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Final Exam (CH.

7,10,11,12,13 and 15)


Review of attempt 1
Started on Tuesday, March 29, 2011, 11:27 AM

Completed on Tuesday, March 29, 2011, 03:22 PM

Time taken 3 hours 55 mins

Marks 55/80

Grade 13.75 out of a maximum of 20 (69%)

Question1
Marks: 1
The rate of return of a stock held for one year equals
Choose one answer.

a. the dividend yield minus the rate of capital gain.

b. the dividend yield plus the rate of capital gain.

c. the rate of capital gain minus the dividend yield.

d. the change in the price of the stock.

Correct
Marks for this submission: 1/1.

Question2
Marks: 1
The process in which people take their funds out of the banking system seeking higher -yielding securities is
called
Choose one answer.

a. disintermediation.

b. deposit jumping.

c. capital mobility.

d. loophole mining.

Correct
Marks for this submission: 1/1.

Question3
Marks: 1
In the market for reserves, if the federal funds rate is above the interest rate paid on excess reserves, an
open market sale ________ the ________ of reserves, causing the federal funds rate to increase,
everything else held constant.
Choose one answer.

a. decreases; supply

b. increases; demand

c. increases; supply

d. decreases; demand

Correct
Marks for this submission: 1/1.

Question4
Marks: 1
Funds held in ________ are subject to reserve requirements.
Choose one answer.

a. all time deposits

b. all checkable and time deposits

c. all checkable, time, and money market fund deposits

d. all checkable deposits

Correct
Marks for this submission: 1/1.

Question5
Marks: 1
If market participants rely only past stock prices to forecast future stock prices,
Choose one answer.

a. they have rational expectations.

b. they will be better able to forecast future price increases than future price
decreases.
c. they will be better able to forecast future price decreases than future price
increases.
d. they have adaptive expectations.

Correct
Marks for this submission: 1/1.

Question6
Marks: 1
The ________ that required separation of commercial and investment banking was repealed in 1999.
Choose one answer.

a. the Federal Reserve Act.

b. the Glass-Steagall Act.

c. the Monetary Control Act.

d. the Bank Holding Company Act.

Correct
Marks for this submission: 1/1.

Question7
Marks: 1
Large-denomination CDs are ________, so that like a bond they can be resold in a ________ market before
they mature.
Choose one answer.

a. nonnegotiable; secondary

b. negotiable; secondary

c. nonnegotiable; primary
d. negotiable; primary

Correct
Marks for this submission: 1/1.

Question8
Marks: 1
Banks that actively manage liabilities will most likely meet a reserve shortfall by
Choose one answer.

a. seeking new deposits.

b. borrowing federal funds.

c. selling municipal bonds.

d. calling in loans.

Correct
Marks for this submission: 1/1.

Question9
Marks: 1
Today the United States has a dual banking system in which banks supervised by the ________ and by the
________ operate side by side.
Choose one answer.

a. federal government; municipalities

b. municipalities; states

c. federal government; states

d. state governments; municipalities

Correct
Marks for this submission: 1/1.

Question10
Marks: 1
Provisions in loan contracts that prohibit borrowers from engaging in specified risky activities are called
Choose one answer.

a. liens.

b. proscription bonds.

c. due-on-sale clauses.

d. restrictive covenants.

Correct
Marks for this submission: 1/1.

Question11
Marks: 1
The era of bank panics in the United States was effectively ended by
Choose one answer.

a. introducing deposit insurance.

b. implementing the gold standard.


c. abandoning the gold standard.

d. establishing the Fed as lender of last resort.

Correct
Marks for this submission: 1/1.

Question12
Marks: 1
Higher capital requirements will reduce the problems incurred when troubled ________ which had been off-
balance sheet activities come back on the balance sheet.
Choose one answer.

a. Eurodollars

b. negotiable CDs

c. Federal funds

d. structured investment vehicles (SIVs)

Correct
Marks for this submission: 1/1.

Question13
Marks: 1
Bank reserves include
Choose one answer.

a. vault cash and deposits at the Fed.

b. deposits at the Fed and short-term treasury securities.

c. vault cash and short-term Treasury securities.

d. deposits at other banks and deposits at the Fed.

Correct
Marks for this submission: 1/1.

Question14
Marks: 1
Because of an expected rise in interest rates in the future, a banker will likely
Choose one answer.

a. make long-term rather than short-term loans.

b. make either short or long-term loans; expectations of future interest rates are
irrelevant.
c. buy long-term rather than short-term bonds.

d. buy short-term rather than long-term bonds.

Correct
Marks for this submission: 1/1.

Question15
Marks: 1
Since the European Central Bank ________ interest on reserves, banks have a ________ cost of complying
with reserve requirements when compared to banks complying with the reserve requirements of the Federal
Reserve.
Choose one answer.
a. does not pay; higher

b. pays; higher

c. does not pay; lower

d. pays; lower

Correct
Marks for this submission: 1/1.

Question16
Marks: 1
Deposit insurance has not worked well in countries with
Choose one answer.

a. a weak institutional environment.

b. a tradition of the rule of law.

c. few opportunities for corruption.

d. strong supervision and regulation.

Correct
Marks for this submission: 1/1.

Question17
Marks: 1
The research document given to the Federal Open Market Committee that contains the forecast of national
economic variables for the next two years is called the
Choose one answer.

a. green book.

b. beige book.

c. blue book.

d. black book.

Correct
Marks for this submission: 1/1.

Question18
Marks: 1
The most common definition that monetary policymakers use for price stability is
Choose one answer.

a. high and stable inflation.

b. low and stable inflation.

c. an inflation rate of zero percent.

d. low and stable deflation.

Correct
Marks for this submission: 1/1.

Question19
Marks: 1
The subprime financial crisis lead to a decline in stock prices because
Choose one answer.

a. higher expected future stock prices.

b. higher current dividends.

c. of a lowered expected dividend growth rate.

d. of a lowered required return on investment in equity.

Incorrect
Marks for this submission: 0/1.

Question20
Marks: 1
A stockholder's ownership of a company's stock gives her the right to
Choose one answer.

a. vote and be the residual claimant of all cash flows.

b. vote and be the primary claimant of all cash flows.

c. vote and assume responsibility for all liabilities.

d. manage and assume responsibility for all liabilities.

Correct
Marks for this submission: 1/1.

Question21
Marks: 1
First National Bank
Assets Liabilities
Rate-
sensitive $20 million $50 million
Fixed-rate $80 million $50 million

Assuming that the average duration of its assets is five years, while the average duration of its liabilities is
three years, then a 5 percentage point increase in interest rates will cause the net worth of First National to
decline by ________ of the total original asset value.
Choose one answer.

a. 10 percent

b. 15 percent

c. 5 percent

d. 25 percent

Correct
Marks for this submission: 1/1.

Question22
Marks: 1
Which of the following is NOT a way in which power was divided up in the Federal Reserve System?
Choose one answer.

a. between importers and exporters

b. among states and regions


c. between bankers and business interests

d. between government and the private sector

Incorrect
Marks for this submission: 0/1.

Question23
Marks: 1
Because banks engage in regulatory arbitrage, the Basel Accord on risk-based capital requirements may
result in
Choose one answer.

a. reduced risk taking by banks.

b. reduced supervision of banks by regulators.

c. increased risk taking by banks.

d. increased fraudulent behavior by banks.

Correct
Marks for this submission: 1/1.

Question24
Marks: 1
Investment banks that are part of ________ are regulated and supervised like banks.
Choose one answer.

a. Freddie Mac

b. insurance companies

c. Fannie Mae

d. bank holding companies

Correct
Marks for this submission: 1/1.

Question25
Marks: 1
Which of the following are reported as assets on a bank's balance sheet?
Choose one answer.

a. Savings deposits

b. Reserves

c. Bank capital

d. Borrowings

Correct
Marks for this submission: 1/1.

Question26
Marks: 1
When Happy Feet Corporation announces that their fourth quarter earnings are up 10%, their stock price
falls. This is consistent with the efficient markets hypothesis
Choose one answer.

a. if earnings were not as high as expected.


b. if earnings were not as low as expected.

c. the company just invented a new bunion product.

d. if a merger is anticipated.

Correct
Marks for this submission: 1/1.

Question27
Marks: 1
If the Fed wants to temporarily inject reserves into the banking system, it will engage in
Choose one answer.

a. a matched sale-purchase transaction.

b. an open market sale.

c. a reverse repurchase agreement.

d. a repurchase agreement.

Correct
Marks for this submission: 1/1.

Question28
Marks: 1
The majority of members of the Federal Open Market Committee are
Choose one answer.

a. members of the Federal Advisory Council.

b. presidents of member banks.

c. the seven Federal Reserve governors.

d. Federal Reserve Bank presidents.

Correct
Marks for this submission: 1/1.

Question29
Marks: 1
Which of the following is NOT true of an insolvent bank?
Choose one answer.

a. The value of its assets is less than the value of its liabilities.

b. It must have no more deposits.

c. It may be unable to pay off its depositors.

d. Its net worth is negative.

Correct
Marks for this submission: 1/1.

Question30
Marks: 1
Automated teller machines
Choose one answer.
a. cost about the same to use as human tellers in banks, so banks discourage
their use by charging more for use of ATMs.

b. are more costly to use than human tellers, so banks discourage their use by
charging more for use of ATMs.
c. cost nothing to use, so banks provide their services free of charge.

d. cost less than human tellers, so banks may encourage their use by charging
less for using ATMs.
Correct
Marks for this submission: 1/1.

Question31
Marks: 1
Which of the following accurately summarize the empirical evidence about technical analysis?
Choose one answer.

a. Technical analysts tend to outperform other financial analysis, but on average


they nevertheless under-perform the market.

b. Technical analysts fare no better than other financial analysis, and like other
financial analysts they under-perform the market.
c. Technical analysts fare no better than other financial analysis on average they

do not outperform the market.


d. Technical analysts fare no better than other financial analysis, and like other
financial analysts they outperform the market.
Correct
Marks for this submission: 1/1.

Question32
Marks: 10
Suppose banks incur heavy losses and become more cautious, increasing their demand for reserve. Make
use of a graph of the loanable funds market to show how the Fed can use open market operations to
maintain the same federal funds rate.

Answer:

Question33
Marks: 1
When one party to a transaction has incentives to engage in activities detrimental to the other party, there
exists a problem of
Choose one answer.

a. split incentives.

b. pre-contractual opportunism.

c. moral hazard.

d. ex ante shirking.

Correct
Marks for this submission: 1/1.

Question34
Marks: 1
Regular bank examinations and restrictions on asset holdings help to indirectly reduce the ________
problem because, given fewer opportunities to take on risk, risk-prone entrepreneurs will be discouraged
from entering the banking industry.
Choose one answer.

a. moral hazard

b. ex post shirking

c. post-contractual opportunism

d. adverse selection

Correct
Marks for this submission: 1/1.

Question35
Marks: 1
What is the name of the entity, composed of Federal Reserve district bankers, that consults on monetary
policy?
Choose one answer.

a. The Monetary Policy Council

b. The Federal Open Market Committee

c. The District Bank Committee

d. The Federal Advisory Council

Incorrect
Marks for this submission: 0/1.

Question36
Marks: 1
Although it has a population about half that of the United States, Japan has
Choose one answer.

a. about 25 percent of the number of banks.

b. more than 5000 commercial banks.

c. fewer than 100 commercial banks.

d. many more banks.

Correct
Marks for this submission: 1/1.

Question37
Marks: 1
Banks subject to reserve requirements set by the Federal Reserve System include
Choose one answer.

a. only banks with assets less than $500 million.

b. only nationally chartered banks.

c. all banks whether or not they are members of the Federal Reserve
System.
d. only banks with assets less than $100 million.
Correct
Marks for this submission: 1/1.

Question38
Marks: 1
The regulatory system that has evolved in the United States whereby banks are regulated at the state level,
the national level, or both, is known as a
Choose one answer.

a. tiered regulatory system.

b. dual banking system.

c. bilateral regulatory system.

d. two-tiered regulatory system.

Correct
Marks for this submission: 1/1.

Question39
Marks: 1
The research document given to the Federal Open Market Committee that contains information on the state
of the economy in each Federal Reserve district is called the
Choose one answer.

a. green book.

b. blue book.

c. black book.

d. beige book.

Correct
Marks for this submission: 1/1.

Question40
Marks: 1
The original intention of the Fed's role as lender of last resort was to make loans to banks that were
Choose one answer.

a. not illiquid nor insolvent.

b. illiquid, but not insolvent.

c. both illiquid and insolvent.

d. insolvent, but not illiquid.

Correct
Marks for this submission: 1/1.

Question41
Marks: 1
The interest rate charged on overnight loans of reserves between banks is the
Choose one answer.

a. prime rate.

b. Treasury bill rate.


c. federal funds rate.

d. discount rate.

Correct
Marks for this submission: 1/1.

Question42
Marks: 1
When $1 million is deposited at a bank, the required reserve ratio is 20 percent, and the bank chooses not to
hold any excess reserves but makes loans instead, then, in the bank's final balance sheet,
Choose one answer.

a. the assets at the bank increase by $800,000.

b. reserves increase by $160,000.

c. the liabilities of the bank increase by $800,000.

d. the liabilities of the bank increase by $1,000,000.

Correct
Marks for this submission: 1/1.

Question43
Marks: 1
While the discount rate is "established" by the regional Federal Reserve Banks, in truth, the rate is
determined by
Choose one answer.

a. the Senate.

b. the president of the United States.

c. the Board of Governors.

d. Congress.

Correct
Marks for this submission: 1/1.

Question44
Marks: 1
Suppose, at a given federal funds rate, there is an excess demand for reserves in the federal funds market.
If the Fed wants the federal funds rate to stay at that level, then it should undertake an open market
________ of bonds, everything else held constant. If the Fed does nothing, however, the federal funds rate
will ________.
Choose one answer.

a. purchase; decrease

b. sale; increase

c. sale; decrease

d. purchase; increase

Correct
Marks for this submission: 1/1.

Question45
Marks: 1
Eurodollars are
Choose one answer.
a. dollar-dominated deposits held in banks outside the United States.

b. deposits held by U.S. banks in foreign countries.

c. dollar-dominated deposits held in U.S. banks by Europeans.

d. deposits held by U.S. banks in Europe.

Correct
Marks for this submission: 1/1.

Question46
Marks: 1
In October 2008, the stock market crashed, falling by ________ from its peak value a year earlier.
Choose one answer.

a. over 50%

b. over 30%

c. over 25%

d. over 40%

Incorrect
Marks for this submission: 0/1.

Question47
Marks: 1
Discount policy affects the money supply by affecting the volume of ________ and the ________.
Choose one answer.

a. excess reserves; money multiplier

b. borrowed reserves; monetary base

c. borrowed reserves; money multiplier

d. excess reserves; monetary base

Correct
Marks for this submission: 1/1.

Question48
Marks: 1
When banks offer borrowers smaller loans than they have requested, banks are said to
Choose one answer.

a. rediscount the loan.

b. raze credit.

c. ration credit.

d. shave credit.

Correct
Marks for this submission: 1/1.

Question49
Marks: 10
Suppose the current federal funds rate is 0.25% and the Fed chooses to raise its target to 0.5%. Make use
of a graph of the federal funds market to show how it will use open market operations to accomplish this.
Answer:

Question50
Marks: 1
The Fed can offset the effects of an increase in float by engaging in
Choose one answer.
a. an interest rate swap.

b. a repurchase agreement.

c. an open market purchase.

d. a matched sale-purchase transaction.

Correct
Marks for this submission: 1/1.

Question51
Marks: 1
A phenomenon closely related to market overreaction is
Choose one answer.

a. the random walk.

b. excessive volatility.

c. the January effect.

d. the small-firm effect.

Correct
Marks for this submission: 1/1.

Question52
Marks: 1
Of the following methods that banks might use to reduce moral hazard problems, the one not legally
permitted in the United States is the
Choose one answer.

a. requirement that firms place on their board of directors an officer from the bank.

b. requirement that firms keep compensating balances at the banks from which they
obtain their loans.
c. inclusion of restrictive covenants in loan contracts.

d. requirement that individuals provide detailed credit histories to bank loan officers.

Correct
Marks for this submission: 1/1.

Question53
Marks: 1
Which of the following is NOT an example of off-balance-sheet lending?
Choose one answer.

a. a loan sale

b. a standby letter of credit

c. a loan commitment

d. a swap

Correct
Marks for this submission: 1/1.

Question54
Marks: 1
Which best describes the Federal Reserve district banks?
Choose one answer.

a. Some are private while others are government.

b. They are private-government joint ventures.

c. They are private ventures.

d. They are government ventures.

Correct
Marks for this submission: 1/1.

Question55
Marks: 1
ATMs were developed because of breakthroughs in technology and as a
Choose one answer.

a. increasing the competition from foreign banks.

b. way of concealing transactions from the SEC.

c. means of avoiding restrictive branching regulations.

d. means of avoiding paying interest to corporate customers.

Incorrect
Marks for this submission: 0/1.

Question56
Marks: 1
The Second Bank of the United States was denied a new charter by
Choose one answer.

a. President Benjamin Harrison.

b. President John Q. Adams.

c. Vice President John Calhoun.

d. President Andrew Jackson.

Correct
Marks for this submission: 1/1.

Question57
Marks: 1
Suppose on any given day there is an excess supply of reserves in the federal funds market. If the Federal
Reserve wishes to keep the federal funds rate at its current level, then the appropriate action for the Federal
Reserve to take is a ________ open market ________, everything else held constant.
Choose one answer.

a. defensive; sale

b. defensive; purchase

c. dynamic; purchase

d. dynamic; sale

Correct
Marks for this submission: 1/1.

Question58
Marks: 1
A change in perceived risk of a stock changes
Choose one answer.

a. the expected dividend growth rate.

b. the required rate of return.

c. the current dividend.

d. the expected sales price.

Correct
Marks for this submission: 1/1.

Question59
Marks: 1
Open market operations intended to offset movements in noncontrollable factors (such as float) that affect
reserves and the monetary base are called
Choose one answer.

a. defensive open market operations.

b. dynamic open market operations.

c. reactionary open market operations.

d. offensive open market operations.

Correct
Marks for this submission: 1/1.

Question60
Marks: 1
In 1977, he pioneered the concept of selling new public issues of junk bonds for companies that had not yet
achieved investment-grade status.
Choose one answer.

a. Michael Milken

b. Roger Milliken

c. Carl Ichan

d. Ivan Boskey

Correct
Marks for this submission: 1/1.

Question61
Marks: 1
When market participants have rational expectations,
Choose one answer.

a. they use all information available to them.

b. they are less likely to make accurate forecasts than if they have adaptive
expectations.
c. they only slowly adjust their expectations to news which could affect prices or
returns.
d. they are able to forecast interest rates more accurately than inflation rates.

Correct
Marks for this submission: 1/1.

Question62
Marks: 1
Which of the following statements about the Depository Institutions Deregulation and Monetary Control Act
of 1980 is NOT correct?
Choose one answer.

a. It eliminated restrictions on interstate banking for member banks.

b. It gave member and nonmember banks equivalent access to discount loans.

c. It required all banks to maintain reserve deposits with the Fed.

d. It halted the decline in Fed membership.

Correct
Marks for this submission: 1/1.