MULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers the question.

Transcription

1 Econ 330 Spring 2016: EXAM 2 Name ID Section Number MULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers the question. 1) Banks hold capital because 1) A) higher capital increases the return on equity. B) it increases the likelihood of bankruptcy. C) higher capital increases the returns to the owners. D) they are required to by regulatory authorities. 2) If the central bank pursues a monetary policy that is more expansionary than what firms and people expect, then the central bank must be trying to A) constrain output in the short run. B) boost prices in the short run. C) constrain prices. D) boost output in the short run. 2) 3) Which of the following statements is FALSE? 3) A) Checkable deposits include NOW accounts. B) Checkable deposits are usually the lowest cost source of bank funds. C) Checkable deposits are the primary source of bank funds. D) Checkable deposits are payable on demand. 4) Which of the following statements is FALSE? 4) A) The bank's assets provide the bank with income. B) Bank capital is recorded as an asset on the bank balance sheet. C) A bank issues liabilities to acquire funds. D) A bank's assets are its uses of funds. 5) Assuming initially that the required reserve ratio = 10%, the currency-deposit ratio = 75%, and the excess reserve ratio = 156%, an increase in the currency-deposit ratio to 150% causes the M1 money multiplier to, everything else held constant. A) increase from 0.73 to 0.78 B) increase from 1.54 to 1.67 C) decrease from 0.73 to 0.61 D) decrease from 1.67 to ) If the First National Bank has a gap equal to a negative $30 million, then a 5 percentage point increase in interest rates will cause profits to A) increase by $1.5 million. B) decline by $1.5 million. C) decline by $15 million. D) increase by $15 million. 7) If the required reserve ratio is 10 percent, currency in circulation is $400 billion, checkable deposits are $800 billion, and excess reserves total $0.8 billion, then the monetary base is A) $480 billion. B) $80.8 billion. C) $480.8 billion. D) $80 billion. 8) If a bank has $100,000 of checkable deposits, a required reserve ratio of 20 percent, and it holds $40,000 in reserves, then the maximum deposit outflow it can sustain without altering its balance sheet is A) $20,000. B) $10,000. C) $25,000. D) $30,000. 5) 6) 7) 8)

2 9) The discount rate is kept the federal funds rate because the Fed prefers that. 9) A) above; banks borrow reserves from the Fed B) below; banks borrow reserves from the Fed C) below; banks borrow reserves from each other D) above; banks borrow reserves from each other 10) Unanticipated moral hazard contingencies can be reduced by 10) A) credit rationing. B) specialization in lending. C) long-term customer relationships. D) screening. 11) When a new depositor opens a checking account at the First National Bank, the bank's assets and its liabilities. A) decrease; decrease B) increase; decrease C) increase; increase D) decrease; increase 12) In the market for reserves, if the federal funds rate is above the interest rate paid on excess reserves, an open market sale the supply of reserves causing the federal funds rate to, everything else held constant. A) decreases; increase B) decreases; decrease C) increases; increase D) increases; decrease 11) 12) 13) For a given return on assets, the lower is bank capital 13) A) the lower is the credit risk for the owners of the bank. B) the lower the possibility of bank failure. C) the higher is the return for the owners of the bank. D) the lower is the return for the owners of the bank. 14) The goal for high employment should be a level of unemployment at which the demand for labor equals the supply of labor. Economists call this level of unemployment the A) frictional level of unemployment. B) structural level of unemployment. C) natural rate level of unemployment. D) Keynesian rate level of unemployment. 14) 15) If a bank needs to acquire funds quickly to meet an unexpected deposit outflow, the bank could 15) A) increase loans. B) borrow from another bank in the federal funds market. C) buy corporate bonds. D) buy U.S. Treasury bills. 16) The Federal Reserve System was created to 16) A) promote financial market stability. B) promote rapid economic growth. C) make it easier to finance budget deficits. D) lower the unemployment rate. 17) Assuming initially that the required reserve ratio = 10%, the currency-deposit ratio = 40%, and the excess reserve ratio = 0, an increase in the currency-deposit ratio to 50% causes the M1 money multiplier to, everything else held constant. A) decrease from 2.8 to 2.33 B) increase from 2.33 to 2.8 C) decrease from 2.8 to 2.5 D) increase from 2.5 to )

3 18) From the standpoint of, specialization in lending is surprising but makes perfect sense when one considers the problem. A) moral hazard; diversification B) adverse selection; diversification C) diversification; moral hazard D) diversification; adverse selection 18) First National Bank Assets Liabilities Rate-sensitive $40 million $50 million Fixed-rate $60 million $50 million 19) Assuming that the average duration of its assets is four 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 by of the total original asset value. A) decline; 5 percent B) increase; 20 percent C) decline; 10 percent D) decline; 15 percent 20) Everything else held constant, in the market for reserves, when the supply for federal funds intersects the reserve demand curve on the downward sloping section, decreasing the interest rate paid on excess reserves A) increases the federal funds rate. B) lowers the federal funds rate. C) has no effect on the federal funds rate. D) has an indeterminate effect on the federal funds rate. 19) 20) 21) Through correspondent banking, large banks provide services to small banks, including 21) A) loan guarantees. B) foreign exchange transactions. C) debt reduction. D) issuing stock. 22) Which of the following statements are TRUE? 22) A) A bank's balance sheet shows that total assets equal total liabilities plus equity capital. B) A bank's assets are its sources of funds. C) A bank's balance sheet indicates whether or not the bank is profitable. D) A bank's liabilities are its uses of funds. 23) Net profit after taxes per dollar of equity capital is a basic measure of bank profitability called 23) A) return on capital. B) return on assets. C) return on equity. D) return on investment. 24) Everything else held constant, in the market for reserves, when the federal funds rate is 3%, raising the discount rate from 5% to 6% A) lowers the federal funds rate. B) raises the federal funds rate. C) has no effect on the federal funds rate. D) has an indeterminate effect on the federal funds rate. 24) 25) Today banks can engage in a riskless arbitrage by engaging in which of the following? 25) A) purchase fed funds, then deposit at Federal Reserve B) borrow at discount window, lend in fed funds market C) purchase fed funds, then sell fed funds D) purchase fed funds, then buy 1 month T-bills 26) Which of the following is not a factor contributing to the extraordinary rise in the excess reserve rati o?

4 26) A) failure of Lehman Brothers Investment Bank B) rising opportunity cost of excess reserves C) rising fears of liquidity risk D) fed paying interest on excess reserves 27) 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 A) the liabilities of the bank increase by $800,000. B) the assets at the bank increase by $800,000. C) reserves increase by $160,000. D) the liabilities of the bank increase by $1,000, ) Banks earn profits by selling with attractive combinations of liquidity, risk, and return, and using the proceeds to buy with a different set of characteristics. A) assets; liabilities B) loans; deposits C) securities; deposits D) liabilities; assets 29) The money supply is related to expected deposit outflows, and is related to the market interest rate. A) positively; positively B) negatively; positively C) positively; negatively D) negatively; negatively 27) 28) 29) 30) Which of the following is not a characteristic of a Repurchase Agreement, Repo? 30) A) legal transfer of security to lender B) typically under collateralized to mitigate credit risk C) secured cash loan D) typically a 1-7 day return 31) Which of the following is not an advantage of peer-to-peer lending? 31) A) lower concerns about default risk B) low operating expenses C) lenders earn higher rates D) widespread public acceptance of e-commerce 32) Property promised to the lender as compensation if the borrower defaults is called 32) A) restrictive covenants. B) deductibles. C) collateral. D) contingencies. 33) Bank loans from the Federal Reserve are called and represent a of funds. 33) A) fed funds; source B) discount loans; use C) discount loans; source D) fed funds; use 34) The time-inconsistency problem in monetary policy can occur when the central bank conducts policy A) using a nominal anchor. B) on a discretionary, day-by-day basis. C) using a flexible, discretionary rule. D) using a strict and inflexible rule. 34) 35) In the "Vicious Cycles of the Mortgage Crisis" diagram, which of the following was the nexus bet ween

5 the housing market and the real economy? 35) A) banks incur losses B) increased supply of homes C) banks restrict lending D) homeowners "walk away" foreclosures 36) When you deposit $50 in currency at Old National Bank 36) A) its liabilities decrease by $50. B) its reserves increase by less than $50 because of reserve requirements. C) its assets increase by less than $50 because of reserve requirements. D) its liabilities increase by $50. 37) When Jane Brown writes a $100 check to her nephew and he cashes the check, Ms. Brown's bank assets of $100 and liabilities of $100. A) gains; gains B) loses; gains C) gains; loses D) loses; loses 38) Which of the following is not a factor keeping the natural rate of interest below its long run average? A) lower long term economic growth B) lower government structural deficits C) lower global saving D) negative output gap 39) Because of their liquidity, U.S. government securities are called secondary reserves. A) low; long-term B) high; short-term C) high; long-term D) low; short-term 40) With a 10% reserve requirement ratio, a $100 deposit into New Bank means that the maximum amount New Bank could lend is A) $90. B) $110. C) $10. D) $ ) If, after a deposit outflow, a bank needs an additional $3 million to meet its reserve requirements, the bank can A) increase loans by $3 million. B) sell $3 million of securities. C) reduce deposits by $3 million. D) repay its discount loans from the Fed. 37) 38) 39) 40) 41) 42) Which of the following is not a characteristic of a TALF Loan from the Federal Reserve? 42) A) interest payable monthly B) secured by AAA collateral C) 5-year term D) non-recourse 43) If the required reserve ratio is 10 percent, currency in circulation is $400 billion, checkable deposits are $800 billion, and excess reserves total $0.8 billion, then the money supply is billion. A) $1200 B) $8000 C) $ D) $ ) 44) Which of the following are transaction deposits? 44) A) certificates of deposit B) savings accounts C) checkable deposits D) small-denomination time deposits 45) Banks' asset portfolios include state and local government securities because 45)

6 A) there is no default-risk with state and local government securities. B) they help to attract business from these government entities. C) the Federal Reserve requires member banks to buy securities from state and local governments located within their respective Federal Reserve districts. D) banks consider them helpful in attracting accounts of Federal employees. 46) If a bank needs to raise the amount of capital relative to assets, a bank manager might choose to 46) A) pay higher dividends. B) sell securities the bank owns and put the funds into the reserve account. C) buy back bank stock. D) shrink the size of the bank. 47) When a lender refuses to make a loan, although borrowers are willing to pay the stated interest rate or even a higher rate, the bank is said to engage in A) strategic holding out. B) collusive behavior. C) credit rationing. D) coercive bargaining. 47) 48) A bank failure occurs whenever 48) A) a bank cannot satisfy its obligations to pay its depositors and other creditors. B) a bank has to call in a large volume of loans. C) a bank suffers a large deposit outflow. D) a bank refuses to make new loans. 49) To reduce moral hazard problems, banks include restrictive covenants in loan contracts. In order for these restrictive covenants to be effective, banks must also A) be prepared to extend the deadline when the borrower needs more time to comply. B) trust the borrower to do the right thing. C) monitor and enforce them. D) be willing to rewrite the contract if the borrower cannot comply with the restrictions. 49) 50) If a banker expects interest rates to fall in the future, her best strategy for the present is 50) A) to increase the duration of the bank's liabilities. B) to sell long-term certificates of deposit. C) to buy short-term bonds. D) to increase the duration of the bank's assets.

7 1) D 2) D 3) C 4) B 5) A 6) B 7) C 8) C 9) D 10) C 11) C 12) A 13) C 14) C 15) B 16) A 17) C 18) D 19) A 20) C 21) B 22) A 23) C 24) C 25) A 26) B 27) D 28) D 29) B 30) B 31) A 32) C 33) C 34) B 35) D 36) D 37) D 38) C 39) B 40) A 41) B 42) C 43) A 44) C 45) B 46) D 47) C 48) A 49) C 50) D