Central Banking
Chapter Exam Questions
Course Introduction
This course provides an in-depth exploration of the role, functions, and mechanisms of central banks within the modern financial system. Students will examine monetary policy implementation, tools for controlling money supply and interest rates, and strategies for maintaining financial stability. The course also covers the institutional structure of central banks, their interactions with government and private banking sectors, crisis management, and recent developments in central banking practices worldwide. By blending theoretical foundations with real-world case studies, students will gain a comprehensive understanding of how central banks influence economic performance and stability.
Recommended Textbook
Money Banking and the Financial System 3rd Edition by R. Glenn Hubbard
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Page 2
Chapter 1: Introducing Money and the Financial System
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Q1) From 1978 to 2016,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
Q2) 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
Q3) 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
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Page 3
Chapter 2: Money and the Payments System
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Q1) When an economy relies on specialization
A) the economy will generally produce only one product.
B) the economy will usually be heavily agricultural.
C) each individual in the economy produces the goods or services for which he or she has relatively the best ability.
D) each individual will be assigned by the government to produce that good or service the government believes the economy should specialize in.
Answer: C
Q2) All of the following are true in Sweden EXCEPT
A) many branches of Sweden's banks do not accept cash deposits.
B) some stores have stopped accepting cash payments.
C) many churches encourage parishioners to make donations using a mobile banking app.
D) the government no longer issues paper currency.
Answer: D
Q3) Why does the payments system continue to change over time?
Answer: New forms of payments are introduced that increase the efficiency of the payments system by reducing transactions costs.
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4
Chapter 3: Interest Rates and Rates of Return
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Sample Questions
Q1) If the real interest rate is 2% and expected inflation is 2%,the nominal interest rate is A) 0%.
B) 1%.
C) 2%.
D) 4%.
Answer: D
Q2) Why may investors buy a Treasury bill with a negative real interest rate?
A) fear of rising inflation
B) concern about high yields on other bonds
C) fear of default by the U.S. government
D) concern about the high default risk of alternative investments
Answer: D
Q3) Debt instruments are also called A) equities.
B) credit market instruments.
C) prospectuses.
D) units of account.
Answer: B
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Chapter 4: Determining Interest Rates
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Sample Questions
Q1) The bond supply curve
A) shows the quantity of bonds lenders are willing to supply as bond prices change. B) shows the quantity of bonds lenders are willing to supply as interest rates change.
C) shows the quantity of bonds borrowers are willing to supply as bond prices change.
D) is represented by a downward-sloping line when the price of bonds is on the vertical axis and the quantity of bonds supplied is on the horizontal axis.
Q2) An increase in the corporate profits tax is likely to cause
A) the equilibrium interest rate to rise and the equilibrium price of bonds to fall.
B) the equilibrium interest rate to fall and the equilibrium price of bonds to rise.
C) the equilibrium interest rate and the equilibrium price of bonds to both rise.
D) the equilibrium interest rate and the equilibrium price of bonds to both fall.
Q3) What is a black swan event?
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Chapter 5: The Risk Structure and Term Structure of Interest
Rates
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Sample Questions
Q1) The expectations theory
A) has difficulty explaining why U.S. Treasury securities have lower yields than corporate bonds.
B) has difficulty explaining why yields on bonds of different maturities move together.
C) has difficulty explaining why yield curves usually slope upward.
D) accounts well for the fact that yield curves usually slope upward.
Q2) The existence of rating agencies has
A) lowered returns on corporate bonds.
B) raised returns on corporate bonds.
C) left returns on corporate bonds largely unaffected.
D) raised returns on both corporate bonds and Treasury securities.
Q3) The segmented markets theory
A) has difficulty explaining why yield curves usually slope up.
B) has difficulty explaining why yield curves usually slope down.
C) has difficulty explaining why yields on instruments of different maturities tend to move together.
D) provides a good explanation of why yields on instruments of different maturities tend to move together.
Q4) What are the economic implications of an inverted yield curve?
Page 7
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Chapter 6: The Stock Market, information, and Financial
Market Efficiency
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Sample Questions
Q1) An asset's fundamental value equals
A) its face value.
B) its maturity value.
C) the market's best guess of the present value of the asset's expected future returns.
D) the weighted sum of its market price over the recent past.
Q2) According to the Gordon growth model,an increase in the required return on equity
A) increases the future value of the stock.
B) reduces the current dividend.
C) reduces the value of a stock.
D) reduces the expected growth rate of the dividend.
Q3) If traders in a market have rational expectations,then
A) the price of an asset equals its fundamental value.
B) prices of riskier assets are higher than prices of less risky assets.
C) past prices of assets do not affect market participants' expectations of future asset prices.
D) they make use of less information than they would if they had adaptive expectations.
Q4) How can stock prices affect spending by businesses and households?
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Chapter 7: Derivatives and Derivative Markets
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Sample Questions
Q1) The initial deposit required by a buyer or seller of a futures contract is known as A) credit.
B) margin requirement.
C) debit.
D) marking.
Q2) On the day of delivery
A) the spot price will equal the futures price.
B) the spot price will be greater than the futures price by an amount equal to the current interest rate times the futures price.
C) the futures price will be greater than the spot price by an amount equal to the current interest rate times the spot price.
D) there is no necessary relation between the spot price and the futures price.
Q3) Forward transactions
A) allow savers and borrowers to conduct a transaction now and settle in the future.
B) allow savers and borrowers to postpone a transaction from now to the future.
C) always involve increased risk compared with spot transactions.
D) may not be conducted on organized exchanges.
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9
Chapter 8: The Market for Foreign Exchange
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Sample Questions
Q1) Which of the following would cause the nominal exchange rate to appreciate?
A) The real exchange rate depreciates.
B) The domestic inflation rate decreases.
C) The domestic inflation rate increases.
D) The government budget deficit decreases.
Q2) If the interest rate on a U.S.one-year bond is 2%,the interest rate on a Brazilian one-year bond is 8%,and the currency premium on reals (Brazilian currency)is 3%,what is the expected rate of appreciation of the U.S.dollar according to interest-rate parity?
A) -3%
B) 3%
C) 5%
D) 6%
Q3) Speculators who think the euro is likely to decline over the next year can take all of the following actions EXCEPT
A) buying put options on euros.
B) selling euro futures contracts.
C) selling euro forward contracts.
D) buying call options on euros.
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Chapter 9: Transactions Costs, asymmetric Information, and the Structure of the Financial System
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Sample Questions
Q1) The "lemons problem" in the used car market arises from
A) the difficulty U.S. producers have in making reliable cars.
B) the difficulty buyers have in distinguishing good cars from lemons.
C) the tendency of buyers of used cars to pay for them with bad checks.
D) the reluctance of many car dealers to handle used cars.
Q2) Restrictive covenants
A) generally require that firms use debt finance rather than equity finance.
B) generally require that firms use equity finance rather than debt finance.
C) put restrictions on the use of borrowed funds.
D) were outlawed under the Civil Rights Act of 1964.
Q3) In regard to crowdfunding,investors with incomes or net worth of greater than $100,000 can invest up to ________ per year in equity in startups through online crowdfunding sites.
A) $10,000
B) $50,000
C) 10% of their income or net worth
D) 40% of their income or net worth
Q4) What are the reasons why disclosure by the SEC does not eliminate the information costs of adverse selection?
Q5) How do car dealers help reduce adverse selection?
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Chapter 10: The Economics of Banking
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Sample Questions
Q1) Moral hazard can contribute to high bank leverage in all of the following ways EXCEPT A) having high capital requirements.
B) bank managers are compensated in part on providing shareholders with high returns on equity.
C) high bank leverage provides shareholders with a potential for a higher return on equity.
D) federal deposit insurance has reduced the incentive of depositors to monitor the behavior of bank managers.
Q2) FICO scores are based on information gathered from the three major credit reporting agencies.Which of the following is NOT one of those agencies?
A) Equifax
B) Experian
C) TransUnion
D) FDIC
Q3) How can banks measure interest-rate risk?
Q4) Compare the characteristics of loans and marketable securities in terms of liquidity,risk,and information costs.
Q5) What steps can a bank take to deal with a significant outflow of deposits?
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Chapter 11: Beyond Commercial Banks: Shadow Banks and
Nonbank Financial Institutions
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Sample Questions
Q1) All of the following are differences between hedge funds and mutual funds EXCEPT
A) hedge funds are largely unregulated.
B) hedge funds consist of a relatively small number of wealthy investors.
C) hedge funds make risky investments that mutual funds cannot make.
D) hedge funds use money collected from savers to make investments.
Q2) Underwriting involves
A) insuring the life or health of individuals.
B) guaranteeing a price for new capital to the issuing firm.
C) selling stock more cheaply than conventional stockbrokers.
D) issuing stock and using the proceeds to buy bonds.
Q3) Hedge funds have been criticized for
A) their heavy use of short selling.
B) their inability to mobilize a large amount of funds.
C) forcing quick price changes that reduce market inefficiencies.
D) excessive use of hedging strategies.
Q4) The largest institutional participants in capital markets are
A) pension funds.
B) insurance companies.
C) consumer finance companies.
D) business finance companies.
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Chapter 12: Financial Crises and Financial Regulation
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Sample Questions
Q1) During the Great Depression,unemployment peaked at A) 10%.
B) between 15 and 20%.
C) over 20%.
D) 81%.
Q2) Why was the Fed reluctant to rescue insolvent banks?
A) It thought it may lead to moral hazard.
B) It thought it may lead to adverse selection.
C) It thought they were still liquid.
D) It did not think they were insolvent.
Q3) The Franklin National Bank Crisis had its greatest impact on the market for A) commercial paper.
B) commodity futures.
C) negotiable certificates of deposit.
D) Eurodollars.
Q4) Why do bank panics normally lead to recessions?
Q5) Why do governments want to maintain the health of the banking system?
Q6) What are the primary reasons for and against a policy of "too big to fail."
Q7) What are the four explanations given as to why the Fed did not intervene to stabilize the banking system during the Great Depression?
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Chapter 13: The Federal Reserve and Central Banking
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Q1) Which best describes the Federal Reserve district banks?
A) They are private ventures.
B) They are government ventures.
C) Some are private while others are government.
D) They are private-government joint ventures.
Q2) Which of the following is NOT an activity carried out by Federal Reserve district banks?
A) open market operations
B) issuing new Federal Reserve Notes
C) making discount loans
D) examining state member banks
Q3) The original intent of the Federal Reserve Act of 1913 was to provide the Fed with what role?
A) regulator of the banking system
B) lender of last resort
C) manage the exchange rate
D) maintain a balanced budget
Q4) What is included in the public statement released by the FOMC following the conclusion of its meeting?
Q5) What are the roles of Federal Reserve district banks?
Page 15
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Chapter 14: The Federal Reserves Balance Sheet and the
Money Supply Process
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Q1) If currency outstanding equals $500 million,checkable deposits equal $2 billion,reserves equal $200 million,and the required reserve ratio is 0.10,the money multiplier equals
A) 1.14.
B) 3.57.
C) 4.35.
D) 5.
Q2) The Fed's portfolio of securities consists principally of A) municipal bonds.
B) corporate bonds.
C) U.S. Treasury obligations.
D) obligations of foreign governments.
Q3) All of the following were reasons that the Fed increased the required reserve ratio in 1936 EXCEPT
A) concerns over the possibility of future inflation.
B) to eliminate the high level of excess reserves.
C) fears that the economy was overheating.
D) concerns over a speculative bubble.
Q4) Illustrate the effect of the Fed purchasing $50 million worth of mortgage-backed securities on the Fed's balance sheet.
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Chapter 15: Monetary Policy
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Sample Questions
Q1) A Federal Reserve repurchase agreement involves
A) an agreement by a bank to repay a discount loan on a specific day.
B) an agreement by a dealer to buy back securities she has sold to the Fed.
C) an agreement between the Fed and the Treasury for the Fed to purchase a specified amount of Treasury securities.
D) an agreement by a commercial bank to make a loan to another bank in the federal funds market.
Q2) A matched sale-purchase transaction is also known as a
A) reverse repo.
B) discount loan.
C) put option.
D) federal funds loan.
Q3) All of the following central banks took action to stimulate their economies following the 2007-2009 financial crisis and recession by implementing negative interest rates EXCEPT
A) the U.S. Federal Reserve.
B) the European Central Bank.
C) the Swiss National Bank.
D) Denmark's Nationalbank.
Q4) What is the difference between defensive and dynamic open market operations?
Page 17
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Chapter 16: The International Financial System and Monetary Policy
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Q1) Why has the IMF come in for widespread criticism for its handling of the Asian financial crisis?
A) It refused to make loans to any of the countries whose currencies were under speculative attack.
B) Its policies did not sufficiently punish speculators with losses, giving rise to moral hazard.
C) Its policies led to unsustainably low interest rates in a number of Asian countries.
D) Its policies failed to lead to sufficient hardship for citizens in a number of Asian countries, giving rise to moral hazard.
Q2) Suppose that Ruritania has a fixed exchange rate versus the U.S.dollar.If foreign investors become convinced that the Ruritanian currency is overvalued,what actions might they take to profit from this conviction? Would these actions make it easier or harder for Ruritania to maintain the value of its currency versus the dollar? Why?
Q3) How does a sterilized intervention by the Fed in foreign exchange markets differ from an unsterilized intervention?
Q4) What is the policy trilemma?
Q5) Discuss the problems associated with the imposition of capital controls.
Page 18
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Chapter 17: Monetary Theory I- the Aggregate Demand and Aggregate Supply Model
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Q1) Most economists believe that changes in the price level have
A) no effect on the quantity of output supplied in either the short run or the long run.
B) an effect on the quantity of output supplied in the short run, but not in the long run.
C) an effect on the quantity of output supplied in the long run, but not in the short run.
D) an effect on the quantity of output supplied in both the short run and the long run.
Q2) If the coefficient a in the new classical expression for short-run aggregate supply were equal to zero
A) aggregate output would always be at its full-employment level.
B) the short-run aggregate supply curve would slope down.
C) the short-run aggregate supply curve would be a horizontal line.
D) aggregate output would only differ from its full-employment level if the actual price level did not equal the expected price level.
Q3) Analyze the following statement: "I know the fact that prices have started to rise rapidly seems like bad news,but at least prices starting to go up means that output must be starting to go up as well."
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Chapter 18: Monetary Theory Ii: the Is-Mp Model
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Q1) Explain how an increase in real interest rates affects the components of aggregate expenditure.
Q2) How is the economy likely to respond when AE (sales)exceeds production?
Q3) In the IS-MP model,when the Fed increases the real interest rate
A) the MP curve shifts up resulting in a decline in the output gap.
B) the MP curve shifts up resulting in an increase in the output gap.
C) the MP curve shifts down resulting in a decline in the output gap.
D) the MP curve shifts down resulting in an increase in the output gap.
Q4) In a closed economy,the goods market is in equilibrium when
A) Y = S + I + G.
B) C + S = I + G.
C) C + I = S + G.
D) Y = C + I + G.
Q5) What is the inflation gap? What is the output gap?
Q6) An increase in the expected profitability of investment will cause
A) the IS curve to shift right.
B) the IS curve to shift left.
C) the MP curve to shift upward.
D) the MP curve to shift downward.
Q7) What three parts of the economy are represented in the IS-MP model?
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