Banking and Financial Institutions
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Course Introduction
This course offers a comprehensive overview of banking and financial institutions, focusing on their roles within the modern financial system. Students will explore the structure, functions, and regulatory environment of commercial banks, credit unions, investment banks, and other financial intermediaries. Topics include the management of risk, interest rates, asset and liability management, and the impact of technological innovation on the banking sector. Additionally, the course examines the response of financial institutions to economic challenges and crises, providing students with practical knowledge to understand current trends and issues in the banking industry.
Recommended Textbook
MandB 3 3rd Edition by Dean Croushore
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Page 2
Chapter 1: Money and the Financial System
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Sample Questions
Q1) In the long run, the only economic variable that the Federal Reserve can affect is
A)inflation.
B)output.
C)unemployment.
D)the exchange rate.
Answer: A
Q2) Buying stocks gives an investor
A)a very low but safe return.
B)ownership in corporations.
C)the riskiest asset available in the market.
D)a pure and random speculative gamble.
Answer: B
Q3) Americans should not worry about all the dollars held by foreigners because
A)most of the currency is reinvested into America.
B)taxes are lower as a result.
C)interest rates are lower as a result.
D)stock prices are higher as a result.
Answer: B
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3
Chapter 2: The Financial System and the Economy
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Q1) An investor calculating the standard deviation of different investments is measuring the ______ of alternative investment portfolios.
A)expected return
B)risk
C)taxation
D)liquidity
Answer: B
Q2) A security has a price of $3,000 and an amount to be repaid in a single payment of $3,400.What is the amount of interest on the security?
Answer: Interest = amount repaid minus price = $3,400 - $3,000 = $400
Q3) Investors who wish to reduce their risk should
A)buy stocks of small companies.
B)diversify.
C)buy stocks of large companies.
D)keep large amounts of cash.
Answer: B
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Chapter 3: Money and Payments
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Sample Questions
Q1) A type of inside money that allows a shopper to prepay some amount and then spend it at her will is a ______card.
A)debit
B)credit
C)commodity
D)stored-value
Answer: D
Q2) The Fed measures the money supply following a system based mainly on
A)the liquidity and size of various bank accounts.
B)the interest rate on different assets.
C)the correlation of different assets with GDP growth.
D)legal requirements.
Answer: A
Q3) Which of the following monetary assets is likely to be most liquid?
A)Currency
B)Traveler's checks
C)Funds in checking accounts
D)Money held as certificate of deposits
Answer: A
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Page 5
Chapter 4: Present Value
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Sample Questions
Q1) The amount of money that you would need to invest today to yield a given future amount is called the A)future value.
B)present value.
C)rate of discount.
D)discount factor.
Q2) After amortizing the principal, a debt security that makes the same dollar payment every year is referred to as a A)coupon bond.
B)fixed-payment security.
C)discount bond.
D)perpetuity.
Q3) Consider a fixedpayment security that pays $100 at the end of every year for five years.If the annual rate of discount is 7 percent, the present value of the security is A)$142.64.
B)$410.02.
C)$789.34.
D)$999.63.
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Chapter 5: The Structure of Interest Rates
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Sample Questions
Q1) Suppose that a risk-neutral investor has a choice between buying a one-year bond paying 4 percent today, a two- year bond paying 5 percent today, a three-year bond paying 5.3 percent today, or a four-year bond paying 5.8 percent today.The investor would buy
A)a one-year bond today.
B)a two-year bond today.
C)a three-year bond today.
D)a four-year bond today.
Q2) A basis point equals
A)one hundredth of a percentage point.
B)one tenth of a percentage point.
C)one half of a percentage point.
D)ten percentage points.
Q3) The analysis of the term structure of interest rates assumes that
A)there is uncertainty about future interest rates.
B)there is no risk involved in the purchase and sale of longterm securities.
C)shortterm and longterm securities offer the same rate of interest.
D)there are no transaction costs.
Q4) What do steep upward-sloping yield curves indicate about the business cycle?
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Chapter 6: Real Interest Rates
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Sample Questions
Q1) Investors can lock in a real interest rate and thus avoid most of the risk of unexpected inflation by buying
A)corporate bonds.
B)inflation-indexed securities.
C)stock.
D)mortgage-backed securities.
Q2) If the nominal interest rate was 4 percent, the expected real interest rate was 3 percent, and the realized real interest rate was 5 percent, then the expected inflation rate was ______and the realized inflation rate was_____ .
A)?1 percent; 1 percent
B)?1 percent; 2 percent
C)1 percent; ?1 percent
D)1 percent; 1 percent
Q3) Which of the following happens when the expected inflation rate rises?
A)Both the demand and supply curve for bonds shift upward.
B)The demand curve for bonds shift to the left.
C)The supply curve for bonds shift to the right.
D)The expected real interest rate rises.
Q4) Explain why inflation risk is a problem for investors.
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Chapter 7: Stocks and Other Assets
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Sample Questions
Q1) Shareholders are also called A)bondholders.
B)brokers.
C)stockholders.
D)debt-holders.
Q2) An investor buys a stock for $10,000 and earns dividends of $250 during the course of the year.At the end of the year, the stock is worth $9,300.The dividend yield for the year is
A) 2.5 percent.
B)2.5 percent.
C)4.5 percent.
D) 7.0 percent.
Q3) An investor buys a stock for $10,000 and earns dividends of $250 during the course of the year.At the end of the year, the stock is worth $9,300.The capital-gains yield for the year is
A)2.5 percent.
B) 2.5 percent.
C) 4.5 percent.
D) 7.0 percent.
Q4) Write a formula for the equity premium.
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Chapter 8: How Banks Work
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Sample Questions
Q1) In a recent year, a bank earned $36 million in interest on its assets of $523 million, it paid out $9 million in interest on its liabilities (excluding capital) of $470 million, and it paid its workers $21.5 million in total compensation.Calculate the bank's spread and its return on equity.
Q2) Suppose a bank has $200 million as transaction deposits, and holds $25 million as reserves.If the reserve requirement is uniformly 10% on any positive amount, the bank's excess reserves equals
A)$25 million.
B)$10 million.
C)$5 million.
D)$1 million.
Q3) Sarah, a customer of a bank, transfers $10,000 from her checking account to her money-market deposit account. Which of the following changes will be reflected in Sarah's bank's balance sheet?
A)Reserves decrease by $10,000.
B)Transactions deposits increase by $10,000.
C)Nontransactions deposits decrease by $10,000.
D)Borrowings increase by $10,000.
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Page 10
Chapter 9: Governments Role in Banking
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Q1) Which of the following acts gives the responsibility as the lender of last resort to the central bank in the U.S?
A)National Bank Act
B)Federal Reserve Act
C)Bank Holding Company Act
D)McFadden Act
Q2) In the CAMELS rating system, which is used to assess the health of the banks, the letter C stands for
A)controls.
B)currency reserves.
C)capital adequacy.
D)compliance with regulations.
Q3) Which of the following is NOT a method used by the FDIC to handle a bank failure?
A)Foreclosure
B)Purchase and assumption
C)Assistance
D)Payoff
Q4) Prior to the passage of the McFadden Act in 1927, what characterized a national bank?
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Chapter 10: Economics Growth and Business Cycles
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Sample Questions
Q1) The growth rate of compensation per hour was slowest during the A)long boom period.
B)economic liftoff period.
C)Great Depression.
D)reorganization period.
Q2) Explain how compensation per hour has changed in the periods of economic liftoff, reorganization, and the long boom.What explanations can you offer for the changes?
Q3) Country X has a population of 70 million, of which 32 million are employed and 8 million are unemployed but looking for employment.The size of the labor force in Country X is .
A)40 million
B)32 million
C)38 million
D)62 million
Q4) Compensation of workers per hour in the U.S.grew the fastest in the A)long boom.
B)economic liftoff period.
C)Great Depression.
D)reorganization period.
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Chapter 11: Modeling Money
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Sample Questions
Q1) The ATM model of the demand for cash is a
A)general-equilibrium model.
B)steady state model.
C)partial-equilibrium model.
D)no-equilibrium model.
Q2) At the starting point of a dynamic model,
A)all variables measure zero.
B)key variables of a model are growing at a decreasing rate.
C)key variables of a model are growing at an increasing rate.
D)key variables in the model are constant or growing at a constant rate.
Q3) In a dynamic model, what three key assumptions are needed to make the prices of goods and services endogenous?
Q4) Suppose you have a 20 percent probability of having your cash lost or stolen, and you spend $25 each day.Your total cost of holding cash is (182.50/T) + (3.75 × T).
a.What is your cost of going to the ATM?
b.What is the nominal interest rate?
c.How often will you go to the ATM to minimize your costs?
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13
Chapter 12: The Aggregate-Demandaggregate-Supply Model
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Q1) In the aggregate demand-aggregate supply model, a decrease in the expected price level, everything else remaining unchanged, causes _____to_____ in the short run.
A)output; increase
B)output; decline
C)output; remain unchanged
D)inflation; increase
Q2) The argument that a change in policy systematically alters the structure of econometric models is known as the
A)Keynesian cross.
B)cross-equation restriction.
C)Lucas critique.
D)endogeneity principle.
Q3) The development of the large structural macroeconomic models was spearheaded by _____economists.
A)Keynesian
B)classical
C)Ricardian
D)institutional
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Chapter 13: Modern Macroeconomic Models
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Q1) Which of the following is a criticism leveled against VAR models?
A)VAR models are based on classical rather than Keynesian economic theory.
B)Var models are not based on data.
C)VAR models are unable to isolate the effects of policy variables because those variables are not exogenous.
D)VAR models isolate the effects of policy variables because those variables are exogenous variables.
Q2) In the two-period model, a lower real interest rate
A)reduces the present value of income.
B)causes the budget constraint to rotate in a clockwise direction.
C)makes households that had initially planned to save better off.
D)makes households that had initially planned to borrow better off.
Q3) Can VARs be used to analyze the effects of monetary policy?
Q4) An RBC researcher who picks a few key parameters based on long-run historical averages of the data is probably
A)calibrating a model.
B)using econometric analysis.
C)replicating a model.
D)solving a model analytically.
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Chapter 14: Economic Interdependence
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Q1) The real exchange rate between the domestic currency of a country and the foreign currency increases by 2 percent.If the domestic price level increases by 4 percent while the foreign price level increases by 3 percent, the nominal exchange rate will
A)increase by 1 percent.
B)decrease by 3 percent
C)increase by 2.5 percent
D)decrease by 3 percent.
Q2) Suppose the exchange rate adjusts so that interest-rate parity holds.Also assume that the interest rate on a one-year Canadian bond is 3 percent and the interest rate on a one-year U.S.bond is 5 percent.
a.If the exchange rate today is 1.40 Canadian dollars per U.S.dollar, what do you expect the exchange rate to be one year from now?
b.Suppose relative purchasing-power parity holds, and the inflation rate in Canada is expected to be 1 percent over the next year.What is the expected inflation rate in the United States?
Q3) How should a country respond when foreign investors withdraw investments from that country?
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Chapter 15: The Federal Reserve System
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Q1) Which of the following statements is true?
A)The Fed does not need to rely on the Government for its operating funds.
B)Open market operations can be used by the Fed only to tighten monetary policy and not to ease it.
C)The Board of Governors of the Fed is headed by the President of the United States.
D)The operations of the Fed are deeply dependent on the actions of the ruling political power.
Q2) Each of the following helps the Federal Reserve to be independent of the federal government except
A)the fourteen-year terms of the governors.
B)the establishment of the Fed in the Constitution.
C)the staggered terms of the governors.
D)the independence of the Fed's income.
Q3) Shares in the Federal Reserve Banks are owned by
A)the federal government of the United States.
B)banks that are members of the Federal Reserve System.
C)the governments of the states in which they are located.
D)private citizens who own stock in them.
Q4) Comment on the success of various Fed chairmen in reducing inflation.
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Chapter 16: Monetary Control
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Q1) The main asset on the Federal Reserve's balance sheet is
A)discount loans.
B)securities.
C)monetary base.
D)capital.
Q2) Since the 2008 financial crisis, what has happened to the M1 and M2 multipliers?
Q3) The amount of nonborrowed reserves equals
A)the monetary base plus the amount of discount loans.
B)the amount of reserves plus the amount of discount loans.
C)the amount of reserves minus the sum of the amount of discount loans and currency.
D)the monetary base minus the sum of the amount of discount loans and currency.
Q4) During the holiday season in December, people use more currency than usual.To offset this increase in demand for money, the Fed increases the money supply through A)defensive open-market operations.
B)dynamic open-market operations.
C)discount loans for profit.
D)discount loans for business needs.
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Chapter 17: Monetary Policy: Goals and Tradeoffs
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Q1) The equation for the Phillips curve in an economy is ? = ?<sup>e</sup> ? 0.5(U ? 5), If the inflation rate is 2 percent and the expected inflation rate is 4 percent, the unemployment rate in the economy must be
A)3.0 percent.
B)4.5 percent.
C)8.0 percent.
D)9.0 percent.
Q2) The lag between when a change in policy is decided and when it is put into action is referred to as the _____lag.
A)implementation
B)recognition
C)effectiveness
D)decision
Q3) Describe the lags in the policymaking process and how they might lead to instability.
Q4) Describe the three major costs of unanticipated inflation and give an example of each.
Q5) Why is there an effectiveness lag for monetary policy?
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19
Chapter 18: Rules for Monetary Policy
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Q1) The Fed is said to tighten policy when it
A)decreases both the money growth and the federal funds rate.
B)decreases the money growth and increases the federal funds rate.
C)increases both the money growth and the federal funds rate.
D)increases the money growth and decreases the federal funds rate.
Q2) If monetary policy is not set by a rule, it is said to be set by A)randomization.
B)discretion.
C)credibility.
D)destabilization.
Q3) Why have economists abandoned the use of money-growth rules in the United States? Explain.
Q4) In general, periods in which the Taylor rule suggested tighter monetary policy than the Fed actually put in place are periods of rising inflation.Periods in which the Taylor rule suggested that monetary policy should be easier than the Fed actually put in place are periods of declining inflation.Describe a recent exception to these results.
Q5) How does a central bank establish credibility?
Q6) What are the major advantages and disadvantages of inflation targeting?
Q7) What challenges do policymakers and researchers face in using the Taylor rule?
Page 20
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