Financial Institutions and Markets
Practice Exam
Course Introduction
This course offers a comprehensive examination of financial institutions and markets, focusing on their roles within the broader economic system. Students will explore the structure and function of key financial institutions such as banks, insurance companies, pension funds, and investment firms, as well as the operational dynamics of financial markets including money, bond, equity, and derivatives markets. Topics include the regulatory environment, risk management, instruments traded, financial intermediation, and the impact of financial globalization. The course equips students with an understanding of how these interconnected entities facilitate the flow of funds, allocate resources, and influence economic growth and stability.
Recommended Textbook
MandB 3 3rd Edition by Dean Croushore
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Chapter 1: Money and the Financial System
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Sample Questions
Q1) More than half of all U.S.dollars can be found
A)in foreign countries.
B)in the United States.
C)in the underground economy.
D)in bank vaults.
Answer: A
Q2) Economic policy affects
A)only the amount of money in the economy.
B)only the lending policy of financial intermediaries.
C)the entire financial system.
D)how financial securities are traded and no other part of the financial system.
Answer: C
Q3) When the overall level of business activity declines persistently, there is said to be
A)a revolution.
B)a hyperinflation.
C)a recession.
D)an expansion.
Answer: C
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Chapter 2: The Financial System and the Economy
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Q1) When a household borrows to buy a home, the resulting security is referred to as
A)a discount bond.
B)a Treasury bill.
C)mortgage debt.
D)consumer credit.
Answer: C
Q2) Four friends- Phillips, Eliza, John, and Jacob are associated with Redhood Ltd.in different ways.Phillips is the CEO of Redhood Ltd., Melissa works as an accountant while John owns some shares of Redhood Ltd.and Jacob has some debt securities issued by the company.Who is likely to be paid last in case of a bankruptcy?
A)John
B)Jacob
C)Phillips
D)Melissa
Answer: A
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Chapter 3: Money and Payments
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Q1) In an economy, the amount of money held in currency and coins is $3,500, the amount of money held as traveler's check is $1,000, the amount of money held as checkable deposits is $2,000, the amount of money held in savings deposit is $4,000, and the amount of money held with retailed money market mutual funds is $700.M1 in the economy equals
A)$3,500.
B)$6,500.
C)$10,500.
D)$11,300.
Answer: B
Q2) Which of the following monetary assets is likely to be least liquid?
A)Coins and currency
B)Travelers checks
C)Funds held in checking accounts
D)Funds held as certificate of deposits
Answer: D
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Chapter 4: Present Value
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Q1) Consider a coupon bond that pays $105 every year and repays its principal amount of $1,500 at the end of 3 years.If the annual rate of discount is 7 percent, the present value of the bond is approximately
A)$735.35.
B)$765.00.
C)$1,395.00.
D)$1,500.00.
Q2) The present value of a perpetuity that pays $F every year when the annual rate of discount is i is
A)F/(1 + i).
B)F×i.
C)F/i.
D)F + i.
Q3) Consider a one-year discount bond that pays $2,000 one year from now.If the annual rate of discount is 3 percent, calculate the present value of the bond.
Q4) Consider a coupon bond that pays $350 every year and repays its principal amount of $5,000 at the end of four years.If the annual rate of discount is 6 percent, what is the present value of the bond?
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Chapter 5: The Structure of Interest Rates
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Q1) The interest that an investor will earn, on maturity, if she purchases a two year bond by paying 6.6 percent today is
A)1.1025.
B)1.1363.
C)1.0036.
D)1.0003.
Q2) According to the expectations theory of the term structure of interest rates, if the interest rate on a one-year bond today is 3.0 percent, the expected interest rate on a one-year bond one year from now is 4.0 percent, and the expected interest rate on a one-year bond two years from now is 4.5 percent, then the interest rate on a two-year bond today is
A)3.00 percent.
B)3.50 percent.
C)3.83 percent.
D)4.00 percent.
Q3) What is the reason for a low rated security to generate a high yield to maturity?
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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Q1) Suppose that a change in the expected inflation rate leads supply and demand to adjust so that the after-tax expected real interest rate is unchanged at 2.0 percent.The tax rate is 30 percent.Initially, the expected inflation rate is 3.0 percent.If the expected inflation rate rises from 3 percent to 6 percent, the nominal interest rate
A)rises by 3 percent.
B)rises by 4.25 percent.
C)falls by 4.25 percent.
D)falls by 3 percent.
Q2) Realized real interest rates in the United States were often negative in the early A)1960s.
B)1970s.
C)1980s.
D)1990s.
Q3) Realized real interest rates in the United States were the highest in the A)1960s.
B)1970s.
C)1980s.
D)1990s.
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Chapter 7: Stocks and Other Assets
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Q1) According to the capital asset pricing model (CAPM), the return to a stock
A)follows a random walk.
B)depends on oil prices, interest rates, and economic growth.
C)depends on how risky the stock is compared with the market average.
D)depends on the stock's risk and the risk to bonds.
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 capital-gains yield for the year is
A)2.5 percent.
B) 2.5 percent.
C) 4.5 percent.
D) 7.0 percent.
Q3) Identify the correct statement from the following.
A)Dividend payments are subject to taxes while realized capital gains are not.
B)Realized capital gains are subject to taxes while dividend payments are not.
C)Both dividend payments and realized capital gains are subject to taxes.
D)Neither dividend payments nor realized capital gains are subject to taxes.
Q4) Write a formula for the equity premium.
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Chapter 8: How Banks Work
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Q1) Savings-and-loan associations suffered losses in the late 1970s when
A)the farm sector of the economy became unprofitable, forcing many farmers into bankruptcy, leading to many bad farm loans.
B)inflation rose, causing short-term interest rates to rise.
C)oil prices rose sharply, causing S&Ls to lose money invested in the oil sector.
D)short-term interest rates fell, causing S&Ls to suffer capital losses on their portfolios of short-term securities.
Q2) Banks earn profit by
A)borrowing from depositors at a lower interest rate, and lending those funds at a higher interest rate.
B)reducing the service charges for safety vaults and ATM facilities.
C)lending more loans to non-risky business firms.
D)reducing the amount of transaction deposits.
Q3) Which size category of banks generally has the largest spread?
A)Small banks
B)Medium-sized banks
C)The 100 largest banks
D)The 10 largest banks
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Chapter 9: Governments Role in Banking
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Sample Questions
Q1) According to the Consumer Financial Protection Bureau, banks must not offer mortgage loans to households for whom the monthly mortgage payments costs more than of their income.
A)20 percent
B)35 percent
C)43 percent
D)50 percent
Q2) The agreement concluded in 2010 imposed higher capital requirements on banks all over the world.
A)Basel III.
B)Basel II.
C)Basel I.
D)Basel IV.
Q3) When the Federal Reserve makes a loan to a bank at the discount window,
A)the Fed requires that the loan be repaid the next day.
B)the interest rate charged by the Fed is equal to the federal funds rate.
C)the loan is backed by collateral.
D)the Fed requires the bank to buy additional deposit insurance.
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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Q1) Classical economists believe that the economy
A)is unable to return to equilibrium because wages and prices are sticky and do not adjust right away.
B)will not return to equilibrium without government intervention.
C)is unable to return to equilibrium because wages and prices are flexible.
D)will return to equilibrium quickly without the need for government intervention.
Q2) The growth rate of output and employment in a country started declining after rising sharply for three years.In which stage of the business cycle is the country currently operating?
A)Peak
B)Trough
C)Expansion
D)Depression
Q3) The reorganization period in the U.S.occurred from
A)1929 1949.
B)1949 1970.
C)1971 1982.
D)1982 present.
Q4) Describe classical economists.
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Chapter 11: Modeling Money
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Q1) What will happen to the nominal interest rate and the equilibrium quantity of money because of the following changes?
a.A decline in people's incomes
b.An increase in the level of prices
c.A decline in the supply of money
Q2) Describe three different changes in the ATM model that would increase the time between ATM visits and increase the quantity of money demanded.
Q3) If the cost of going to the ATM is $1 and the nominal interest rate is 5 percent, someone who has a 15 percent probability of having his cash lost or stolen and spends $10 each day will go to the ATM once in every ____ days approximately.
A)10
B)13
C)16
D)19
Q4) Describe the standard equation used to describe the demand for money.In that equation, what would happen to the demand for money if prices were to double?
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Q1) Suppose ATM costs increased because of additional security required to prevent electronic fraud.Explain how this would affect money demand, aggregate demand, output, and the price level in the short run and the long run.
Q2) One of the reasons that led to the inconsistency of the large structural macroeconomic models was
A)that endogenous variables such as foreign output were treated as exogenous.
B)that all equations were estimated together to test their interrelations with one another.
C)that individual equations were estimated in isolation with one another.
D)that exogenous variables such as level of technology were treated as endogenous.
Q3) Aggregate supply tells us
A)the amount of goods and services being purchased in an economy.
B)the amount of goods and services being produced in an economy.
C)the total amount of physical capital in an economy.
D)the total amount of investments in an economy.
Q4) Suppose another breakthrough in computer technology greatly increases total factor productivity.Explain how this would affect aggregate supply, output, and the price level in the short run and the long run.
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Chapter 13: Modern Macroeconomic Models
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Q1) In a structural VAR, a restriction that describes the impact of the current-period value of one variable on the current-period value of another variable is known as a restriction.
A)contemporaneous
B)long-run
C)short-run
D)structural
Q2) In the two-period model, suppose a household's income in the first period is $30,000, income in the second period is $60,000, and the real interest rate is 30 percent.What is the household's maximum spending in the second period, if it decides to save the entire amount in the first period?
A)$40,000
B)$50,000
C)$80,000
D)$99,000
Q3) Describe the general procedures followed by DSGE researchers creating a new model.
Q4) Can VARs be used to analyze the effects of monetary policy?
Q5) What are the advantages and disadvantages of VAR models?
Q6) Describe the new neoclassical synthesis.
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Chapter 14: Economic Interdependence
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Q1) Suppose the only good traded between Mexico, the U.S., and Brazil is beef, which is produced by all three countries. If the cost of producing a pound of beef is 5 pesos in Mexico, 2 dollars in the U.S., and 1 real in Brazil, the exchange rates based on the law of one price would be______ pesos per dollar and_____ dollars per real.
A)2.5; 2
B)2.5; 0.5
C)0.4; 0.5
D)0.4; 2
Q2) The balance on the current account plus the balance on the capital and financial account equals
A)0.
B)1 .
C)-1.
D)100.
Q3) From 1970 to 2000, the U.S.dollar
A)appreciated against the U.K.pound and depreciated against the Canadian dollar.
B)depreciated against the U.K.pound and appreciated against the Canadian dollar.
C)appreciated against both the U.K.pound and the Canadian dollar.
D)depreciated against both the U.K.pound and the Canadian dollar.
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Chapter 15: The Federal Reserve System
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Q1) How long is the normal term in office for a Governor of the Federal Reserve Board?
A)Five years
B)Seven years
C)Fourteen years
D)Life
Q2) If Federal Reserve governors can only serve one fourteen-year term, how is it possible that Greenspan joined the Fed in 1987 and did not leave until 2006?
Q3) Is there evidence that the Federal Reserve has built itself into an inefficient bureaucracy?
Q4) Primary government securities dealers are _____that meet certain capital requirements and agree to actively transact with the Fed when it engages in open-market operations.
A)small investment banks and brokers
B)large stockbrokers
C)large investment banks and brokers
D)community banks and credit unions
Q5) What are the central banking functions that a Federal Reserve Bank performs?
Q6) Describe the roles of the Federal Reserve governors other than the chairman.
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Chapter 16: Monetary Control
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Q1) Which of the following is true of an economy that has hit the zero lower bound?
A)The money supply in the economy increases rapidly as additions are made to the monetary base.
B)Any increase increase in its monetary base is exactly offset by a decline in its money multipliers.
C)Any short-term bond would provide a return that is much lower than the return from holding cash.
D)The economy's interest rates decline when there is an increase in the monetary base.
Q2) An increase in the amount of discount loans by the Fed
A)increases the money supply by an amount equal to the increase in the loans times the multiplier.
B)decreases the money supply by an amount equal to the increase in the loans times the multiplier.
C)decreases the money supply by an amount greater than the increase in the loans times the multiplier.
D)increases the money supply by an amount lower than the increase in the loans times the multiplier.
Q3) Since the 2008 financial crisis, what has happened to the M1 and M2 multipliers?
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Chapter 17: Monetary Policy: Goals and Tradeoffs
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Q1) When the Fed adopts a contractionary monetary policy, the interest rate at which the Fed lends to other banks will be expected to _____and the money supply in the economy would be expected to _____.
A)decrease; decrease
B)decrease; increase
C)increase; decrease
D)increase; increase
Q2) In an economy, the actual inflation rate is increasing while the ideal inflation rate is constant.In such a case, the inflation gap in the economy will A)increase over time.
B)decrease over time.
C)stay the same.
D)initially decrease then increase.
Q3) If the natural rate of unemployment is 5.2 percent and the unemployment rate is 5.5 percent, then the unemployment gap is A) 5.8 percent.
B) 0.3 percent.
C)+0.3 percent.
D)+5.8 percent.
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Chapter 18: Rules for Monetary Policy
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Q1) If the velocity of money is 8.2, the money supply is $223 billion, and real output is $958 billion, what is the price level?
A)0.5
B)0.8
C)1.7
D)1.9
Q2) Usually inflation targets are set for a
A)low but positive inflation rate.
B)high and positive inflation rate.
C)negative inflation rate.
D)zero inflation rate.
Q3) Which of the following happened as a result of inflation targeting in New Zealand ?
A)It made the goals of the central bank explicit.
B)It led to a higher expected inflation rate.
C)It increased the inflation rate in the country.
D)It lowered the credibility of the central bank.
Q4) Why do monetarists favor the use of a nonactivist rule for monetary policy?
Q5) Why have economists abandoned the use of money-growth rules in the United States? Explain.
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