Bank Management Final Exam
Course Introduction
Bank Management explores the fundamental principles and practices essential to effective management of financial institutions, with a particular focus on commercial banks. The course covers key topics such as regulatory frameworks, risk management, asset-liability management, credit analysis, investment strategies, loan portfolio management, and the impact of economic and technological changes on banking operations. Through case studies and practical examples, students develop analytical skills to assess bank performance and make informed managerial decisions in a complex and evolving financial environment.
Recommended Textbook
The Economics of Money Banking and Financial Markets 9th Edition by Frederic S. Mishkin
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Page 2
Chapter 1: Why Study Money, Banking, and Financial Markets
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Sample Questions
Q1) The management of money and interest rates is called ________ policy and is conducted by a nation's ________ bank.
A)monetary; superior
B)fiscal; superior
C)fiscal; central
D)monetary; central
Answer: D
Q2) Banks and other financial institutions engage in financial intermediation,which
A)can hurt the performance of the economy.
B)can benefit economic performance.
C)has no effect on economic performance.
D)involves borrowing from investors and lending to savers.
Answer: B
Q3) The upward and downward movement of aggregate output produced in the economy is referred to as the ________.
A)roller coaster
B)see saw
C)business cycle
D)shock wave
Answer: C
Page 3
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Chapter 2: An Overview of the Financial System
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Q1) The process of asset transformation refers to the conversion of
A)safer assets into risky assets.
B)safer assets into safer liabilities.
C)risky assets into safer assets.
D)risky assets into risky liabilities.
Answer: C
Q2) The primary assets of a pension fund are
A)money market instruments.
B)corporate bonds and stock.
C)consumer and business loans.
D)mortgages.
Answer: B
Q3) Corporations receive funds when their stock is sold in the primary market.Why do corporations pay attention to what is happening to their stock in the secondary market?
Answer: The existence of the secondary market makes their stock more liquid and the price in the secondary market sets the price that the corporation would receive if they choose to sell more stock in the primary market.
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Chapter 3: What Is Money
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Q1) If peanuts serve as a medium of exchange,a unit of account,and a store of value,then peanuts are
A)bank deposits.
B)reserves.
C)money.
D)loanable funds.
Answer: C
Q2) The payments system is
A)the method of conducting transactions in the economy.
B)used by union officials to set salary caps.
C)an illegal method of rewarding contracts.
D)used by your employer to determine salary increases.
Answer: A
Q3) In explaining the evolution of money
A)government regulation is the most important factor.
B)commodity money,because it is valued more highly,tends to drive out paper money.
C)new forms of money evolve to lower transaction costs.
D)paper money is always backed by gold and therefore more desirable than checks.
Answer: C
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Chapter 4: Understanding Interest Rates
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Sample Questions
Q1) The interest rate that describes how well a lender has done in real terms after the fact is called the
A)ex post real interest rate.
B)ex ante real interest rate.
C)ex post nominal interest rate.
D)ex ante nominal interest rate.
Q2) The return on a 5 percent coupon bond that initially sells for $1,000 and sells for $950 next year is
A)-10 percent.
B)-5 percent.
C)0 percent.
D)5 percent.
Q3) The ________ interest rate more accurately reflects the true cost of borrowing.
A)nominal
B)real
C)discount
D)market
Q4) Your favorite uncle advises you to purchase long-term bonds because their interest rate is 10%.Should you follow his advice?
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Chapter 5: The Behavior of Interest Rates
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Q1) Everything else held constant,when stock prices become ________ volatile,the demand curve for bonds shifts to the ________ and the interest rate ________.
A)more; right; rises
B)more; right; falls
C)less; left; falls
D)less; left; does not change
Q2) A rise in the price level causes the demand for money to ________ and the interest rate to ________,everything else held constant.
A)decrease; decrease
B)decrease; increase
C)increase; decrease D)increase; increase
Q3) In the loanable funds framework,the ________ is measured on the vertical axis. A)price of bonds
B)interest rate
C)quantity of bonds
D)quantity of loanable funds
Q4) Use demand and supply analysis to explain why an expectation of Fed rate hikes would cause Treasury prices to fall.
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Chapter 6: The Risk and Term Structure of Interest Rates
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Q1) The preferred habitat theory of the term structure is closely related to the A)expectations theory of the term structure.
B)segmented markets theory of the term structure.
C)liquidity premium theory of the term structure.
D)the inverted yield curve theory of the term structure.
Q2) The collapse of the subprime mortgage market
A)did not affect the corporate bond market.
B)increased the perceived riskiness of Treasury securities.
C)reduced the Baa-Aaa spread.
D)increased the Baa-Aaa spread.
Q3) If investors expect interest rates to fall significantly in the future,the yield curve will be inverted.This means that the yield curve has a ________ slope.
A)steep upward
B)slight upward
C)flat
D)downward
Q4) If the federal government where to raise the income tax rates,would this have any impact on a state's cost of borrowing funds? Explain.
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Page 8
Chapter 7: The Stock Market, the Theory of
Expectations,
and the Efficient Market Hypothesis
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Q1) Rational expectations forecast errors will on average be ________ and therefore ________ be predicted ahead of time.
A)positive; can
B)positive; cannot
C)negative; can
D)zero; cannot
Q2) Using the Gordon growth model,a stock's price will increase if
A)the dividend growth rate increases.
B)the growth rate of dividends falls.
C)the required rate of return on equity rises.
D)the expected sales price rises.
Q3) The subprime financial crisis lead to a decline in stock prices because
A)of a lowered expected dividend growth rate.
B)of a lowered required return on investment in equity.
C)higher expected future stock prices.
D)higher current dividends.
Q4) You believe that a corporation's dividends will grow 5% on average into the foreseeable future.If the company's last dividend payment was $5 what should be the current price of the stock assuming a 12% required return?
Page 9
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Chapter 8: An Economic Analysis of Financial Structure
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Sample Questions
Q1) Direct finance involves the sale to ________ of marketable securities such as stocks and bonds.
A)households
B)insurance companies
C)pension funds
D)financial intermediaries
Q2) One reason China has been able to grow so rapidly even though its financial development is still in its early stages is
A)the high savings rate of around 40%.
B)the shift of labor to the agricultural sector.
C)the stringent enforcement of financial contracts.
D)the ease of obtaining high-quality information about creditors.
Q3) The presence of economies of scope may benefit financial institutions but may create potential costs from ________.
A)conflicts of interest
B)multiple profitable enterprises
C)economies of scale
D)unsecured debt
Q4) Explain the principal-agent problem as it pertains to equity contracts.
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Chapter 9: Financial Crises and the Subprime Meltdown
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Q1) When the value of loans begins to drop,the net worth of financial institutions falls causing them to cut back on lending in a process called
A)deleveraging.
B)releveraging.
C)capitulation.
D)deflation.
Q2) Factors that led to worsening financial market conditions in East Asia in 1997-1998 include
A)weak supervision by bank regulators.
B)a rise in interest rates abroad.
C)unanticipated increases in the price level.
D)increased uncertainty from political shocks.
Q3) The originate-to-distribute business model has a serious ________ problem since the mortgage broker has little incentive to make sure that the mortgagee is a good credit risk.
A)principal-agent
B)debt deflation
C)democratization of credit
D)collateralized debt
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Chapter 10: Banking and the Management of Financial Institutions
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Q1) Looking at the Net Interest Margin indicates that the poor bank performance in the late 1980s
A)was not the result of interest-rate movements.
B)was not the result of risky loans made in the early 1980s.
C)resulted from a narrowing of the gap between interest earned on assets and inters paid on liabilities.
D)resulted from a huge decrease in provisions for loan losses.
Q2) The share of checkable deposits in total bank liabilities has
A)expanded moderately over time.
B)expanded dramatically over time.
C)shrunk over time.
D)remained virtually unchanged since 1960.
Q3) Net profit after taxes per dollar of equity capital is a basic measure of bank profitability called
A)return on assets.
B)return on capital.
C)return on equity.
D)return on investment.
Q4) How can specializing in lending help to reduce the adverse selection problem in lending?
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Chapter 11: Economic Analysis of Financial Regulation
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Q1) In May 1991,the FDIC announced that it would sell the government's final 26% stake in Continental Illinois,ending government ownership of the bank that it had rescued in 1984.The FDIC took control of the bank,rather than liquidate it,because it believed that Continental Illinois
A)was a good investment opportunity for the government.
B)could be the Chicago branch of a new governmentally-owned interstate banking system.
C)was too big to fail.
D)would become the center of the new midwest region central bank system.
Q2) Because of asymmetric information,the failure of one bank can lead to runs on other banks.This is the
A)too-big-to-fail effect.
B)moral hazard problem.
C)adverse selection problem.
D)contagion effect.
Q3) The federal agencies that examine banks include
A)the Federal Reserve System.
B)the Internal Revenue Service.
C)the SEC.
D)the U.S.Treasury.
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Chapter 12: Banking Industry: Structure and Competition
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Q1) Which of the following statements concerning bank regulation in the United States are true?
A)The Office of the Comptroller of the Currency has the primary responsibility for state banks that are members of the Federal Reserve System.
B)The Federal Reserve and the state banking authorities jointly have responsibility for the 900 state banks that are members of the Federal Reserve System.
C)The Office of the Comptroller of the Currency has sole regulatory responsibility over bank holding companies.
D)The state banking authorities have sole regulatory responsibility for all state banks.
Q2) The declining cost of computer technology has made ________ a reality.
A)brick and mortar banking
B)commercial banking
C)virtual banking
D)investment banking
Q3) What financial innovations helped banks to get around the bank branching restrictions of the McFadden Act?
Q4) Why did the interest rate volatibility of the 1970s spur financial innovation?
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14
Chapter 13: Central Banks and the Federal Reserve System
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Q1) The Federal Open Market Committee's "balance of risks" is an assessment of whether,in the future,its primary concern will be
A)higher exchange rates or higher unemployment.
B)higher inflation or a stronger economy.
C)higher inflation or a weaker economy.
D)lower inflation or a stronger economy.
Q2) An important function of the regional Federal Reserve Banks is
A)setting reserve requirements.
B)clearing checks.
C)determining monetary policy.
D)setting margin requirements.
Q3) Members of the Executive Board of the European System of Central Banks are appointed to ________ year,nonrenewable terms.
A)four
B)eight
C)ten
D)fourteen
Q4) Explain the similarities and differences between the European System of Central Banks and the Federal Reserve System.
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Chapter 14: The Money Supply Process
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Sample Questions
Q1) The factor accounting for the steepest rise in the currency ratio since 1892 is A)taxes.
B)bank panics.
C)illegal activity.
D)an increase in wealth.
Q2) The equation that represents M2 in the model of the money supply process is
A)M2 = C + D
B)M2 = C + D + T - MMF.
C)M2 = C + D - T + MMF.
D)M2 = C + D + T + MMF.
Q3) Suppose that from a new checkable deposit,First National Bank holds two million dollars in vault cash,nine million dollars in excess reserves,and faces a required reserve ratio of ten percent.Given this information,we can say First National Bank has ________ million dollars on deposit with the Federal Reserve.
A)one
B)two
C)eight
D)ten
Q4) Explain why the simple deposit multiplier overstates the true deposit multiplier.
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Chapter 15: Tools for Monetary Policy
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Q1) The interest rate charged on overnight loans of reserves between banks is the A)prime rate.
B)discount rate.
C)federal funds rate.
D)Treasury bill rate.
Q2) When the Fed acts as a lender of last resort,the type of lending it provides is
A)primary credit.
B)seasonal credit.
C)secondary credit.
D)installment credit.
Q3) If float is predicted to decrease because of good weather,the manager of the trading desk at the New York Fed bank will likely conduct ________ open market operations to ________ reserves.
A)defensive; inject
B)defensive; drain
C)dynamic; inject
D)dynamic; drain
Q4) Explain the Fed's three tools of monetary policy and how each is used to change the money supply.Does each tool affect the monetary base or the money multiplier?
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Chapter 16: The Conduct of Monetary Policy: Strategy and Tactics
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Q1) Compared to the United States,Japan's experience with monetary targeting performed
A)better with regard to the inflation rate and output fluctuations.
B)worse with regard to the inflation rate and output fluctuations.
C)better with regard to the inflation rate,but worse with regard to output fluctuations.
D)worse with regard to the inflation rate,but better with regard to output fluctuations.
Q2) Which of the following is the best description of the monetary policy strategy followed by the European Central Bank (ECB)?
A)The ECB follows monetary targeting.
B)The ECB follows inflation targeting.
C)The ECB has a hybrid strategy with elements of both monetary targeting and inflation targeting.
D)The ECB has a Fed-like "just do it" approach.
Q3) The monetary policy strategy that suffers a lack of transparency is
A)exchange-rate targeting.
B)monetary targeting.
C)inflation targeting.
D)the implicit nominal anchor.
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Chapter 17: The Foreign Exchange Market
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Q1) The ________ suggests that the most important factor affecting the demand for domestic and foreign assets is the expected return on domestic assets relative to foreign assets.
A)theory of asset demand
B)law of one price
C)interest parity condition
D)theory of foreign capital mobility
Q2) When the value of the British pound changes from $1.25 to $1.50,the pound has ________ and the U.S.dollar has ________.
A)appreciated; appreciated
B)depreciated; appreciated
C)appreciated; depreciated
D)depreciated; depreciated
Q3) ________ in the foreign interest rate causes the demand for domestic assets to shift to the right and the domestic currency to ________,everything else held constant.
A)An increase; appreciate
B)An increase; depreciate
C)A decrease; appreciate
D)A decrease; depreciate
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Chapter 18: The International Financial System
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Q1) Under a fixed exchange rate regime,if the domestic currency is initially ________,that is,________ par,the central bank must intervene to purchase the domestic currency by selling foreign assets.
A)overvalued; below B)overvalued; above C)undervalued; below D)undervalued; above
Q2) Because it provides some indication of what is happening to U.S.claims on foreign wealth and the demand for imports and exports,the ________ is closely followed by economists wanting information on the future movement of exchange rates.
A)trade balance
B)capital account
C)current account balance
D)statistical discrepancy
Q3) Which of the following is not a disadvantage of controls on capital outflows?
A)The controls may lead to excessive risk taking by the domestic banks.
B)They are seldom effective during a crisis.
C)Capital flight may increase after they are put in place.
D)Controls often lead to an increase in government corruption.
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Chapter 19: The Demand for Money
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Q1) If nominal GDP is $10 trillion,and the money supply is $2 trillion,velocity is A)0.2.
B)5.
C)10.
D)20.
Q2) Friedman's argument that competition among banks will tend to keep the difference between the return on bonds and money relatively constant implies that changes in ________ will have ________ on the demand for money.
A)interest rates; a big impact
B)income; a big impact
C)income; little effect
D)interest rates; little effect
Q3) If initially the money supply is $1 trillion,velocity is 5,the price level is 1,and real GDP is $5 trillion,an increase in the money supply to $2 trillion
A)increases real GDP to $10 trillion.
B)causes velocity to fall to 2.5.
C)increases the price level to 2.
D)increases the price level to 2 and velocity to 10.
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Chapter 20: The Islm Model
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Q1) If net exports increase by 100 and the mpc is 0.75,equilibrium aggregate output increases by
A)100.
B)250.
C)400.
D)750.
Q2) Aggregate demand in an economy with no government or foreign trade is
A)consumer expenditure plus actual investment.
B)consumer expenditure plus planned investment.
C)consumer expenditure plus inventory investment.
D)consumer expenditure plus fixed investment.
Q3) If unplanned investment is negative,firms will ________ production and output will
A)cut; rise
B)cut; fall
C)increase; rise
D)increase; fall
Q4) Keynes believed that unstable investment caused the Great Depression.Using the simple Keynesian model,explain how a fall in investment affects equilibrium output.
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Chapter 21: Monetary and Fiscal Policy in the ISLM Model
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Q1) Everything else held constant,an expansionary ________ policy will cause the interest rate to rise,while an expansionary ________ policy will cause the interest rate to fall.
A)monetary; monetary
B)monetary; fiscal
C)fiscal; monetary
D)fiscal; fiscal
Q2) A shift in tastes toward American goods ________ net exports in the U.S.and causes the IS curve to shift to the ________ in the U.S.,everything else held constant.
A)decreases; right
B)decreases; left
C)increases; right
D)increases; left
Q3) Everything else held constant,an increase in government spending will cause
A)aggregate demand to increase
B)aggregate demand to decrease
C)the quantity of aggregate demand to increase
D)the quantity of aggregate demand to decrease
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Chapter 22: Aggregate Demand and Supply Analysis
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Q1) Explain and demonstrate graphically the effects of a negative supply shock in both the short-run and long-run.
Q2) Everything else held constant,an increase in net taxes ________ aggregate
A)increases; demand
B)decreases; demand
C)decreases; supply
D)increases; supply
Q3) Everything else held constant,a change in workers' expectations about the aggregate price level will cause ________ to change.
A)aggregate demand
B)short-run aggregate supply
C)the production function
D)long-run aggregate supply
Q4) Explain through the component parts of aggregate demand why the aggregate demand curve slopes down with respect to the price level.Be sure to discuss two channels through which changes in prices affect demand.
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24
Chapter 23: Transmission Mechanisms of Monetary Policy:
The Evidence
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Q1) Early Keynesians believed that ________ interest rates during the Great Depression indicated that monetary policy was ________.
A)high; easy
B)high; tight
C)low; easy
D)low; tight
Q2) Monetarists contend that the channels of monetary influence in Keynesian structural models are too ________ defined,________ the importance of monetary policy.
A)broadly; exaggerating
B)broadly; understating
C)narrowly; understating
D)narrowly; exaggerating
Q3) During the Great Depression,real interest rates
A)rose to unprecedentedly high levels.
B)rose only slightly above the long-run trend.
C)fell to unprecedentedly low levels.
D)fell only slightly below the long-run trend.
Q4) Discuss three channels by which monetary policy affects stock prices and aggregate spending.
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Chapter 24: Money and Inflation
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Q1) Complete Milton Friedman's famous proposition: "Inflation is always and everywhere a ________ phenomenon."
A)monetary
B)political
C)policy
D)budgetary
Q2) If aggregate output is below the natural rate level,advocates of discretionary policy would recommend that the government
A)do nothing.
B)try to eliminate the high unemployment by attempting to shift the aggregate supply curve to the right.
C)try to eliminate the high unemployment by attempting to shift the aggregate demand curve to the right.
D)try to eliminate the high unemployment by attempting to shift the aggregate demand curve to the left.
Q3) Suppose that the economy is at the natural rate of output.Explain how a positive supply shock,followed by a more restrictive monetary policy,allows policymakers a painless way to reduce inflation.
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26
Chapter 25: Rational Expectations: Implications for Policy
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Q1) The new classical model has the word classical associated with it because,when an increase in the money supply is anticipated,aggregate output
A)drops below the natural rate level.
B)rises above the natural rate level.
C)remains at the natural rate level.
D)increases in the short run,but not in the long run.
Q2) An expansionary monetary policy will cause aggregate output to expand in the new classical macroeconomic model
A)if the policy is unanticipated.
B)if the policy is anticipated.
C)only after a long and variable lag,provided the policy is anticipated.
D)never; output will never expand in the new classical model when monetary policy is changed.
Q3) In a new classical view of the world,the best anti-inflation policy,when viewed as being credible,is
A)a gradualist policy.
B)a cold turkey policy.
C)a complete monetary and fiscal reform measure.
D)an activist policy.
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