Chapter 11: Banking Industry: Structure and Competition
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Q1) State banks that are not members of the Federal Reserve System are most likely to be examined by the A)Federal Reserve System.
B)FDIC.
C)FHLBS.
D)Comptroller of the Currency.
Q2) The business term for economies of scope is A)economies of scale.
B)diversification.
C)cooperation.
D)synergies.
Q3) The entry of AT&T and GM into the credit card business is an indication of A)government's efforts to deregulate the provision of financial services.
B)the rising profitability of credit card operations.
C)the reduction in costs of credit card operations since 1990.
D)the sale of unprofitable operations by Bank of America and Citicorp.
Q4) What financial innovations helped banks to get around the bank branching restrictions of the McFadden Act?
Q5) Discuss three ways in which U.S.banks can become involved in international banking.
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Chapter 12: Financial Crises
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Q1) ________ is a process of bundling together smaller loans (like mortgages)into standard debt securities.
A)Securitization
B)Origination
C)Debt deflation
D)Distribution
Q2) The Dodd-Frank bill created an agency to monitor markets for asset price bubbles and the buildup of systemic risk.This agency is called the
A)Resolution Trust Authority.
B)Board of Governors.
C)Financial Stability Oversight Council.
D)Macroprudential Supervisory Agency.
Q3) The originate-to-distribute business model has a serious ________ problem since the mortgage broker has little incentive to make sure that the mortgagee is a good credit risk.
A)principal-agent
B)debt deflation
C)democratization of credit
D)collateralized debt
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Chapter 13: Nonbank Finance
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Q1) An innovation that blurred the distinction between brokerage firms and commercial banks was Merrill Lynch's development in 1977 of the
A)cash management account.
B)money market mutual fund.
C)individual retirement account.
D)discount brokerage.
Q2) Which of the following is NOT an advantage of private equity funds?
A)Private companies are not subject to the same regulations as a publicly traded company.
B)Managers of private firms are not under the same level of pressure to produce high returns compared to the managers of publicly traded firms.
C)Private equity firms can do a better job in controlling the problems created by moral hazard.
D)Private equity funds give managers of the companies higher stakes compared to managers in publicly traded companies.
Q3) Explain why the Social Security system faces problems.Discuss the possible solutions to these problems.
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Chapter 14: Financial Derivatives
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Q1) A long contract requires that the investor
A)sell securities in the future.
B)buy securities in the future.
C)hedge in the future.
D)close out his position in the future.
Q2) If a bank manager wants to protect the bank against losses that would be incurred on its portfolio of treasury securities should interest rates rise,he could ________ options on financial futures.
A)buy put
B)buy call
C)sell put
D)sell call
Q3) By taking the long position on a futures contract of $100,000 at a price of 96 you are agreeing to ________ a ________ face value security for ________.
A)sell;$100,000;$96,000.
B)sell;$96,000;$100,000.
C)buy;$100,000;$96,000.
D)buy;$96,000;$100,000.
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Chapter 15: Conflicts of Interest in the Financial Industry
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Q1) When financial institutions are able to reduce the costs of information for each service they offer by applying the same information source to each service,we say that the financial institution is realizing
A)economies of scope.
B)economies of scale.
C)increasing returns.
D)diminishing marginal returns.
Q2) Under the Global Legal Settlement of 2002,the provision that requires investment banking firms to make their analysts' recommendations public is an example of
A)regulate for transparency.
B)supervisory oversight.
C)separation of functions.
D)socialization of information production.
Q3) Of the remedies for conflicts of interest,which one is the most intrusive?
A)regulate for transparency
B)separation of functions
C)supervisory oversight
D)socialization of information production
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Chapter 16: Central Banks and the Federal Reserve System
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Q1) There are ________ members of the Board of Governors of the Federal Reserve System.
A)5
B)7
C)12
D)19
Q2) The Chairman of the Board of Governors is chosen from among the seven governors and serves a ________,renewable term.
A)one-year
B)two-year
C)four-year
D)eight-year
Q3) The president from which Federal Reserve Bank always has a vote in the Federal Open Market Committee?
A)Philadelphia
B)Boston
C)San Francisco
D)New York
Q4) Make the case for and against an independent Federal Reserve.
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Chapter 17: The Money Supply Process
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Q1) During the 2007-2009 financial crisis the currency ratio
A)increased sharply.
B)decreased sharply.
C)increased slightly.
D)decreased slightly.
Q2) If reserves in the banking system increase by $100,then checkable deposits will increase by $1000 in the simple model of deposit creation when the required reserve ratio is
A)0.01.
B)0.10.
C)0.05.
D)0.20.
Q3) Which of the following are NOT assets on the Fed's balance sheet?
A)discount loans
B)U.S.Treasury deposits
C)cash items in the process of collection
D)U.S.Treasury bills
Q4) Explain two ways by which the Federal Reserve System can increase the monetary base.Why is the effect of Federal Reserve actions on bank reserves less exact than the effect on the monetary base?
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Chapter 18: Tools of Monetary Policy
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Q1) If Treasury deposits at the Fed are predicted to ________,the manager of the trading desk at the New York Fed bank will likely conduct ________ open market operations to ________ reserves.
A)rise;defensive;drain
B)fall;defensive;drain
C)rise;dynamic;inject
D)fall;dynamic;drain
Q2) If float is predicted to increase because of bad weather,the manager of the trading desk at the New York Fed bank will likely conduct ________ open market operations to ________ reserves.
A)defensive;inject
B)defensive;drain
C)dynamic;inject
D)dynamic;drain
Q3) At its inception,the Federal Reserve was intended to be
A)the Treasury's banker.
B)the issuer of government debt.
C)a lender-of-last-resort.
D)a regulator of bank holding companies.
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Chapter 19: The Conduct of Monetary Policy: Strategy and Tactics
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Q1) The FOMC "Statement on Long-Run Goals and Monetary Policy Strategy"made it clear that the Federal Reserve would be pursuing ________,consistent with its dual mandate.
A)a flexible form of inflation targeting
B)a strict form of inflation targeting
C)a zero inflation targeting
D)an implicit inflation targeting
Q2) Explain the Taylor rule,including the formula for setting the federal funds rate target,and the components of the formula.If the Fed were to use this rule,how many goals would it use to set monetary policy?
Q3) Although the Fed professed employment of a monetary aggregate targeting strategy during the 1970s,its behavior suggests that it emphasized
A)free-reserve targeting.
B)interest-rate targeting.
C)a real-bills doctrine.
D)price-index targeting.
Q4) Explain what inflation targeting is.What are the advantages and disadvantages of this type of monetary policy strategy?
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Chapter 20: The Foreign Exchange Market
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Q1) With a 10 percent interest rate on dollar deposits,and an expected appreciation of 7 percent over the coming year,the expected return on dollar deposits in terms of the foreign currency is
A)3 percent.
B)10 percent.
C)13.5 percent.
D)17 percent.
Q2) If the real exchange rate between the United States and Japan is ________,then it is cheaper to buy goods in Japan than in the United States.
A)greater than 1.0
B)greater than 0.5
C)less than 0.5
D)less than 1.0
Q3) The theory of portfolio choice suggests that the most important factor affecting the demand for domestic and foreign assets is
A)the level of trade and capital flows.
B)the expected return on these assets relative to one another.
C)the liquidity of these assets relative to one another.
D)the riskiness of these assets relative to one another.
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Chapter 21: The International Financial System
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Q1) Because the United States was the reserve-currency country under the Bretton Woods system,it could run large balance of payments ________ without ________ significant amounts of international reserves.
A)deficits;losing B)deficits;gaining C)surpluses;losing
D)surpluses;gaining
Q2) Economists closely follow the current account balance because they believe it can provide information on the future movement of A)interest rates.
B)gold flows.
C)exchange rates.
D)special drawing rights.
Q3) In the early 1970s,the U.S.ran large balance of payments ________,causing an ________ dollar and an ________ German mark.
A)deficits;undervalued;overvalued
B)deficits;overvalued;undervalued
C)surpluses;undervalued;overvalued
D)surpluses;overvalued;undervalued
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Chapter 22: Quantity Theory, inflation and the Demand for Money
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Q1) The Baumol-Tobin analysis suggests that a decrease in the brokerage fee for buying and selling bonds will cause the demand for money to ________ and the demand for bonds to ________.
A)increase;increase
B)increase;decrease
C)decrease;decrease D)decrease;increase
Q2) If the government finances its spending by issuing debt to the public,the monetary base will ________ and the money supply will ________.
A)increase;increase
B)increase;decrease
C)decrease;increase
D)not change;not change
Q3) The quantity theory of inflation indicates that if the aggregate output is growing at 3% per year and the growth rate of money is 5%,then inflation is A)2%.
B)8%.
C)-2%.
D)1.6%.
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Chapter 23: Aggregate Demand and Supply Analysis
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Q1) Suppose the economy is producing at the natural rate of output.An open market sale of bonds by the Fed will cause ________ in real GDP in the long run and ________ in inflation in the long run,everything else held constant.
A)an increase;an increase
B)a decrease;a decrease
C)no change;an increase
D)no change;a decrease
Q2) A central bank that does NOT follow the Taylor principle will fail to raise nominal interest rates by more than the increase in expected inflation.As a result,the monetary policy curve is ________ sloping and the aggregate demand curve is ________ sloping.
A)upward;downward
B)downward;downward
C)upward;upward
D)downward;upward
Q3) The long-run rate of unemployment to which an economy always gravitates is the
A)normal rate of unemployment.
B)natural rate of unemployment.
C)neutral rate of unemployment.
D)inflationary rate of unemployment.
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Chapter 24: Monetary Policy Theory
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Q1) The time it takes for policy makers to obtain data indicating what is happening in the economy is called
A)the data lag.
B)the recognition lag.
C)the legislative lag.
D)the implementation lag.
E)the effectiveness lag.
Q2) When the economy suffers a temporary negative supply shock and the monetary policy makers try to stabilize economic activity in the short run,then
A)aggregate demand curve shifts rightward.
B)output will be at its potential.
C)inflation rate will be higher.
D)all of the above.
E)both A and B.
Q3) The Fed's quantitative easing is to purchase ________ to affect credit spreads.
A)long-term securities
B)short-term securities
C)both long-term and short-term securities
D)private assets
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Chapter 25: Transmission Mechanisms of Monetary Policy
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Q1) Which of the following is NOT an advantage of a correctly specified structural model?
A)Structural models may help us to more accurately predict the effect that monetary policy has on economic activity.
B)A structural model provides more pieces of evidence about monetary policy's effect on economic activity.
C)Structural models may allow economists to more accurately predict the impact institutional changes have on the link between monetary policy and income.
D)A structural model imposes no restrictions on the way monetary policy affects the economy.
Q2) During the Great Depression,Tobin's q
A)rose dramatically,as did real interest rates.
B)fell to unprecedentedly low levels.
C)stayed fairly constant,in contrast to most other economic measures.
D)rose only slightly,in spite of Hoover's attempts to prop it up.
Q3) Discuss three channels by which monetary policy affects stock prices and aggregate spending.
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Chapter 26: Financial Crises in Emerging Market Economies
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Q1) A feature of debt markets in emerging-market countries is that debt contracts are typically
A)very short term.
B)long term.
C)intermediate term.
D)perpetual.
Q2) In emerging market countries,many firms have debt denominated in foreign currency like the dollar or yen.A depreciation of the domestic currency
A)results in increases in the firm's indebtedness in domestic currency terms,even though the value of their assets remains unchanged.
B)results in an increase in the value of the firm's assets.
C)means that the firm does not owe as much on their foreign debt.
D)strengthens their balance sheet in terms of the domestic currency.
Q3) What two key factors trigger speculative attacks leading to currency cries in emerging market countries?
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Chapter 27: The IS Curve
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Q1) Using the information contained in Situation 20-1,if autonomous consumption increases by $100,then equilibrium aggregate output will change by A)-$1,000.
B)-$100.
C)$100.
D)$1,000.
Q2) When interest rates rise in the United States (with the price level fixed),the value of the dollar ________,domestic goods become ________ expensive,and net exports
A)falls;less;fall
B)falls;more;rise
C)rises;more;fall
D)rises;less;fall
Q3) An autonomous appreciation of the U.S.dollar makes American goods ________ expensive relative to foreign goods which ________ net exports in the U.S.
A)less;decreases
B)less;increases
C)more;decreases
D)more;increases
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Chapter 28: The Monetary Policy and Aggregate Demand
Curves
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Q1) Based on the Taylor Principle,a central bank's endogenous response of raising interest rates when inflation rises
A)causes an upward movement along the monetary policy curve.
B)causes a downward movement along the monetary policy curve.
C)shifts the monetary policy curve upward.
D)shifts the monetary policy curve downward.
Q2) The Taylor Principle states that central banks raise nominal rates by ________ than any rise in expected inflation so that real interest rates ________ when there is a rise in inflation.
A)less;rise
B)more;fall
C)less;fall
D)more;rise
Q3) The Fed's policy actions of reacting to higher inflation by raising the real interest rate during 2004-2006 were
A)upward movements along the monetary policy curve.
B)downward movement along the monetary policy curve.
C)upward shifts of the monetary policy curve.
D)downward shifts of the monetary policy curve.
Page 30
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Chapter 29: The Role of Expectations in Monetary Policy
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Q1) Lucas argues that when policies change,expectations will change thereby
A)changing the relationships in econometric models.
B)causing the government to abandon its discretionary stance.
C)forcing the Fed to keep its deliberations secret.
D)making it easier to predict the effects of policy changes.
Q2) Approaches to establishing central bank credibility include
A)continued success at keeping inflation under control.
B)central bank independence.
C)appointment of a more conservative central banker.
D)all of the above.
Q3) The U.S.government can play an important role in establishing the credibility of anti-inflation policy by
A)demonstrating fiscal responsibility.
B)monitoring the Fed.
C)conducting fiscal policy.
D)all of the above.
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Chapter 30: The ISLM Model
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Q1) Show graphically and explain why targeting an interest rate is preferable when money demand is unstable and the IS curve is stable.
Q2) Everything else held constant,a monetary expansion is characterized by ________ output and ________ interest rates.
A)rising;rising
B)rising;falling
C)falling;rising
D)falling;falling
Q3) In the basic closed-economy ISLM model,the LM curve can be described by an equation where
A)output is a function of consumption.
B)money is a function of interest rates.
C)output is a function of money.
D)interest rate is a function of output.
Q4) The money market is in equilibrium
A)at any point on the IS curve.
B)at any point on the LM curve.
C)at only one point on the LM curve.
D)only at the intersection of the IS and LM curves.
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