Financial Markets and Institutions
Chapter Exam Questions
Course Introduction
This course offers a comprehensive examination of financial markets and institutions, exploring how they facilitate the allocation of resources and the management of risk in the global economy. Students will analyze the roles of various financial instruments, intermediaries, and regulatory bodies, gaining insight into the functioning of markets such as stocks, bonds, derivatives, and foreign exchange. The course also addresses the impact of monetary policy, financial innovation, and globalization on market dynamics, while discussing issues such as financial stability, systemic risk, and regulatory frameworks. Through case studies and practical examples, students develop a solid understanding of the critical functions that financial markets and institutions serve in both domestic and international contexts.
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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Q1) Which of the following is NOT a financial policymaker?
A)Securities and Exchange Commission (SEC)
B)Federal Deposit Insurance Corporation (FDIC)
C)Consumer Financial Protection Bureau (CFPB)
D)Federal Reserve System (the Fed)
Answer: C
Q2) 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
Q3) The expected rate of change in prices is known as the A)forecasted mean CPI.
B)Okun's law coefficient.
C)augmented inflation rate.
D)expected inflation rate.
Answer: D
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3
Chapter 2: The Financial System and the Economy
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Q1) When a country's financial system is young, it usually relies more on______ finance.
A)micro
B)direct
C)nonintermediary
D)indirect
Answer: D
Q2) Risk that cannot be eliminated by diversification is
A)unsystematic risk.
B)systematic risk.
C)default risk.
D)interest-rate risk.
Answer: B
Q3) If the price of a share of Aqua Inc.increased from $40 to $44 over a year, the capital-gains yield per share was _____.
A)10 percent
B)4 percent
C)11 percent
D)0.4 percent
Answer: A
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Page 4
Chapter 3: Money and Payments
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Q1) Describe the difference between inside money and outside money, and explain whether each of the following items represent inside money or outside money:
a.Checking accounts
b.Coins
c.Travelers checks
d.Money-market mutual funds
e.$100 bills
Answer: Inside money is created by the private sector, whereas outside money is created by the government or nature.
a.Checking accounts represent inside money.
b.Coins represents outside money.
c.Travelers check represents inside money.
d.Money-market mutual funds represents inside money
e.$100 bills represent outside money.
Q2) Why did M1 grow so rapidly in the early 1990s, whereas M2 did not?
Answer: M1 grew rapidly because of demand for U.S.currency by people in Eastern Europe.M2 grew slowly because the economy was growing slowly.The difference in growth rates is possible because currency is a much larger fraction of M1 than it is of M2.
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Chapter 4: Present Value
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Q1) The equation that allows us to compare dollar amounts to be received at different dates is the
A)present-value formula.
B)Taylor rule.
C)interest-rate parity equation.
D)Roy's identity
Q2) The present value of a series of future payments is
A)inversely related to the future value.
B)unrelated to the discount factor.
C)inversely related to the rate of discount.
D)directly related to the discount factor.
Q3) In the one-period present-value equation, P = F/(1 + i), the term 1 + i is referred to as A)future value.
B)present value.
C)the rate of discount.
D)the discount factor.
Q4) Consider a perpetuity that pays $300 every year.If the rate of discount is 6 percent, calculate the present value of the bond.
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6
Chapter 5: The Structure of Interest Rates
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Q1) A corporate bond with a financial rating of _____ is likely to have the lowest yield to maturity.?
A)Ccc
B)Baa
C)Aaa
D)BBB
Q2) Which of the following is true of a certificate of deposit?
A)It is sold by large corporations to raise short-term funds.
B)A fall in its demand will lead to an increase in the price of the security and a fall in its yield to maturity.
C)Higher the term to maturity of a certificate of deposit, higher the yield to maturity.
D)It is not a liquid security and cannot be transferred from one party to another.
Q3) Which of the following is true of shortterm interest rates?
A)Short-term interest rates decline when long-term interest rates increase.
B)Shortterm interest rates are more volatile than longterm interest rates.
C)Shortterm interest rates are higher than longterm interest rates.
D)Shortterm interest rates are less volatile than longterm interest rates.
Q4) What do steep upward-sloping yield curves indicate about the business cycle?
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Page 7
Chapter 6: Real Interest Rates
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Q1) Suppose you buy an inflation-indexed bond that will adjust with inflation and thus pay you $2,500 in real (inflation- adjusted) terms each year for the next five years, plus your real principal of $100,000 at the end of the fifth year.The nominal interest rate is 4 percent and the expected inflation rate is 1 percent.What is the present value of the bond? Show your work.
Q2) If your after-tax realized real interest rate was 2 percent over the past year and you owned a one-year bond that paid 8 percent interest, what was the inflation rate if you faced a tax rate of 15 percent?
A)4.8 percent
B)5.1 percent
C)5.4 percent
D)6.0 percent
Q3) The amount of interest paid on a debt security in dollar terms as a percent of the principal is referred to as the
A)expected real interest rate.
B)realized real interest rate.
C)after-tax real interest rate.
D)nominal interest rate.
Q4) Explain why inflation risk is a problem for investors.
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Chapter 7: Stocks and Other Assets
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Q1) In the CAPM, a stock has a beta coefficient of 0.1.The average returns to all stocks in the market is 10%.If the interest rate on three-month T-bills is at around 2 percent, what is the expected return to this stock? Assume that unsystematic risk is zero.
A)2.5 percent
B)5.0 percent
C)7.5 percent
D)10.0 percent
Q2) In the CAPM, the only source of systematic risk is
A)changes in government policy.
B)changes in inflation rates.
C)fluctuations in the foreign exchange rate.
D)overall movement of the stock model.
Q3) The Wilshire 5000 stock index is
A)an index of the 2000 largest industrial companies whose shares trade in U.S.markets.
B)an index of all the companies with U.S.headquarters whose shares trade in the U.S.
C)an index of 5000 major companies whose shares trade in U.S.markets.
D)an index of the average stock prices of many small firms operating in the U.S.
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Chapter 8: How Banks Work
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Q1) A bank has currency and coins equal to $20 million in its vaults.It has securities worth $10 million, has borrowings equal to $5 million, and has given out loans equal to $2 million.It also has deposits with the Federal Reserve equal to $4 million.The total reserves of the bank equals
A)$12 million.
B)$22 million.
C)$24 million.
D)$36 million.
Q2) When people or firms that are worse than average risks are most likely to enter a contract that is offered to everyone, the problem is called
A)irrational expectations.
B)adverse selection.
C)opportunity cost.
D)moral hazard.
Q3) Which size category of banks generally has the smallest spread?
A)The 10 smallest banks
B)The 100 smallest banks
C)Medium-sized banks
D)Large banks
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Page 10
Chapter 9: Governments Role in Banking
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Q1) The letter M, in the CAMELS rating system, which is used to assess the health of the banks, stands for _____.
A)management
B)money market account
C)mortgage
D)maturity
Q2) To keep large financial firms from behaving recklessly and endangering the rest of the economy, the Dodd-Frank Wall Street Reform and Consumer Protection Act created the
A)Financial Stability Oversight Council.
B)Financial Stimulus Oversight Council.
C)Financial Stability Output Council.
D)Financial Crisis Oversight Corporation.
Q3) The Federal Reserve's function as the lender of last resort leads ?to the problem of
A)?economic instability.
B)?contagion.
C)?bank run.
D)?adverse selection.
Q4) What is the Basel III Accord?
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Chapter 10: Economics Growth and Business Cycles
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Q1) According to real business cycle (RBC) theory, the main source of the business cycle is
A)changes in the amount of money in the economy.
B)waves of optimism and pessimism that cause business investment in capital goods to fluctuate.
C)changes in the prices of oil and other resources.
D)changes in productivity.
Q2) Suppose a country has a population of 76 million, of which 53 million are in the working-age population.Of those, 3 million are unemployed and 46 million are employed.
a.Calculate the number of people who are in the labor force.
b.Calculate the number of people who are not in the labor force.
c.Calculate the labor-force participation rate.
d.Calculate the unemployment rate.
Q3) The economic liftoff period in the U.S.occurred from
A)1929 1949.
B)1950 1970.
C)1970 1982.
D)1982 present.
Q4) Describe classical economists.
Page 12
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Chapter 11: Modeling Money
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Q1) In the liquidity-preference model,
A)both the nominal interest rate and the price level in the economy are exogenous variables.
B)both the nominal interest rate and the price level in the economy are endogenous variables.
C)the nominal interest rate is an exogenous variable, while the price level in the economy is an endogenous variable.
D)the nominal interest rate is an endogenous variable, while the price level in the economy is an exogenous variable.
Q2) In the liquidity-preference model, a decrease in the money supply causes
A)the nominal interest rate to increase and the equilibrium quantity of money to decrease.
B)the nominal interest rate to increase and the equilibrium quantity of money to remain unchanged.
C)the nominal interest rate to decrease and the equilibrium quantity of money to remain unchanged.
D)both the nominal interest rate and the equilibrium quantity of money to decrease.
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Chapter 12: The Aggregate-Demandaggregate-Supply Model
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Q1) In some sophisticated macroeconomic models, if monetary policy is used to combat recession, the real interest rate _____, whereas the real interest rate ______if fiscal policy is used.
A)increases; decreases
B)decreases; increases
C)remains unchanged; increases
D)decreases; remains unchanged
Q2) In the aggregate demand-aggregate supply model, everything else remaining unchanged, an increase in production costs shifts the _____curve to the _____.
A)long-run aggregate supply; right
B)long-run aggregate supply; left
C)short-run aggregate supply; right
D)short-run aggregate supply; left
Q3) A rise in the incomes of foreign consumers, everything else remaining unchanged, causes net exports to A)decline.
B)not change.
C)rise.
D)rise at first, then decline later.
14
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Chapter 13: Modern Macroeconomic Models
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Q1) RBC models are said to reproduce some important relationships between variables over the U.S.business cycle. Identify one such relationship from the given options.
A)Output growth is closely related to growth in investment expenditure over the business cycle.
B)Over the course of the business cycle, consumption spending on physical capital grow less than the investment spending on physical capital.
C)Over the course of the business cycle, consumption spending on physical capital grow more than the investment spending on physical capital.
D)Output growth is closely related to growth in labor hours over the business cycle.
Q2) If people form their expectations using all the information available to them, they are said to have
A)informed expectations.
B)rational expectations.
C)irrational forecasts.
D)an information set.
Q3) What are the advantages and disadvantages of VAR models?
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15
Chapter 14: Economic Interdependence
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Q1) The balance on the current account plus the balance on the capital and financial account equals
A)0.
B)1 .
C)-1.
D)100.
Q2) Suppose, the U.S.has domestic savings of $100 billion, domestic investment of $60 billion, and a government budget surplus of $30 billion.Based on these figures, the amount of net foreign investment is $_____ billion.
A)10
B)70
C)130
D)190
Q3) In economic expansions, the dollar usually
A)appreciates.
B)depreciates.
C)remains unaffected.
D)follows no consistent pattern.
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Chapter 15: The Federal Reserve System
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Q1) In which of the following cities is a Federal Reserve Bank NOT located
A)Richmond.
B)Denver.
C)Kansas City.
D)St.Louis.
Q2) There is strong evidence that political business cycles are prevalent in A)Germany.
B)Japan.
C)the U.S.
D)New Zealand.
Q3) A Federal Reserve policymaker voting for option A is most likely doing so because of a need to
A)tighten monetary policy.
B)maintain monetary policy at an unchanged level.
C)ease monetary policy.
D)give the chairman discretion to change monetary policy.
Q4) Are there any benefits to having both banking supervisors and economic researchers working together at a Reserve bank?
Q5) Why isn't the right to vote at FOMC meetings considered to be very important within the Fed?
17
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Chapter 16: Monetary Control
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Q1) Suppose the M1 multiplier is currently 2.23 and the M2 multiplier is currently 7.95.If banks decide to increase the ratio of excess reserves they hold relative to the amount of transaction accounts they hold, how will the multipliers for M1 and M2 be affected (in qualitative, not quantitative, terms)?
Q2) The supply curve of reserves in an economy is horizontal when A)the federal funds rate is greater than the seasonal credit discount rate.
B)the federal funds rate is less than the secondary credit discount rate.
C)the federal funds rate equals the primary credit discount rate.
D)the federal funds rate is less than the primary credit discount rate.
Q3) The extra collateral the Fed requires above the value of a discount loan is known as A)the term premium.
B)a haircut.
C)a covenant.
D)secondary credit.
Q4) Another name for the monetary base is A)commodity money.
B)fiat money.
C)high-powered money.
D)bank reserves.
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Chapter 17: Monetary Policy: Goals and Tradeoffs
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Q1) Describe the lags in the policymaking process and how they might lead to instability.
Q2) Why is there an effectiveness lag for monetary policy?
Q3) An equation that sums the squared output gap to the squared inflation gap, with a weight that determines the tradeoff between them is referred to as the
A)Fed's objective function.
B)cost of disinflation.
C)Sharpe ratio.
D)Phillips equation.
Q4) In case of positive inflation rates,
A)both borrowers and lenders of fund lose out.
B)both borrowers and lenders of fund gain.
C)lenders of funds gain, while borrowers lose out.
D)borrowers of funds gain, while lenders lose out.
Q5) If the equation for the Phillips curve is ? = ?<sup>e</sup> ? 0.5(U ? 5),
Then the natural rate of unemployment is
A)10 percent.
B)5 percent.
C)2.5 percent.
D)0.5 percent.
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Chapter 18: Rules for Monetary Policy
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Q1) Why do monetarists favor the use of a nonactivist rule for monetary policy?
Q2) What causes the formation of an expectations trap and how can the Fed prevent one from forming?
Q3) Which terms in the equation for Taylor rule can be influenced by the government through monetary policy?
A)Inflation gap and interest-rate spread
B)Unemployment gap and interest-rate spread
C)Interest-rate spread and unemployment gap
D)Output gap and inflation gap
Q4) If velocity of money is 6, the price level is 1.2, and real output is worth $1,100 billion, what is the money supply?
A)$65 billion
B)$153 billion
C)$220 billion
D)$5,500 billion
Q5) Monetarists think that
A)money growth is closely related to inflation in the long run.
B)money demand is unstable in the long run.
C)the central should focus on short run economic fluctuations.
D)the central bank should rely on discretionary policy making.
Page 20
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