Money and Banking Exam Preparation Guide
Course Introduction
Money and Banking explores the fundamental role of money, financial institutions, and central banking in the modern economy. The course examines the evolution and functions of money, the mechanics of financial markets, and the principles underlying the operation of commercial banks and other financial intermediaries. Students will analyze the creation of money, monetary policy implementation, the structure and regulation of banking systems, and the impact of central banks especially the Federal Reserve on economic stability and growth. Emphasis is placed on understanding interest rates, the money supply process, and the relationship between financial institutions and macroeconomic policy objectives.
Recommended Textbook
MandB 3 3rd Edition by Dean Croushore
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Chapter 1: Money and the Financial System
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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) An equation that relates the interest rate to the output gap and the inflation rate is
A)the Phillips relation.
B)the Sharpe ratio.
C)Okun's law.
D)the Taylor rule.
Answer: D
Q3) Economists who try to predict recessions find that recessions are
A)easy to predict.
B)difficult to predict.
C)non-existent before the year 2000.
D)non-existent since the year 2000.
Answer: B
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Chapter 2: The Financial System and the Economy
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Q1) In the United States, the biggest issuers of securities are
A)households.
B)business firms.
C)governments.
D)financial intermediaries.
Answer: B
Q2) The owner of a financial security is known as
A)an investor.
B)a debtor.
C)a broker.
D)a securitor.
Answer: A
Q3) A financial market is
A)a place or a mechanism by which borrowers, savers, and financial intermediaries trade.
B)an electronic means of transacting.
C)a place where people engage in indirect finance.
D)a secondary market.
Answer: A
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Chapter 3: Money and Payments
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Q1) Which of the following statements is true of commodity money?
A)The manufacturing cost is cheaper than that of fiat money.
B)Large quantities of commodity money may not be portable.
C)The most common example of commodity money is paper currency.
D)Commodity money has value because it is decreed by the government.
Answer: B
Q2) Donovan's $200,000 CD matures.He deposits $20,000 into his checking account, buys a CD for $150,000, and puts $30,000 into his money-market mutual fund.How does this affect M1 and M2?
Answer: He cashed in a large time deposit, which was not part of M1 or M2.He put $20,000 into an M1 asset (checking account) and $30,000 into an M2 asset (MMMF).M1 rises by $20,000.Because M1 is part of M2, M2 rises by $20,000 + $30,000 = $50,000.
Q3) U.S.currency is currently
A)representative money.
B)full-bodied money.
C)inside money.
D)fiat money.
Answer: D
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Chapter 4: Present Value
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Q1) Consider a three-year coupon bond that has a present value of $2,000.If the annual rate of discount is 7 percent, and the payment made at the end of each year is $140, the principal amount to be repaid at the end of three years is
A)$1,860.00.
B)$2,000.00.
C)$2,140.00.
D)$2,156.40.
Q2) Earning interest on the interest that was earned in prior years is referred to as A)discounting.
B)compounding.
C)present valuing. D)bonding.
Q3) John spends $4,000 on a perpetuity that pays $150 each year.The yield to maturity of this perpetuity is A)1.5%.
B)3.75%.
C)6.2 %. D)15%.
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Chapter 5: The Structure of Interest Rates
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Q1) Suppose an investor purchases a one-year bond today, for $960.The bond promises a return of $1,000.She purchases another one-year bond, after a year, for $887 that promises a return of $990.What is the yield to maturity earned by the investor on the purchase of these two shortterm bonds?
A)6.50 percent
B)7.85 percent
C)8 percent
D)10 percent
Q2) Consider the following hypothetical situation.The interest rate on a two-year bond today is 7.5 percent and the interest rates on two one-year bonds are 3 percent and 4 percent respectively.The term premium earned by the investors is
A)5 percent.
B)4 percent.
C)4.25 percent.
D)6 percent.
Q3) What do steep upward-sloping yield curves indicate about the business cycle?
Q4) What is the reason for a low rated security to generate a high yield to maturity?
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Chapter 6: Real Interest Rates
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Q1) If your after-tax realized real interest rate was 1 percent over the past year and you owned a one-year bond that paid 6 percent interest, what was the inflation rate if your tax rate was 15 percent?
A)3.95 percent
B)4.1 percent
C)4.25 percent
D)5.0 percent
Q2) The hypothesis that an increase in the expected inflation rate will cause the nominal interest rate to rise and the real interest rate to remain unchanged is the
A)Fisher hypothesis.
B)rational-expectations theory.
C)Okun's hypothesis.
D)Keynesian hypothesis.
Q3) Realized real interest rates in the United States were the highest in the A)1960s.
B)1970s.
C)1980s.
D)1990s.
Q4) How can the expected inflation rate be measured?
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Chapter 7: Stocks and Other Assets
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Q1) In the CAPM,
A)larger the value of for a stock, larger is the unsystematic risk involved in investing in the stock.
B)larger the value of for a stock, smaller is the unsystematic risk involved in investing in the stock.
C)larger the value of for a stock, larger is the systematic risk involved in investing in the stock.
D)larger the value of for a stock, smaller is the systematic risk involved in investing in the stock.
Q2) Which of the following statements is true?
A)Different stock indexes normally show the same total returns.
B)Stock indexes do not provide information on dividends.
C)Mutual funds encourage investors to invest in the same security instead of diversifying.
D)The S&P 500 is an example of a mutual fund.
Q3) Write a formula for the equity premium.
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9
Chapter 8: How Banks Work
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Q1) Which of the following reduces the risk of moral hazard and the bank's risk in making loans?
A)Collateral
B)Adverse selection
C)Fixed interest rate
D)Securitization
Q2) The reserve requirement is 0 percent on the first $8 million in transaction deposits, 3 percent on amounts between $8 million and $50 million, and 10 percent on amounts above $50 million.A bank with transaction deposits totaling $7 million has required reserves equal to
A)$0.00 million.
B)$0.21 million.
C)$0.70 million.
D)$1.17 million.
Q3) When the existence of a contract changes the behavior of a party to the contract, the problem is called
A)irrational expectations.
B)adverse selection.
C)opportunity cost.
D)moral hazard.
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Chapter 9: Governments Role in Banking
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Q1) Suppose a banking market consists of banks that have the following shares of the market: 34 percent, 28 percent, 16 percent, 10 percent, 8 percent, and 4 percent.Calculate the HHI.
Q2) Which of the following is an example of a solvent bank?
A)A bank that is out of funds to meet the demand of customers
B)A bank with negative equity capital
C)A bank that has high default risk on debt issue
D)A bank with positive equity capital
Q3) The letter E, in the CAMELS rating system, which is used to assess the health of the banks, represents the _____ for a bank.
A)elasticity of demand.
B)equal opportunity compliance.
C)earnings.
D)elements of risk.
Q4) A credit union that obtains a federal charter obtains its charter from which government agency?
A)The Federal Savings and Loan Insurance Corporation
B)The National Credit Union Administration
C)The Federal Deposit Insurance Corporation
D)The Office of the Comptroller of the Currency
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Chapter 10: Economics Growth and Business Cycles
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Q1) \(\text { Consider the following production function }\)Y = A×K<sup>a</sup>×L<sup>1?a</sup>. If a = 0.3, and over the past year total factor productivity grew 2.3 percent, capital grew 2 percent, and labor grew 3 percent, what was the growth rate of output?
A)0 percent
B)5 percent
C)2 percent
D)7 percent
Q2) The last depression in the United States occurred in
A)the 1900s.
B)the 1930s.
C)the 1960s.
D)the 1990s.
Q3) Which of the following is likely to happen according to monetarists if money supply increases?
A)Unemployment will increase
B)Output will increase
C)Consumption will fall
D)Investment will fall
Q4) Explain the four major theories of the causes of the business cycle.
Page 12
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Chapter 11: Modeling Money
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Sample Questions
Q1) How much is someone who visits the ATM once every 7 days and has an average cash balance of $70 expected to spend daily?
A)$5
B)$10
C)$15
D)$20
Q2) One of the debatable assumptions on which the ATM model for the demand for cash is based on is that
A)money supply is constant.
B)individuals spend the same amount of money every day.
C)the ongoing rate of inflation is always greater than 10%.
D)cash held in banks do not attract interest.
Q3) In the liquidity-preference model, a decline in prices causes the
A)money supply curve to shift to the right.
B)money supply curve to shift to the left.
C)money demand curve to shift to the left.
D)money demand curve to shift to the right.
Q4) Describe three different changes in the ATM model that would increase the time between ATM visits and increase the quantity of money demanded.
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Q1) Suppose increased costs for security raised the costs of production for all firms.Explain how this would affect aggregate supply, output, and the price level in the short run and the long run.
Q2) Purchases of new houses are part of A)net exports.
B)government spending.
C)investment.
D)consumption.
Q3) Describe the effect of expansionary monetary policy in a recession.Contrast the results with no monetary policy action.
Q4) Full-employment output is the amount of output produced when the economy is A)in recession.
B)above the natural rate of unemployment.
C)utilizing all of its labor and capital.
D)in equilibrium.
Q5) A rise in the price level in an economy
A)shifts its long-run aggregate supply curve to the right.
B)shifts its long-run aggregate supply curve to the left.
Page 14
C)does not have any effect on its long-run aggregate supply.
D)does not have any effect on its aggregate demand.
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Chapter 13: Modern Macroeconomic Models
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Q1) Precautionary savings is
A)forced savings, which occurs when the government implicitly saves for people through the Social Security system.
B)additional savings people make in order to profit from the high returns to the stock market.
C)savings made by the poor.
D)the extra amount of savings a household maintains because of uncertainty about its future income.
Q2) Under which of the following situations can fiscal policy affect people's expectations?
A)If the interest rate on borrowing is higher than the interest rate on lending
B)If the interest rate on lending is more than the interest rate on borrowing
C)If the interest rate on borrowing and lending are the same
D)If the interest rate on lending changes more than a change in the interest rate on borrowing
Q3) What are the advantages and disadvantages of VAR models?
Q4) Describe the general procedures followed by DSGE researchers creating a new model.
Q5) Can VARs be used to analyze the effects of monetary policy?
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Chapter 14: Economic Interdependence
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Q1) A country engages in a contractionary monetary policy that causes its income to decline and its interest rate to rise. This causes investors from other countries to increase their financial investments in that country, causing the interest rate in the investors' countries to rise.In this case, the business cycle is being transmitted internationally through ____ effect.
A)a trade
B)an interest-rate
C)an exchange-rate
D)an expected-inflation
Q2) Suppose the inflation rate in Canada is 1 percent and the inflation rate in Mexico is 3 percent.If the nominal exchange rate in terms of Mexican pesos per Canadian dollar falls by 4 percent, by how much will the real exchange rate (in terms of Mexican goods per Canadian good) change?
A)+6 percent
B)+2 percent
C) 2 percent
D) 6 percent
Q3) How should a country respond when foreign investors withdraw investments from that country?
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Chapter 15: The Federal Reserve System
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Q1) Each Federal Reserve Bank is
A)a corporation.
B)a government owned enterprise.
C)a publicly traded company.
D)a government-sponsored enterprise.
Q2) What are the central banking functions that a Federal Reserve Bank performs?
Q3) The Federal Reserve publication that discusses forecasts for the economy is known as the
A)Redbook.
B)Beigebook.
C)Bluebook.
D)Greenbook.
Q4) The chairman of the Federal Reserve Board, under whose leadership the inflation rate reduced from about 10 percent to about 4 percent in the 1980s was
A)Arthur Burns.
B)G.William Miller.
C)Paul Volcker.
D)Alan Greenspan.
Q5) Describe the Beigebook, the Greenbook, and the Bluebook.
Q6) Comment on the success of various Fed chairmen in reducing inflation.
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Chapter 16: Monetary Control
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Q1) If the M1 multiplier is 3 and the Fed engages in open-market sales in the amount of $3 billion, then M1 will
A)increase by $1 billion.
B)decline by $1 billion.
C)decline by $9 billion.
D)increase by $9 billion.
Q2) The money multiplier equals
A)the money supply divided by the monetary base.
B)currency held by the non-bank public plus banks' reserves.
C)currency held by the non-bank public plus transaction accounts.
D)M2 divided by M1.
Q3) If the M2 multiplier is 8.3, how much would the Fed need to add to the monetary base in order to increase the M2 measure of the money supply by $830 million?
A)$10 million
B)$100 million
C)$1 billion
D)$6.889 billion
Q4) 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) If the actual inflation rate in an economy is 6% and the ideal inflation rate is 4%, the inflation gap in the economy is
A)2%.
B)4%.
C)2%.
D)6%.
Q2) An equation that summarizes the total cost to the economy when output differs from potential and inflation rate differs from the ideal inflation rate is referred to as the A)cost of disinflation.
B)Fed's objective function.
C)Sharpe ratio.
D)Phillips curve.
Q3) A decrease in the money supply is an example of a(n)_____ policy.
A)countercyclical
B)procyclical
C)contractionary
D)expansionary
Q4) Describe the lags in the policymaking process and how they might lead to instability.
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Chapter 18: Rules for Monetary Policy
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Q1) If a country's potential output is $100 billion and the output gap is 5%, the country's actual output is
A)$500 billion.
B)$20 billion.
C)$95 billion.
D)$105 billion
Q2) Why are policymakers willing to use rules for monetary policy as general guides, but unlikely to follow such rules blindly?
Q3) The Fed eases policy when it
A)decreases both the money growth and the federal funds rate.
B)decreases the money growth and increases the federal funds rate.
C)increases both the money growth and the federal funds rate.
D)increases the money growth and decreases the federal funds rate.
Q4) How does a central bank establish credibility?
Q5) What challenges do policymakers and researchers face in using the Taylor rule?
Q6) A central bank that is explicit about its goals and plans is said to be
A)obvious.
B)transparent.
C)translucent.
D)opaque.
Page 20
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