Financial Intermediation
Exam Questions
Course Introduction
Financial Intermediation examines the critical roles that financial institutions such as banks, investment firms, and insurance companies play in the economy by channeling funds from savers to borrowers. This course explores the mechanisms through which intermediaries facilitate efficient allocation of capital, manage risk, and reduce information asymmetries between surplus and deficit economic agents. Topics include the structure and evolution of financial markets, the regulatory environment, asset transformation, the management of liquidity and credit risk, and the impact of technological advancements in financial intermediation. Through real-world case studies and analytical models, students gain a foundational understanding of the importance of financial intermediaries in supporting economic growth and stability.
Recommended Textbook
Money Banking and the Financial System 3rd Edition by R. Glenn Hubbard
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18 Chapters
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Page 2
Chapter 1: Introducing Money and the Financial System
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Sample Questions
Q1) At the beginning of the financial crisis,banks were hurt by all of the following EXCEPT
A) declines in the value of mortgage-backed securities.
B) defaults on mortgages by those with subprime mortgages.
C) holding too many Treasury bonds.
D) not being repaid on loans to real estate developers.
Answer: C
Q2) 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
Q3) How are interest payments on mortgages distributed to investors who own mortgage-backed securities?
Answer: The banks that grants,or originates,the original mortgages will still collect the interest paid by the borrowers and send those interest payments on to the government agency or financial firm to distribute to the investors who have bought the mortgage-backed security.
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3
Chapter 2: Money and the Payments System
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Sample Questions
Q1) Andy can't make a deal with Danny.Andy has an Alex Rodriguez baseball card and would like to trade it to Danny for Danny's Albert Pujols card,but Danny doesn't want an Alex Rodriguez card.Andy's problem illustrates the drawback to a barter system known as
A) the specialization problem.
B) the double coincidence of wants problem.
C) the many prices problem.
D) the transactions problem.
Answer: B
Q2) Under a system of barter
A) each individual trades output directly with another.
B) only agricultural goods may be traded.
C) goods may be traded for money, but money may not be traded for goods.
D) currency is accepted for purchases, but personal checks are not.
Answer: A
Q3) What is the difference between money,income,and wealth?
Answer: Income is equal to a person's earnings over a period of time.Wealth is the sum of a person's assets minus the sum of a person's liabilities.Money is a medium of exchange and one component of a person's wealth.
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Page 4
Chapter 3: Interest Rates and Rates of Return
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Sample Questions
Q1) Suppose you purchase a bond with a coupon of $30 for $1,025.You sell it one year later for $1,050.What rate of return did you earn? Report a percentage with two decimal places.
Answer: The rate of return is $30 / $1,025 + ($1,050 - $1,025)/ $1,025 = 5.37%.
Q2) The total payment to a lender for a one-period simple loan is A) (P + i)<sup>n</sup>.
B) P + i.
C) i(1 + i).
D) P(1 + i).
Answer: D
Q3) The amount of funds the borrower receives from the lender with a simple loan is called the A) principal. B) equity.
C) claim.
D) collateral.
Answer: A
Q4) 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%.
Page 5
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Chapter 4: Determining Interest Rates
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Q1) In the market for loanable funds,the seller is considered to be
A) the lender.
B) the borrower.
C) the lender or the borrower depending upon the use to which the funds are put.
D) the lender or the borrower depending upon whether interest rates are rising or falling.
Q2) 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.
Q3) Explain what happens to the nominal interest rate when there is an increase in real GDP.Make use of a graph of the money market to illustrate this change in real GDP and the nominal interest rate.
Q4) Which of the following will cause the money demand curve to shift to the right?
A) a decrease in real GDP
B) an increase in the price level
C) an increase in the nominal interest rate
D) a decrease in the supply of money
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Chapter 5: The Risk Structure and Term Structure of Interest
Rates
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Q1) Which of the following is the highest bond rating assigned by Moody's Investors Service?
A) Aaa
B) A
C) B
D) Baa
Q2) Some claim that ratings agencies have a conflict of interest since
A) they rate the quality of their own bonds.
B) agencies charge firms for their services rather than investors, they have an incentive to give high ratings to gain business.
C) government began to include bond ratings as part of regulations of mutual funds, banks, and financial firms.
D) they issued many of the mortgages that were later securitized into bonds.
Q3) Steve Forbes has run for president twice on a program of a "flat tax." Under a flat tax,there would be only one tax bracket for the federal income tax and most tax deductions and tax exemptions would be eliminated.Suppose that Forbes wins the 2020 presidential election.What would be the likely impact on the market for municipal bonds?
Q4) How do ratings agencies earn income?
Page 7
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Chapter 6: The Stock Market, information, and Financial
Market Efficiency
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Q1) Suppose you are considering buying shares of a stock to hold for one year.The stock has an expected annual dividend of $2 and an expected price at the end of the year of $25.If your required rate of return is 10%,what is the most that you should be willing to pay for the stock? Round off to the nearest cent.
Q2) Under the efficient markets hypothesis,for news about a company's prospects to have a large impact on the price of the company's stock,the news must
A) have an impact on the company's profitability in the short term.
B) have an impact on the company's profitability in the long term.
C) significantly increase the likelihood that the company will go bankrupt.
D) significantly reduce the liquidity of the company's stock.
Q3) Under the efficient markets hypothesis,what would be the price per share of a company whose current dividend is $10.00 and whose dividends are expected to grow by 3% per year (assume the risk-adjusted interest rate is 10%)?
A) $74.62
B) $79.23
C) $142.86
D) $147.14
Q4) What are the differences between common stock and preferred stock?
Page 8
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Chapter 7: Derivatives and Derivative Markets
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Q1) The intrinsic value of an option
A) is equal to the option premium.
B) is the amount the option actually is worth if it is immediately exercised.
C) is the amount the option is expected to be worth on its expiration date.
D) is impossible to determine in the absence of information on the future prices of the underlying asset.
Q2) The primary difference between an American and a European option is
A) American options must be exercised on the expiration date.
B) European options must be exercised on the expiration date.
C) American options may be exercised at any point up until the expiration date.
D) European options may be exercised at any point up until the expiration date.
Q3) In a put options contract,the
A) seller has the obligation to receive the instrument at a specified time.
B) buyer has the obligation to deliver the instrument at a specified time.
C) buyer has the obligation to receive the instrument at a specified time.
D) seller has the obligation to deliver the instrument at a specified time.
Q4) Why do futures have lower information costs and higher liquidity than forward contracts?
Q5) What are the steps involved in using options for a short sale of a stock?
Q6) How do exchanges seek to reduce default risk in the futures market?
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Chapter 8: The Market for Foreign Exchange
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Q1) Suppose that short-term real interest rates fall in Japan.Is this likely to be good news or bad news for the tourism industry in Hawaii?
Q2) Suppose you invest $5,000 in a one-year Japanese bond that pays 1% interest.At the time of your purchase,85 yen equals $1 while one year later,80 yen equals $1.What will be the value of your investment in one year when measured in dollars?
Q3) Suppose that a slice of pepperoni pizza costs £1 in London and $2 in San Francisco.If the real exchange rate is one-third of a slice of U.S.pizza for one slice of British pizza,how many pounds should you receive in exchange for $1?
A) 1/3
B) 1.5
C) 2
D) 3
Q4) Eurodollars refer to
A) dollar deposits in banks outside the United States.
B) dollar deposits only in banks in Europe.
C) dollars printed especially for the European market.
D) the exchange rate between the U.S. dollar and the euro.
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Page 10
Chapter 9: Transactions Costs, asymmetric Information, and the Structure of the Financial System
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Q1) Moral hazard problems arise when
A) lenders have difficulty in distinguishing between good and lemon firms.
B) a downturn in economic activity makes repaying loans difficult for borrowers.
C) borrowers have an incentive to act in ways that do not reflect the lender's interests.
D) borrowers default on loans.
Q2) Which of the following concerns were raised as a result of record low interest rates in 2016?
A) high perceived risk of default
B) high interest rate risk
C) corporations facing a lack of demand for bonds
D) high risk premiums on investment-grade corporate bonds
Q3) Moral hazard arises from
A) the difficulty of distinguishing good-risk borrowers from bad-risk borrowers.
B) the likelihood that bad-risk borrowers are more likely to accept a loan than are good-risk borrowers.
C) savers' difficulties in monitoring borrowers.
D) borrowers' difficulties in locating savers.
Q4) How does adverse selection affect the participation of small- and medium-sized firms in the stock market?
Page 11
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Chapter 10: The Economics of Banking
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Sample Questions
Q1) The difference between a savings deposit and a time deposit is
A) time deposits pay no interest.
B) savings deposits pay no interest.
C) time deposits have specified maturities.
D) savings deposits have specified maturities.
Q2) In which of the following assets are commercial banks in the United States NOT allowed to invest checkable deposits?
A) home mortgages
B) corporate bonds
C) municipal bonds
D) U.S. Treasury bonds
Q3) Which of the following statements about checkable deposits is correct?
A) Checkable deposits are a larger fraction of banks' funds today than in 1973.
B) Checkable deposits are a smaller fraction of banks' funds today than in 1973.
C) All checkable deposits pay interest.
D) No checkable deposits pay interest.
Q4) What four off-balance-sheet activities have banks come to rely on to earn fee income?
Q5) How does moral hazard contribute to high bank leverage?
Q6) What are the different forms of bank borrowings?
Page 12
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Chapter 11: Beyond Commercial Banks: Shadow Banks and
Nonbank Financial Institutions
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Q1) Sales finance companies
A) purchase accounts receivable of small firms at a discount.
B) sell commercial paper and buy long-term corporate bonds.
C) take in deposits from savers and buy corporate commercial paper.
D) are affiliated with companies which manufacture or sell goods.
Q2) Blood tests administered to applicants for medical insurance are an example of an attempt by insurance companies to deal with the problem of
A) moral hazard.
B) the drug abuse problems currently plaguing the country.
C) adverse selection.
D) failure of policyholders to keep paying their premiums.
Q3) What do many economists see finance companies as having an advantage in?
A) purchasing commercial paper
B) selling long-term securities
C) monitoring the value of collateral
D) charging consumers particularly low interest rates
Q4) What are three reasons that employees may prefer to save through pensions provided by employers rather than through savings accounts?
Q5) What type of economic research do analysts at investment banks conduct?
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Chapter 12: Financial Crises and Financial Regulation
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Q1) As of 2016,what portion of bank assets were owned by the five largest bank holding companies?
A) less than 10%
B) approximately 25%
C) more than 50%
D) almost 80%
Q2) Why do bank panics normally lead to recessions?
Q3) The recession of 2007-2009 was
A) most severe recession ever experienced in the United States.
B) the first recession since the 1930s to be accompanied by a financial crisis.
C) caused by a stock market crash.
D) limited to the economy of the United States.
Q4) What are the two most common reasons for a sovereign debt crisis?
Q5) Which investment caused the Reserve Primary Fund to incur heavy losses?
A) mortgage-backed securities
B) real estate investment trusts
C) commercial paper issued by Bear Stearns
D) commercial paper issued by Lehman Brothers
Q6) In what ways did the stock market crash of 1929 increase the severity of the downturn?
Page 14
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Chapter 13: The Federal Reserve and Central Banking
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Q1) Assuming a required reserve ratio of 8%,interest rate on reserves of 0.5%,and interest rate on loans of 4%,what is the effective cost of the reserve requirement on a $1,000 deposit?
A) 0.05%
B) 0.28%
C) 0.32%
D) 4%
Q2) Which of the following appears to be evidence against the public interest view of the Fed's motivation?
A) the conflict with the Treasury over interest rate fixing during World War II
B) the failure of the Fed to emphasize the goal of price stability
C) the unwillingness of the Fed to turn over its excess profits to the Treasury
D) the independence of Fed chairmen from the authority of the president
Q3) The members of Federal Reserve district bank boards of directors who are leaders in industry,commerce,and agriculture are known as
A) Class A directors.
B) Class B directors.
C) Class C directors.
D) Class D directors.
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Page 15
Chapter 14: The Federal Reserves Balance Sheet and the
Money Supply Process
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Q1) If C represents currency,D represents checkable deposits,N represents savings accounts,and MM represents money market mutual funds,which of the following equations is correct?
A) M2 = N + MM
B) M2 = D + N + MM
C) M2 = C + D + N + MM
D) M2 = C + D
Q2) A $10 million open market sale will decrease the monetary base by
A) $10 million.
B) $10 million times the money multiplier.
C) $10 million divided by the money multiplier.
D) an amount between $0 and $10 million, depending on the fraction of the purchase the public wishes to hold as currency.
Q3) The difference between currency outstanding and currency in circulation is equal to A) vault cash.
B) bank reserves.
C) coins issued by the U.S. Treasury.
D) zero; they are the same thing.
Q4) Briefly explain the process of multiple deposit creation.
Page 16
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Chapter 15: Monetary Policy
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Q1) All of the following are associated with rising inflation EXCEPT
A) income redistribution.
B) a steady decrease in interest rates.
C) firms hesitating to enter into long-term contracts with suppliers.
D) families having trouble deciding how much to save for retirement.
Q2) Describe the temporary lending facilities that the Fed set up during the Financial Crisis of 2007-2009.
Q3) Intermediate targets are
A) interim goals set on the way to fully achieving policy goals.
B) targets for policy goals that are of secondary importance.
C) targets the Fed hopes to achieve by June of each year.
D) financial variables, such as interest rates or monetary aggregates, the Fed believes will help it to achieve policy goals.
Q4) The benchmark default-free interest rate of the financial system is generally considered to be
A) the federal funds rate.
B) the interest rate on the 10-year Treasury note.
C) the discount rate.
D) the 30-year fixed rate mortgage.
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Chapter 16: The International Financial System and Monetary Policy
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Q1) Under the Bretton Woods system,exchange rates were supposed to be adjusted
A) only when a country experienced fundamental disequilibrium.
B) daily.
C) weekly.
D) following each annual meeting of the board of governors of the International Monetary Fund.
Q2) Why may a central bank intervene in the foreign exchange market when its currency is appreciating?
A) concerns about the country's exports becoming less competitive
B) concerns about inflation
C) concerns about imports becoming less competitive
D) to sterilize the effects on the domestic economy
Q3) At the time the monetary union in Europe began in 1999,which of the following countries declined to participate?
A) France
B) United Kingdom
C) Italy
D) Germany
Q4) Discuss the problems associated with the imposition of capital controls.
Q5) What is the policy trilemma?
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Chapter 17: Monetary Theory I- the Aggregate Demand and Aggregate Supply Model
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Q1) In the long run,one-time increases or decreases in the nominal money supply affect
A) real output, but not the price level.
B) the price level, but not real output.
C) both real output and the price level.
D) neither real output nor the price level.
Q2) Suppose that initially U.S.households are saving only a small fraction of their incomes because they are relying on rapid increases in stock prices to increase their wealth.If stock prices decline and households decide to increase their saving rate,what will be impact on output in the new Keynesian view? Be sure to distinguish the short run from the long run.
Q3) If the economy experiences simultaneous negative aggregate demand and aggregate supply shocks,and the Fed decides NOT to intervene with expansionary policy.Short-run aggregate supply will eventually shift back to the right,which will eventually bring the economy
A) back to potential GDP at a lower price level.
B) back to potential GDP at a higher price level.
C) back to the original equilibrium price at a lower level of aggregate output.
D) back to the original equilibrium price at a higher level of aggregate output.
Q4) What is the principal source of change in productivity growth?
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Chapter 18: Monetary Theory Ii: the Is-Mp Model
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Q1) Which interest rate is most relevant in determining aggregate expenditures?
A) federal funds rate
B) short-term real interest rate
C) long-term nominal interest rate
D) long-term real interest rate
Q2) The balance sheet channel describes ways in which interest rate changes resulting from monetary policy affect
A) the portfolio decisions of households.
B) the portfolio decisions of businesses.
C) borrowers' net worth.
D) lenders' net worth.
Q3) Which of the following is the least likely to take place if the Fed responds to a negative demand shock by reducing the real interest rate?
A) The IS curve shifts to the right.
B) Output gap returns to zero.
C) Inflation returns to its previous rate.
D) The MP curve shifts down.
Q4) What is potential GDP? What happens to unemployment when GDP is at its potential?
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