Test Bank for Money Banking and the Financial System 5th Edition by Hubbard, O'Brien
ISBN: 9780135429280
Money, Banking, and the Financial System, 5e (Hubbard/O'Brien)
Chapter 1 Introducing Money and the Financial System
1.1 Key Components of the Financial System
1) The financial system is primarily a means by which
A) funds are transferred from savers to borrowers.
B) money is put into circulation.
C) the government puts into operation its plans for the economy.
D) business firms distribute their goods.
Answer: A
Diff: 1
Topic: financial system
Objective: Identify the key components of the financial system
2) Which of the following is NOT a financial asset?
A) a bond issued by Google
B) Wells Fargo Bank
C) a home mortgage loan
D) a certificate of deposit
Answer: B
Diff: 1
Topic: financial assets
Objective: Identify the key components of the financial system
3) If you buy a bond issued by Intel, the bond is a(n)
A) liability to Intel and an asset to you.
B) liability to you and an asset to Intel.
C) liability to both you and Intel.
D) asset to both you and Intel.
Answer: A
Diff: 2
Topic: financial assets
Objective: Identify the key components of the financial system
4) Which of the following forms the largest share of household holdings of financial assets?
A) corporate stocks
B) bonds
C) pension entitlements
D) equity in unincorporated businesses
Answer: C
Diff: 1
Topic: financial assets
Special Feature: Apply the Concept: What Do People Do with Their Savings?
Objective: Identify the key components of the financial system
5) From 1978 to 2024, the percentage of wealth held by households decreased for all of the following categories of assets EXCEPT
A) corporate stocks.
B) bonds.
C) deposits.
D) equity in unincorporated businesses.
Answer: A
Diff: 1
Topic: financial assets
Special Feature: Apply the Concept: What Do People Do with Their Savings?
Objective: Identify the key components of the financial system
6) Which of the following is NOT a key financial service provided by the financial system?
A) risk sharing
B) profitability
C) liquidity
D) information
Answer: B
Diff: 1
Topic: financial system
Objective: Identify the key components of the financial system
7) Economists define risk as
A) the difference between the interest rate borrowers pay and the interest rate lenders receive.
B) the chance that the value of financial assets will change from what you expect.
C) the ease with which an asset can be exchanged for other assets or for goods and services.
D) the difference between the return on common stock and the return on corporate bonds.
Answer: B
Diff: 1
Topic: financial system
Objective: Identify the key components of the financial system
8) Economists define liquidity as
A) the difference between the return on the asset and the return on a long-term U.S. Treasury bond.
B) the fraction the asset makes up of an investor's portfolio.
C) the ease with which an asset can be exchanged for money.
D) the difference between the total demand for an asset and the total supply of the asset.
Answer: C
Diff: 1
Topic: financial system
Objective: Identify the key components of the financial system
9) Which of the following assets is the most liquid?
A) money market mutual fund
B) computer
C) washing machine
D) U.S. Treasury bond
Answer: A
Diff: 2
Topic: financial system
Objective: Identify the key components of the financial system
10) By providing and communicating information, the financial system
A) reduces the difference between the return on three-month U.S. Treasury bills and the return on thirtyyear U.S. Treasury bonds.
B) relieves individual savers from the necessity of searching out individual borrowers.
C) eliminates the risk in investing in the stock market.
D) guarantees investors a reasonable return on their money.
Answer: B
Diff: 2
Topic: financial system
Objective: Identify the key components of the financial system
11) Financial securities that represent partial ownership of a corporation are known as
A) bonds.
B) stocks.
C) coupons.
D) dividends.
Answer: B
Diff: 1
Topic: financial assets
Objective: Identify the key components of the financial system
12) Securitization is the process of
A) issuing stocks to finance capital spending.
B) issuing bonds to finance purchases of equipment and structures.
C) reducing risk by decreasing corporate debt loads.
D) converting loans into securities.
Answer: D
Diff: 1
Topic: financial assets
Objective: Identify the key components of the financial system
13) If a bank grants you a mortgage, the mortgage is
A) an asset to you as well as an asset to the bank.
B) an asset to you, but a liability to the bank.
C) a liability to you, but an asset to the bank.
D) a liability to you as well as a liability to the bank.
Answer: C
Diff: 2
Topic: financial assets
Objective: Identify the key components of the financial system
14) Financial markets
A) channel funds indirectly between borrowers and lenders.
B) channel funds directly from lenders to borrowers.
C) act as go-betweens by holding a portfolio of assets and issuing claims based on that portfolio to savers.
D) generally provide lenders with lower returns than do financial intermediaries.
Answer: B
Diff: 2
Topic: financial institutions
Objective: Identify the key components of the financial system
15) If you purchase a Treasury bond, the Treasury bond is
A) an asset to you as well as an asset to the U.S. government.
B) an asset to you, but a liability to the U.S. government.
C) a liability to you, but an asset to the U.S. government.
D) a liability to you as well as a liability to the U.S. government.
Answer: B
Diff: 2
Topic: financial assets
Objective: Identify the key components of the financial system
16) Funds flow from lenders to borrowers
A) indirectly through financial markets.
B) directly through financial intermediaries.
C) indirectly through financial intermediaries.
D) primarily through government agencies.
Answer: C
Diff: 1
Topic: financial institutions
Objective: Identify the key components of the financial system
17) Which of the following is NOT a financial intermediary?
A) NASDAQ
B) Allstate Insurance Company
C) Bank of America
D) Vanguard Total Stock Market Index Fund
Answer: A
Diff: 1
Topic: financial institutions
Objective: Identify the key components of the financial system
18) Which of the following is NOT a financial intermediary?
A) mutual fund
B) bank
C) stock exchange
D) insurance company
Answer: C
Diff: 1
Topic: financial institutions
Objective: Identify the key components of the financial system
19) The main role of financial intermediaries is to
A) provide funds to the federal government to cover the budget deficit.
B) borrow funds from savers and lend them to borrowers.
C) provide advice to consumers on how they should handle their finances.
D) help ensure that there is enough money in circulation.
Answer: B
Diff: 1
Topic: financial institutions
Objective: Identify the key components of the financial system
20) Financial intermediaries
A) include banks and other depository institutions.
B) include the New York and American Stock exchanges.
C) directly issue claims on individual borrowers to savers.
D) are owned and operated by the federal government.
Answer: A
Diff: 1
Topic: financial institutions
Objective: Identify the key components of the financial system
21) A "primary market" is a market
A) for government securities.
B) in which newly issued claims are sold to buyers by borrowers.
C) in which newly issued claims are sold by savers to borrowers.
D) for debt by large or "primary" corporations.
Answer: B
Diff: 1
Topic: financial institutions
Objective: Identify the key components of the financial system
22) A bank lending depositors' money to a local business and a pension fund investing contributions in shares of a company are similar financial activities in that
A) both involve the use of financial markets.
B) both involve funds being channeled from savers to borrowers through financial intermediaries.
C) both involve a reduction in the overall level of liquidity in the financial system.
D) both involve in an increase in the overall level of risk in the financial system.
Answer: B
Diff: 2
Topic: financial system
Objective: Identify the key components of the financial system
23) The leading federal regulatory body for financial markets in the United States is the
A) Federal Bureau of Investigation.
B) Securities and Exchange Commission.
C) Federal Financial Market Bureau.
D) Investors Protection Agency.
Answer: B
Diff: 1
Topic: financial institutions
Objective: Identify the key components of the financial system
24) Economists define money as
A) cash in circulation.
B) deposits in commercial banks.
C) anything that people are willing to accept in payment for goods and services or to pay off debts.
D) bonds issued by large corporations.
Answer: C
Diff: 1
Topic: financial system
Objective: Identify the key components of the financial system
25) The Federal Reserve System
A) is in charge of managing the New York Stock Exchange.
B) is headed by the Secretary of the Treasury.
C) is the central bank of the United States.
D) is responsible for conducting fiscal policy for the United States.
Answer: C
Diff: 1
Topic: Federal Reserve
Objective: Identify the key components of the financial system
26) Monetary policy refers to the government's
A) decisions on how much money to spend.
B) decisions on how much money to collect in taxes.
C) plans for retiring the national debt.
D) management of the money supply and interest rates to achieve macroeconomic objectives.
Answer: D
Diff: 1
Topic: Federal Reserve
Objective: Identify the key components of the financial system
27) Diversification refers to the
A) splitting of wealth into many assets.
B) difference between the liquidity of an asset and its risk.
C) difficulty of converting investments in common stocks into investments in bonds.
D) difficulty of selling common stocks in a weak market.
Answer: A
Diff: 1
Topic: financial system
Objective: Identify the key components of the financial system
28) The purpose of diversification is to
A) increase the liquidity of a financial portfolio.
B) reduce the brokerage fees involved in managing a financial portfolio.
C) reduce risk.
D) reduce tax liability.
Answer: C
Diff: 1
Topic: financial system
Objective: Identify the key components of the financial system
29) The financial system provides risk sharing by allowing
A) borrowers to obtain funds either directly or indirectly.
B) savers to earn interest tax-free.
C) borrowers to convert liabilities into assets.
D) savers to hold many assets.
Answer: D
Diff: 2
Topic: financial system
Objective: Identify the key components of the financial system
30) Liquidity
A) is the best available measure of the riskiness of an asset.
B) is a characteristic of money, and of no other asset.
C) is the ease with which an asset can be exchanged for money.
D) was declining for many financial assets during the 1990s.
Answer: C
Diff: 1
Topic: financial system
Objective: Identify the key components of the financial system
31) Which of the following assets is the least liquid?
A) money market mutual fund
B) stock
C) treasury bond
D) house
Answer: D
Diff: 1
Topic: financial system
Objective: Identify the key components of the financial system
32) Increased liquidity in recent decades has reduced interest rates on which of the following assets
(holding constant all other things that affect interest rates)?
A) U.S. government bonds
B) bonds issued by large corporations
C) business loans
D) bonds issued by state governments
Answer: C
Diff: 2
Topic: financial system
Objective: Identify the key components of the financial system
33) The financial system performs the role of communicating information by A) constantly increasing the liquidity of most assets.
B) constantly reducing the riskiness of most assets.
C) incorporating all available information into the prices of financial assets.
D) providing to investors for a nominal charge all government reports available about a particular company.
Answer: C
Diff: 2
Topic: financial system
Objective: Identify the key components of the financial system
34) The distinguishing feature of a well-functioning financial market is the
A) continual increase in the liquidity of most assets.
B) continual reduction in the riskiness of most assets.
C) increased ease of converting common stocks into bonds.
D) incorporation of available information into asset prices.
Answer: D
Diff: 2
Topic: financial system
Objective: Identify the key components of the financial system
35) In the United States, monetary policy is carried out by
A) the Federal Reserve System.
B) Congress.
C) the President.
D) Congress and the President acting together.
Answer: A
Diff: 1
Topic: Federal Reserve
Objective: Identify the key components of the financial system
36) In the United States, the lender of last resort is
A) Fannie Mae.
B) the Federal Reserve.
C) the Federal Deposit Insurance Corporation.
D) the Securities and Exchange Commission.
Answer: B
Diff: 1
Topic: Federal Reserve
Objective: Identify the key components of the financial system
37) A decline in bank lending has the most significant effect on
A) small businesses.
B) large businesses.
C) state governments.
D) the federal government.
Answer: A
Diff: 2
Topic: financial institutions
Special Feature: Apply the Concept: The Rise of Peer-to-Peer Lending and Fintech
Objective: Identify the key components of the financial system
38) As it became clear that the COVID pandemic would cause a significant recession in the United States, all of the following took place EXCEPT
A) the Federal Reserve took steps to stabilize the financial system.
B) employment started to decline.
C) many investors stopped buying financial assets.
D) cities and school districts found it easier to use financial markets to borrow money.
Answer: D
Diff: 2
Topic: financial crises of 2007-2009 and 2020
Special Feature: Chapter Opener: The Covid Pandemic, Financial Markets, and the Flow of Funds
Objective: Provide an overview of the financial crises of 2007-2009 and 2020
39) The Consumer Financial Protection Bureau estimates that about ________ people in the United States lack credit scores.
A) 800,000
B) 17 million
C) 45 million
D) 160 million
Answer: C
Diff: 1
Topic: financial system
Special Feature: Apply the Concept: The Rise of Peer-to-Peer Lending and Fintech
Objective: Provide an overview of the financial crises of 2007-2009 and 2020
40) The funds for loans from peer-to-peer lenders come from three key sources. Which of the following is NOT one of those key sources?
A) individuals
B) government
C) financial firms
D) other businesses
Answer: B
Diff: 1
Topic: financial institutions
Special Feature: Apply the Concept: The Rise of Peer-to-Peer Lending and Fintech
Objective: Identify the key components of the financial system
41) The interest rate on loans made by peer-to-peer lenders tends to be
A) lower than the interest rate on bonds and lower than the interest rate on credit cards.
B) higher than the interest rate on bonds and higher than the interest rate on credit cards.
C) lower than the interest rate on bonds and higher than the interest rate on credit cards.
D) higher than the interest rate on bonds and lower than the interest rate on credit cards.
Answer: D
Diff: 1
Topic: financial institutions
Special Feature: Apply the Concept: The Rise of Peer-to-Peer Lending and Fintech
Objective: Identify the key components of the financial system
42) Peer-to-peer lenders make a profit by
A) paying a lower interest rate to depositors than they charge to borrowers.
B) charging borrowers a one-time fee and charging those who provide funds a fee for collecting payments from borrowers.
C) charging borrowers quarterly interest rates, but paying the providers of funds on an annual basis.
D) securitizing their loans and selling them to large financial institutions.
Answer: B
Diff: 1
Topic: financial institutions
Special Feature: Apply the Concept: The Rise of Peer-to-Peer Lending and Fintech
Objective: Identify the key components of the financial system
43) The process by which investment banks guarantee a certain price to a firm issuing stocks or bonds is known as
A) underwriting.
B) securitization.
C) proprietary trading.
D) peer-to-peer lending.
Answer: A
Diff: 2
Topic: financial institutions
Objective: Identify the key components of the financial system
44) Until very recently, investment banks rarely engaged in which of the following?
A) proprietary trading
B) securitization
C) lending to households
D) underwriting
Answer: C
Diff: 2
Topic: financial institutions
Objective: Identify the key components of the financial system
45) All of the following represent returns to savers EXCEPT
A) dividends on stocks.
B) fees on loans.
C) interest payments on loans.
D) coupon payments on bonds.
Answer: B
Diff: 1
Topic: financial system
Objective: Identify the key components of the financial system
46) The role of the financial system is to
A) channel funds from households and other savers to businesses.
B) protect commercial banks from government regulation.
C) ensure that investment banks remain profitable.
D) provide loans from the Federal Reserve to households and businesses.
Answer: A
Diff: 1
Topic: financial system
Special Feature: Chapter Opener: The Covid Pandemic, Financial Markets, and the Flow of Funds
Objective: Identify the key components of the financial system
47) Ordinary (non-securitized) loans cannot be resold after they have been granted by a bank or another lender. Therefore, these loans are
A) financial assets but not financial securities.
B) financial securities but not financial assets.
C) both financial assets and financial securities.
D) neither financial assets nor financial securities.
Answer: A
Diff: 2
Topic: financial system
Special Feature: Solved Problem: The Services That Securitized Loans Provide Objective: Identify the key components of the financial system
48) Because securitized loans are loans that have been bundled with other loans and sold to investors, they are
A) financial assets but not financial securities.
B) financial securities but not financial assets.
C) both financial assets and financial securities.
D) neither financial assets nor financial securities.
Answer: C
Diff: 2
Topic: financial system
Special Feature: Solved Problem: The Services That Securitized Loans Provide Objective: Identify the key components of the financial system
49) All of the following are true regarding securitized loans EXCEPT
A) they provide risk sharing.
B) they provide information.
C) they provide liquidity.
D) they cannot be resold.
Answer: D
Diff: 2
Topic: financial system
Special Feature: Solved Problem: The Services That Securitized Loans Provide Objective: Identify the key components of the financial system
50) Briefly discuss three reasons why firms may borrow funds from a bank.
Answer: Many firms rely on bank loans to meet their short-term needs for credit, such as funds to pay for inventories or to meet their payrolls. Many firms rely on bank loans to bridge the gap between the time they must pay for inventories or meet their payrolls and when they receive revenues from the sales of goods and services. Some firms also rely on bank loans to meet their long-term credit needs, such as funds they require to physically expand the firm.
Diff: 2
Topic: financial system
Objective: Identify the key components of the financial system
51) Briefly explain the process of securitizing mortgages.
Answer: The mortgage lender sells the loan to a government-sponsored enterprise or financial firm that bundles the mortgage with mortgages from other lenders, providing the basis for a mortgage-backed security.
Diff: 2
Topic: financial assets
Objective: Identify the key components of the financial system
52) How are interest payments on mortgages distributed to investors who own mortgage-backed securities?
Answer: The banks that grants, or originates, the original mortgages will still collect the interest paid by the borrowers and send those interest payments on to the government agency or financial firm to distribute to the investors who have bought the mortgage-backed security.
Diff: 2
Topic: financial assets
Objective: Identify the key components of the financial system
53) Briefly explain the difference in how banks and peer-to-peer lenders make profits on loans.
Answer: Banks have traditionally earned profits on loans by paying a lower interest rate to depositors than they charge to borrowers. Peer-to-peer lenders make profits by charging borrowers a one-time fee and charging the people providing funds a fee for collecting the payments from borrowers.
Diff: 2
Topic: financial institutions
Special Feature: Apply the Concept: The Rise of Peer-to-Peer Lending and Fintech
Objective: Identify the key components of the financial system
1.2 The Crises of 2007-2009 and 2020
1) Which president said, "We have now passed the worst ... and we shall rapidly recover"?
A) Herbert Hoover near the start of the Great Depression
B) Franklin Delano Roosevelt near the start of the Great Depression
C) George W. Bush near the start of the Great Recession
D) Donald Trump during the COVID-19 pandemic
Answer: A
Diff: 1
Topic: financial crises of 2007-2009 and 2020
Objective: Provide an overview of the financial crises of 2007-2009 and 2020
2) What made the recession of 2007-2009 different than any other recession since the Great Depression?
A) The government did not implement a fiscal stimulus.
B) The Fed failed to reduce interest rates.
C) It was accompanied by a financial crisis.
D) The impact was primarily limited to the financial sector.
Answer: C
Diff: 2
Topic: financial crises of 2007-2009 and 2020
Objective: Provide an overview of the financial crises of 2007-2009 and 2020
3) Fannie Mae and Freddie Mac both
A) sell bonds to investors and use the funds to purchase mortgages.
B) help regulate the banking system.
C) directly lend funds to people seeking mortgages.
D) reduce access to funds for mortgages by purchasing existing mortgages.
Answer: A
Diff: 2
Topic: financial crisis
Objective: Provide an overview of the financial crises of 2007-2009 and 2020
4) The Coronavirus Aid, Relief and Economic Security (CARES) Act provided all of the following EXCEPT
A) direct payments to households.
B) loans and grants to businesses under the Paycheck Protection Plan (PPP).
C) direct payments to educational institutions to compensate for lower tax revenues.
D) supplemental unemployment insurance payments.
Answer: C
Diff: 1
Topic: financial crisis
Objective: Provide an overview of the financial crises of 2007-2009 and 2020
5) Which of the following best describes a "bubble"?
A) when the price of an asset reaches a new high
B) an unsustainable increase in the price of a class of assets
C) rapid increases in inflation
D) when bond prices rise more quickly than stock prices
Answer: B
Diff: 1
Topic: financial crisis
Objective: Provide an overview of the financial crises of 2007-2009 and 2020
6) All of the following were significant changes in the mortgage market in the 2000s EXCEPT
A) investment banks became significant participants in the secondary mortgage market.
B) lenders loosened lending standards.
C) mortgage-backed securities became more popular with investors.
D) borrowers tended to increase the amount of their down payments.
Answer: D
Diff: 2
Topic: financial crisis
Objective: Provide an overview of the financial crises of 2007-2009 and 2020
7) In March 2021, Congress and President Biden enacted the American Rescue Plan. This spending bill included funding for the same categories as the CARES act, and also increased tax credits for
A) single-person households.
B) parents of children and for low-income workers.
C) individuals with annual income between $100,000 and $500,000.
D) charities and non-profit organizations.
Answer: B
Diff: 1
Topic: financial crisis
Objective: Provide an overview of the financial crises of 2007-2009 and 2020
8) The Troubled Asset Relief Program (TARP) allowed
A) the Treasury to inject funds into commercial banks in return for stock in the banks.
B) the Fed to provide funds to commercial banks in return for stock.
C) the Treasury to insure bank deposits at major U.S. banks.
D) the Fed to make loans to banks as the lender of last resort.
Answer: A
Diff: 1
Topic: financial crisis
Objective: Provide an overview of the financial crises of 2007-2009 and 2020
9) Which firm did the Treasury allow to fail during the financial crisis?
A) J.P. Morgan
B) Bear Stearns
C) Lehman Brothers
D) American International Group (AIG)
Answer: C
Diff: 1
Topic: financial crisis
Objective: Provide an overview of the financial crises of 2007-2009 and 2020
10) Alt-A borrowers were those who
A) used mortgages to purchase apartments.
B) chose adjustable-rate mortgages instead of fixed-rate mortgages.
C) borrowed using "interest-only" mortgages.
D) did not provide documentation of their income when applying for a mortgage.
Answer: D
Diff: 1
Topic: financial crisis
Objective: Provide an overview of the financial crises of 2007-2009 and 2020
11) The financial crisis of 2007-2009 worsened after the failure of which firm?
A) General Motors
B) Lehman Brothers
C) Bear Stearns
D) American International Group (AIG)
Answer: B
Diff: 1
Topic: financial crisis
Objective: Provide an overview of the financial crises of 2007-2009 and 2020
12) All of the following occurred at the beginning of the financial crisis of 2007-2009 EXCEPT
A) the value of mortgage-backed securities declined sharply.
B) many borrowers defaulted on their mortgages.
C) banks began to ease lending requirements to all borrowers.
D) commercial and investment banks suffered heavy losses due to their holdings of mortgage-backed securities.
Answer: C
Diff: 2
Topic: financial crisis
Objective: Provide an overview of the financial crises of 2007-2009 and 2020
13) Borrowers with flawed credit histories are referred to as ________ borrowers.
A) subprime
B) alt-A
C) adjustable-rate
D) securitized
Answer: A
Diff: 1
Topic: financial crises of 2007-2009 and 2020
Objective: Provide an overview of the financial crises of 2007-2009 and 2020
14) Which of the following was the largest fiscal policy action in U.S. history?
A) the Coronavirus Aid, Relief and Economic Security (CARES) Act
B) the Paycheck Protection Plan (PPP)
C) the Troubled Asset Relief Program (TARP)
D) the Affordable Care Act (ACA)
Answer: A
Diff: 1
Topic: financial crisis
Objective: Provide an overview of the financial crises of 2007-2009 and 2020
15) Why did some economists and policymakers criticize the Fed and Treasury for arranging the sale of Bear Stearns to JP Morgan Chase in 2008?
Answer: The main concern was with the moral hazard problem, which is the possibility that managers of financial firms such as Bear Stearns might make riskier investments if they believe that the federal government will save them from bankruptcy.
Diff: 2
Topic: financial crisis
Objective: Provide an overview of the financial crises of 2007-2009 and 2020
16) What are the four main provisions of the Coronavirus Aid, Relief and Economic Security (CARES) act?
Answer:
1. Direct payments to households
2. Supplemental unemployment insurance payments
3. Funds to state governments to offset some of their costs from fighting the epidemic
4. Loans and grants to businesses under the Paycheck Protection Plan (PPP)
Diff: 2
Topic: financial crisis
Objective: Provide an overview of the financial crises of 2007-2009 and 2020
17) How did securitization and the bursting of the housing bubble contribute to the Financial Crisis of 2007-2009?
Answer: Many investment banks and other investors purchased mortgage-backed securities because they paid higher interest rates than securities of comparable default risk. When the housing bubble burst, the value of the mortgage-backed securities declined significantly, resulting in massive losses for those who owned them, including many investment banks.
Diff: 2
Topic: financial crisis
Objective: Provide an overview of the financial crises of 2007-2009 and 2020