Economics of Money and Banking Test Bank
Course Introduction
This course explores the fundamental principles and functions of money, banking, and financial institutions within the broader economic system. Students will examine the roles played by central banks, the process of money creation, interest rate determination, and the implementation of monetary policy. The course analyzes the structure, regulation, and behavior of financial markets and institutions, emphasizing their impact on macroeconomic stability and growth. Through both theoretical frameworks and contemporary case studies, students will gain insight into how monetary and banking systems influence economic activity, inflation, unemployment, and financial crises.
Recommended Textbook
Money Banking and the Financial System 1st Edition by R. Glenn Hubbard
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Page 2
Chapter 1: Introducing Money and the Financial System
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Sample Questions
Q1) 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
Q2) 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
Q3) How do pawn shops provide financing?
Answer: The borrower provides collateral in the form of an easy-to-sell good in return for a short-term loan with a high interest rate.In the event that the borrower defaults on the loan,the pawn shop sells the good.
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3
Chapter 2: Money and the Payments System
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Sample Questions
Q1) In Moscow in 1989,what were taxi drivers using as a medium of exchange?
A) Russian rubles
B) Marlboro cigarettes
C) gold coins
D) caviar
Answer: B
Q2) How many prices would there be in a barter economy with 100 goods?
A) 100
B) 1,000
C) 4,950
D) 10,000
Answer: C
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.
Q4) In what way are other assets less liquid than money?
Answer: You incur transactions costs when you exchange other assets for money.
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Chapter 3: Interest Rates and Rates of Return
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Sample Questions
Q1) At an interest rate of 3%,what is the present value of $1000 to be received five years from now?
A) $863
B) $1,667
C) $1,159
D) $850
Answer: A
Q2) What is the total rate of return on a bond with a coupon of $38 payable in one year that was purchased for $950 and sold one year later for $931?
A) 2%
B) 4%
C) 6%
D) 19%
Answer: A
Q3) What is the yield to maturity of a perpetuity with a coupon of $40 and a price of $800?
Answer: The yield to maturity equals $40/$800 = 5%.
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Page 5
Chapter 4: Determining Interest Rates
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Sample Questions
Q1) The supply curve for bonds would be shifted to the right by
A) a decrease in expected profitability.
B) a decrease in the corporate tax on profits.
C) a decrease in tax subsidies for investment.
D) a decrease in government borrowing.
Q2) How can diversification reduce idiosyncratic risk but not systematic risk?
Q3) If the expected gains on stocks rise,while the expected returns on bonds do not change,then
A) the demand curve for bonds will shift to the right.
B) the supply curve for loanable funds will shift to the right.
C) the equilibrium interest rate will fall.
D) the equilibrium interest rate will rise.
Q4) The supply curve for bonds would be shifted to the left by
A) a decrease in government borrowing.
B) a decrease in the corporate tax on profits.
C) an increase in tax subsidies for investment.
D) an increase in expected inflation.
Q5) How should a financial plan of an older saver differ from that of a younger saver?
Q6) Assess the impact on the bond market of the rise in Internet trading of stocks.
Page 6
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Chapter 5: The Risk Structure and Term Structure of Interest
Rates
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Sample Questions
Q1) 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.
Q2) If the federal government replaced the current income tax with a value-added tax
A) the prices of Treasury and municipal bonds would rise.
B) the prices of Treasury and municipal bonds would fall.
C) the prices of Treasury bonds would rise, while the prices of municipal bonds would fall.
D) the prices of Treasury bonds would fall, while the prices of municipal bonds would rise.
Q3) During the financial crisis of 2008,the prices of U.S.Treasury securities
A) rose and the price of corporate bonds declined.
B) fell relative to the prices of corporate bonds.
C) remained in the same relative position to the prices of corporate bonds.
D) were frozen by order of the federal government.
Q4) How do ratings agencies earn income?
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Chapter 6: The Stock Market, information, and Financial
Market Efficiency
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Sample Questions
Q1) Limited liability can best be defined as the legal provision that A) shields owners of a corporation from losing more than what they invested in a firm. B) protects bond holders from being sued by other creditors.
C) gives holders of preferred stock priority over holders of common stock. D) reduces the exposure of sole proprietorships to law suits.
Q2) According to the Gordon-Growth model,what is the value of a stock with a dividend of $1,required return on equity of 10% and expected growth rate of dividends of 5%?
A) $2
B) $10
C) $20
D) $21
Q3) Which group of investors vote for a corporation's board of directors?
A) bond holders
B) holders of preferred stock
C) holders of common stock
D) both holders of common and preferred stock
Q4) Shouldn't better informed investors be able to profit from the deviations from pricing efficiency caused by noise traders?
Page 8
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Chapter 7: Derivatives and Derivative Markets
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Sample Questions
Q1) The choice between futures and options
A) depends on whether the underlying instrument is a debt instrument or an equity.
B) reflects a trade-off between the higher cost of using options and the extra insurance benefits that options provide.
C) reflects a trade-off between the higher cost of using futures and the extra insurance benefits that futures provide.
D) reflects a trade-off between the greater risk from using options and the extra insurance benefits that options provide.
Q2) Clearinghouses help to reduce default risk by
A) being the intermediary in trades for buyers and sellers.
B) margin requirements.
C) marking to market.
D) all of the above.
Q3) Forward transactions would be useful to
A) a government wanting to know the size of its future debt.
B) a household wanting to reduce its future tax liability.
C) a business wanting to know the cost of its funds on future loans.
D) a business wanting to expand its operations in overseas markets.
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Chapter 8: The Market for Foreign Exchange
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Sample Questions
Q1) If foreign exchange traders become convinced that the value of the yen will rise against the dollar in the future,the likely result is that
A) demand for the yen will fall in anticipation.
B) the current value of the yen against the dollar will rise.
C) the current value of the yen against the dollar will fall.
D) nominal interest rates in Japan will fall.
Q2) A change in the dollar value of the British pound from $1.60 to $1.50 represents
A) an increase in the pound price of British goods.
B) an appreciation of the dollar relative to the pound.
C) an appreciation of the pound relative to the dollar.
D) an increase in the dollar price of British goods.
Q3) The theory of purchasing power parity assumes that
A) nominal exchange rates are not affected by movements in relative price levels.
B) real exchange rates are fixed.
C) movements in nominal exchange rates are the result of movements in real exchange rates.
D) inflation rates are roughly the same in most countries.
Q4) What is a dollar liquidity swap line?
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Page 10
Chapter 9: Transactions Costs, asymmetric Information, and the Structure of the Financial System
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Sample Questions
Q1) Banks deal with problems of adverse selection by
A) charging high interest rates.
B) gathering information about the default risk of borrowers.
C) making only short-term loans.
D) making only long-term loans.
Q2) How does the principal-agent problem increase the possibility of moral hazard?
Q3) Transactions costs are
A) zero in financial markets.
B) zero in financial intermediaries.
C) the costs of direct financial transactions.
D) equal to the taxes imposed on financial transactions.
Q4) Economies of scale are
A) charges to savers and borrowers imposed by banks in exchange for reducing transactions costs.
B) the reduction in costs per unit that accompanies an increase in volume.
C) decreases in transactions costs that occur as information costs increase.
D) decreases in information costs that occur as transactions costs increase.
Q5) What are the various ways that financial intermediaries can take advantage of economies of scale?
Q6) What are the information costs faced by savers? Page 11
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Chapter 10: The Economics of Banking
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Sample Questions
Q1) Given that most banks have positive gap and negative durations,banks prefer
A) lower market interest rates.
B) higher market interest rates.
C) higher market fixed rates but lower market floating rates.
D) either higher or lower market interest rates since interest rates have little effect on bank profits.
Q2) Excess reserves equal
A) total reserves less required reserves.
B) required reserves less total reserves.
C) total reserves plus required reserves.
D) required reserves divided by total reserves.
Q3) Why do households hold less in checking accounts then they once did?
Q4) Which of the following is a checkable deposit?
A) a NOW account
B) a money market deposit account
C) a certificate of deposit
D) a savings account
Q5) What are the different forms of bank borrowings?
Q6) How does moral hazard contribute to high bank leverage?
Q7) In what ways does a certificate of deposit (CD)differ from a savings deposit?
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Chapter 11: Investment Banks, mutual Funds, hedge Funds, and the Shadow Banking System
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Sample Questions
Q1) Money market mutual funds
A) hold portfolios of stocks.
B) hold portfolios of short-term assets.
C) are always load funds.
D) hold only U.S. Treasury securities.
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) Property and casualty insurers hold
A) more short-term assets than do life insurance companies.
B) fewer short-term assets than do life insurance companies.
C) roughly the same amount of short-term assets as do life insurance companies.
D) only long-term assets.
Q4) What are some reasons that hedge funds have become controversial?
Q5) What information is typically included in a prospectus?
Q7) What type of economic research do analysts at investment banks conduct? Page 14
Q6) How did the financial crisis of 2007-2009 reveal that market participants underestimated two sources of risk from using commercial paper?
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Page 15
Chapter 12: Financial Crises and Financial Regulation
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Sample Questions
Q1) Which of the following is NOT true of an insolvent bank?
A) Its net worth is negative.
B) It may be unable to pay off its depositors.
C) The value of its assets is less than the value of its liabilities.
D) It must have no more deposits.
Q2) Regulation Q was intended to
A) maintain banks' profitability by limiting competition for funds.
B) increase the reserves banks would hold against demand deposits.
C) increase the reserves banks would hold against time deposits.
D) eliminate the need for discount loans.
Q3) The creation of a lender of last resort in the United States
A) occurred in response to banking panics.
B) was mandated in the U.S. Constitution.
C) occurred in response to the S&L crisis of the 1980s.
D) has been recommended by the Treasury in its report of late 1992.
Q4) A bank panic occurs when
A) a bank is worried that its loans will not be repaid.
B) an individual bank cannot meet its reserve requirements.
C) a bank lacks sufficient funds with which to make loans.
D) the situation in which many banks experience a bank run simultaneously.
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Chapter 13: The Federal Reserve and Central Banking
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Sample Questions
Q1) Which of the following is NOT a way in which power was divided up in the Federal Reserve System?
A) between bankers and business interests
B) among states and regions
C) between importers and exporters
D) between government and the private sector
Q2) Under the Federal Reserve Act,which banks must be members of the Federal Reserve System?
A) all commercial banks
B) national banks
C) state banks
D) all banks with capital in excess of $100 million
Q3) All of the following help make the Fed independent of the political process EXCEPT A) financial independence.
B) chair of Fed receives a lifetime appointment.
C) Board members receive a long, nonrenewable appointment.
D) Board members' terms expire at different times, reducing the possible number of appointees by any one president.
Q4) How do individual become members of the Board of Governors?
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Chapter 14: The Federal Reserves Balance Sheet and the
Money Supply Process
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Sample Questions
Q1) If banks hold no excess reserves,checkable deposits total $1.5 billion,currency totals $400 million,and the required reserve ratio is 10%,then the monetary base equals
A) $550 million.
B) $1.54 billion.
C) $1.9 billion
D) $15 billion.
Q2) If the Fed purchases $50,000 in T-bills from a bank,by how much will the bank's excess reserves increase?
A) by $50,000
B) by $50,000 times the required reserve ratio
C) by $50,000 divided by the required reserve ratio
D) not enough information has been provided to answer the question.
Q3) The money multiplier
A) equals 1 over the required reserve ratio.
B) is an expression that converts the monetary base to the money supply.
C) is larger than the simple deposit multiplier.
D) is completely controlled by the Fed.
Q4) Illustrate the effect of an open market sale of $20 million worth of Treasury bills on the Fed's balance sheet.
Page 18
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Chapter 15: Monetary Policy
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Sample Questions
Q1) Since 1980,discount loans have been available
A) only to member banks of the Federal Reserve System.
B) only to national banks.
C) only to state banks.
D) to all depository institutions.
Q2) Which chair of the Fed advocated that the Fed engage in inflation targeting?
A) Greenspan
B) Bernanke
C) Volcker
D) Martin
Q3) The Fed monitors reserve requirements
A) daily.
B) during two-week maintenance periods.
C) monthly.
D) annually.
Q4) Suppose banks incur heavy losses and become more cautious,increasing their demand for reserve.Make use of a graph of the loanable funds market to show how the Fed can use open market operations to maintain the same federal funds rate.
Q5) What is meant by inflation targeting? Does the Fed engage in inflation targeting?
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Chapter 16: The International Financial System and Monetary Policy
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Sample Questions
Q1) When the Fed sells foreign assets and buy domestic assets at the same time,
A) its assets and liabilities rise by the same amount.
B) its assets and liabilities fall by the same amount.
C) the composition of its assets changes, but its liabilities are unaffected.
D) the composition of its liabilities changes, but its assets are unaffected.
Q2) The Bretton Woods system lasted from
A) 1801 to 1861.
B) 1863 to 1914.
C) 1945 to 1971.
D) 1981 to 1993.
Q3) What was the approximate value of the U.S.current account balance in 2009?
A) +$10 billion
B) +$79 billion
C) -$380 billion
D) -$600 billion
Q4) The speculative attack on the German mark in 1971 resulted in
A) a large increase in the German monetary base.
B) a decline in the value of the mark relative to the dollar.
C) a decision to end the floating of the mark against the dollar.
D) a large decrease in the German monetary base.
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Chapter 17: Monetary Theory I: the Aggregate Demand and Aggregate Supply Model
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Sample Questions
Q1) According to some economists,what contributed to the unusual uncertainty that adversely affected aggregate supply during the recovery following the recession of 2007-2009?
Q2) The new classical explanation of aggregate supply is also known as
A) Monetarism.
B) Keynesianism.
C) the misperception theory.
D) the adaptive expectations theory.
Q3) If labor costs rise at the same time that the federal government decreases its purchases,in the short run
A) aggregate output and the price level will both increase.
B) aggregate output will increase, but the price level will fall.
C) aggregate output and the price level will both fall.
D) aggregate output will fall, but the price level may either increase or decrease.
Q4) 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."
Q5) How does an increase in the price level lead to a higher interest rate?
Page 21
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Chapter 18: Monetary Theory Ii: the Is-Mp Model
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Sample Questions
Q1) For the goods market to be in equilibrium in a closed economy,which of the following must be true?
A) Y = S + I + G
B) S + I = C + G
C) S + G = Y + C
D) S = I
Q2) How does the goods market return to equilibrium if AE is less than production?
Q3) Suppose the stock market crashes resulting in a significant decline in the wealth of consumers.Make use of the IS-MP model to illustrate the impact this has on the economy.How is the Fed likely to respond? Show the impact of the change in monetary policy on the graph of the IS-MP model.
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) Explain how does an increase in real interest rates affect the components of AE.
Q6) What is potential GDP? What happens to unemployment when GDP is at its potential?
Q7) How is the economy likely to respond when AE (sales)exceed production?
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