Amount of excess reserves B. Money multiplier C. Excess reserve to deposit ratio D. Amount of reserves 48. The use of deposit sweeping allows banks to: A. Weed out less profitable deposits B. Reduce the amount of required reserves they must hold C. Pay less for FDIC insurance D. Pay higher rates of interest than are allowed by law 49. One thing the Fed has learned over the past twentyfive years is: A. The money multiplier has a trend rate of growth that is fairly constant B. It should focus its attention on targeting M2 C. The theory of the money multiplier isn't very useful since the money multiplier is unstable over time D. The money multiplier is fairly constant no matter what changes are made to the monetary base 50. If we assume a ten percent required reserve rate, and banks not holding any excess reserves and no change in currency holdings, an open market sale of $5 million of U.S. Treasury securities by the Fed, will result in deposits: A. Increasing by $5 million B. Increasing by $50 million C. Decreasing by $50 million D. Not changing Please turn in to me the exam and scantron when you are done. 8 ...
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This note was uploaded on 02/12/2012 for the course ECON 101 taught by Professor Abrams during the Spring '11 term at Adams State University.
- Spring '11