Principles of Money and Banking
Mock Exam
Course Introduction
This course provides a comprehensive introduction to the fundamental principles of money and banking within the modern financial system. It explores the nature and functions of money, the role and structure of financial institutions, and the mechanisms of money creation and monetary policy. Students will examine how central banks influence economic activity, the operation of payment systems, and the interplay between money markets, banks, and the broader economy. Special emphasis is placed on topics such as interest rates, the regulation of financial institutions, and current issues affecting the banking sector. By the end of the course, students will have a solid understanding of the theoretical and practical aspects of money and banking, equipping them with the analytical tools necessary to assess developments in financial markets and institutions.
Recommended Textbook
Money Banking and the Financial System 2nd Edition by Glenn P. Hubbard
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18 Chapters
1827 Verified Questions
1827 Flashcards
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Page 2
Chapter 1: Introducing Money and the Financial System
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Sample Questions
Q1) What was the intent behind the intervention of the Fed and Treasury in financial markets during the Financial Crisis of 2007-2009?
Answer: The actions by the Fed and Treasury were meant to restore the flow of funds between savers and borrowers. Without an increase in the flow of funds to a more normal level, households would have a difficult time making certain purchases and businesses would have difficulty financing investments and inventories.
Q2) Financial markets
A)channel funds indirectly between borrowers and lenders.
B)channel funds directly from lenders to borrowers.
C)act as go-betweens by holding a portfolio of assets and issuing claims based on that portfolio to savers.
D)generally provide lenders with lower returns than do financial intermediaries.
Answer: B
Q3) Which of the following is NOT a financial intermediary?
A)mutual fund
B)bank
C)stock exchange
D)insurance company
Answer: C
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Chapter 2: Money and the Payments System
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Sample Questions
Q1) Automatic teller machines and debit cards are examples of
A)electronic funds transfer systems.
B)commodity monies.
C)legal tender in the United States.
D)modern barter systems.
Answer: A
Q2) Checks are
A)not acceptable for settling transactions in most industrialized countries.
B)less important than currency as a means of settling transactions.
C)promises to pay on demand money deposited with a financial institution.
D)promises to pay coins minted from precious metals on demand.
Answer: C
Q3) All of the following are characteristics of debit cards EXCEPT:
A)payments are deferred until a later date
B)they can be used like checks
C)they eliminate the problem of trust since the bank's computer authorizes the transaction
D)when used at a store, his bank instantly credits the store's account with the amount and deducts it from his account.
Answer: A
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Chapter 3: Interest Rates and Rates of Return
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Sample Questions
Q1) A one-year discount bond with a par value of $1000 sold today, at issuance, for $943 has a yield to maturity of
A)4)30%.
B)5)70%.
C)6)04%.
D)9)43%.
Answer: C
Q2) On a coupon bond, the yield to maturity
A)always equals the coupon rate.
B)equates the present value of all the bond's payments to its price today.
C)increases when the market price of the bond increases.
D)equals the coupon payment divided by the current price of the bond.
Answer: B
Q3) A sustained decrease in the price level is known as A)inflation.
B)disinflation.
C)reflation.
D)deflation.
Answer: D
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Page 5
Chapter 4: Determining Interest Rates
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Sample Questions
Q1) If expected inflation declines by 2%, what should happen to nominal interest rates according to the Fisher effect?
A)rise by 2%
B)fall by 2%
C)be cut in half
D)double in size
Q2) A one-year discount bond with a face value of $1000 that is currently selling for $900 has an interest rate of
A)5)26%.
B)10%.
C)11.1%.
D)100%.
Q3) Suppose that Congress passes an investment tax credit. The likely result will be
A)the supply curve for bonds will shift to the right.
B)the demand curve for bonds will shift to the left.
C)the demand curve for bonds will shift to the right.
D)the equilibrium interest rate will fall.
Q4) How should a financial plan of an older saver differ from that of a younger saver?
Q5) Assess the impact on the bond market of the rise in Internet trading of stocks.
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Chapter 5: The Risk Structure and Term Structure of Interest
Rates
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Sample Questions
Q1) A one-year bond currently pays 5% interest. It's expected that it will pay 4.5% next year and 4% the following year. The two-year term premium is 0.2% while the three-year term premium is 0.35%. What is the interest rate on a three-year bond according to the liquidity premium theory?
A)4)5%
B)4)68%
C)4)85%
D)5)05%
Q2) A one-year bond has an interest rate of 3% and is expected to fall to 2.5% next year and 2% in two years. The term premium for a two-year bond is 0.3% and for a three-year bond is 0.5%. What are the interest rates on a two-year bond and three-year bond according to the liquidity premium theory?
Q3) During the financial crisis of 2007-2009,
A)mortgage-backed securities became more liquid.
B)information costs of mortgage-backed securities rose.
C)information costs of mortgage-backed securities declined.
D)the tax treatment of mortgage-backed securities was changed.
Q4) Describe the facts found in the bond market about the relationship between interest rates on bonds of different maturities.
Page 7
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Chapter 6: The Stock Market, Information, and Financial
Market Efficiency
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Sample Questions
Q1) The difference between a firm's assets and its liabilities is known as:
A)limited liability
B)stock
C)equity
D)profit
Q2) According to the Gordon-Growth model, if the stock price is $21, required return on equity is 10% and the current dividend is $1, what is the expected growth rate of dividends?
A)2%
B)5%
C)10%
D)15%
Q3) A chief criticism of adaptive expectations is that
A)it assumes people ignore information that would be useful in making forecasts
B)people have a hard time adapting
C)it doesn't rely on technical analysis
D)it violates the efficient markets hypothesis
Q4) How would proponents of the efficient markets hypothesis use the Gordon-Growth model to explain the movement of stock prices during the Financial Crisis of 2007-2009?
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Chapter 7: Derivatives and Derivative Markets
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Sample Questions
Q1) Profits from speculation arise because of
A)the spread between the bid and ask prices on bonds.
B)the illiquidity of markets for derivative instruments.
C)the high information costs in markets for derivative instruments.
D)disagreements among traders about future prices of a commodity or financial instrument.
Q2) A shortcoming of swaps that has led to the domination of the swaps market by large firms and financial institutions is
A)the lack of privacy.
B)need to assess creditworthiness.
C)desire for more flexibility.
D)limited size of the market.
Q3) An investor who is considering hedging by selling Treasury futures can also hedge by:
A)buying Treasury put options
B)selling Treasury put options
C)buying Treasury call options
D)buying European Treasury options
Q4) Why may some investors prefer forward contracts to futures?
Q5) What are the information costs associated with forward contracts?
Page 9
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Chapter 8: The Market for Foreign Exchange
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Sample Questions
Q1) If the price level in Japan increases more rapidly than the price level in Britain, we would expect
A)interest rates in Japan to lower than interest rates in Britain.
B)the Japanese yen to depreciate against the British pound.
C)the British pound to depreciate against the Japanese yen.
D)Japanese productivity to have increased more rapidly than British productivity.
Q2) Purchasing power parity's assumption that the real exchange is constant
A)is correct in nearly all instances.
B)would be correct were it not for the existence of trade barriers.
C)is not reasonable.
D)is correct for trade between the United States and Japan, but incorrect in most other bilateral trading relations.
Q3) Since the 1960s, the percentage of U.S. output exported to foreigners
A)remained about the same.
B)more than doubled.
C)increased by more than ten times.
D)declined by about half.
Q4) Briefly explain how a U.S. company that exports to Europe can hedge against exchange rate risk.
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Chapter 9: Transactions Costs, Asymmetric Information, and the Structure of the Financial System
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Sample Questions
Q1) Venture capital firms attempt to overcome the principal-agent problem by
A)investing only in industries with high profit rates.
B)charging high interest rates on loans.
C)holding large equity stakes in the firms they invest in.
D)avoiding investing in common stock.
Q2) Lenders prefer to lend to firms with high net worth because
A)such firms are usually willing to pay higher interest rates.
B)the owners of such firms have more to lose if the firm defaults on a loan.
C)the government requires most bank loans to be made to such firms.
D)such firms usually are unable to raise funds directly through financial markets.
Q3) Transaction and information costs
A)benefit borrowers at the expense of savers.
B)benefit savers at the expense of borrowers.
C)transaction costs hurt savers while information costs hurt borrowers.
D)create profit opportunities for those who can reduce these costs.
Q4) How does adverse selection affect the participation of small- and medium-sized firms in the stock market?
Q5) How is the lemons problem in the used car market an example of asymmetric information?
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Chapter 10: The Economics of Banking
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Sample Questions
Q1) A person takes out a car loan at a bank, but actually uses the money to play the lottery. This situation is an example of which problem banks face in lending?
A)adverse selection
B)moral hazard
C)interest rate risk
D)illiquidity
Q2) Bank borrowing from the Fed is referred to as:
A)federal funds
B)discount loans
C)repurchase agreements
D)reverse repurchase agreements
Q3) Where do the FDIC's funds come from?
A)Congress appropriates money for the FDIC, just as it does for other federal agencies.
B)The FDIC earns income through the insurance premiums paid by insured banks and from investment earnings.
C)The FDIC sells bonds in the financial markets.
D)The FDIC relies on voluntary contributions from the banking community.
Q4) What are the advantages of bank deposits compared to other types of assets?
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12
Chapter 11: Investment Banks, Mutual Funds, Hedge Funds, and the Shadow Banking System
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Sample Questions
Q1) In what year did the mutual fund industry in the United States begin?
A)1812
B)1924
C)1974
D)1990
Q2) What are the risks and reward for investment banks involved in underwriting a new security issue?
Q3) The law of large numbers allows insurance companies to
A)hold capital market instruments as assets without fearing overly large numbers of defaults.
B)hold money market instruments as assets without fearing overly large numbers of defaults.
C)predict the average number of occurrences of insurable events in a large population of policyholders.
D)charge higher premiums than necessary, knowing that large numbers of individuals will pay them.
Q4) Why did Goldman Sachs and Morgan Stanley seek to become financial holding companies in October 2008?
Q5) What information is typically included in a prospectus?
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Chapter 12: Financial Crises and Financial Regulation
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Sample Questions
Q1) What happened to real interest rates during the early 1930s?
A)They declined as nominal interest rates declined.
B)They rose as nominal interest rates rise.
C)They declined due to deflation.
D)They rose due to deflation.
Q2) Which aspects of a bank's operations are evaluated as part of the CAMELS rating system?
Q3) What does it mean for a money market mutual fund to "break the buck"?
A)The value of its share declines below $1.
B)It incurs losses on its investments.
C)It increases its fees to more than 1% of net asset value.
D)It is unable to meet the demand for withdrawals by investors.
Q4) What are two ways that governments can prevent banking panics?
Q5) Which of the following is NOT true of an insolvent bank?
A)Its net worth is negative.
B)It may be unable to pay off its depositors.
C)The value of its assets is less than the value of its liabilities.
D)It must have no more deposits.
Q6) Why do governments want to maintain the health of the banking system?
Q7) How does deflation affect those with debt?
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Chapter 13: The Federal Reserve and Central Banking
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Sample Questions
Q1) What is the name of the entity, composed of Federal Reserve district bankers, that consults on monetary policy?
A)The Federal Open Market Committee
B)The Federal Advisory Council
C)The Monetary Policy Council
D)The District Bank Committee
Q2) During World War II
A)the Board of Governors was temporarily disbanded.
B)the Fed was not allowed to make discount loans.
C)the Fed agreed to hold interest rates on short-term Treasury securities at low levels.
D)the Fed agreed not to buy Treasury securities.
Q3) Which best describes the Federal Reserve district banks?
A)They are private ventures.
B)They are government ventures.
C)Some are private while others are government.
D)They are private-government joint ventures.
Q4) What are the roles of Federal Reserve district banks?
Q5) Who are the members of the Financial Stability Oversight Council?
Q6) Who serves as voting members of the Federal Open Market Committee (FOMC)?
Page 15
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Chapter 14: The Federal Reserves Balance Sheet and the
Money Supply Process
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Sample Questions
Q1) The interest rate the Fed charges on loans to depository institutions is known as
A)the federal funds rate.
B)the Fed loan rate.
C)the discount rate.
D)the interbank clearing rate.
Q2) Most of the increase in the monetary base between 2007 and 2012 was due to increases in:
A)currency
B)bank deposits
C)excess reserves
D)Treasury bills
Q3) Which of the following statements is correct?
A)The discount rate is determined by market forces.
B)The Fed's control over discount lending is more complete than its control over open market operations.
C)Decisions by both banks and the Fed determine the volume of discount loans.
D)The discount rate is typically greater than other short-term market interest rates.
Q4) Briefly explain the process of multiple deposit creation.
Page 16
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Chapter 15: Monetary Policy
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Q1) Which of the following statements is NOT true?
A)Each Federal Reserve bank maintains its own discount window.
B)Before 1980, the Fed rarely made loans to banks which were not members of the Federal Reserve System.
C)Since 1980, all depository institutions have had access to the discount window.
D)Each Federal District Bank can charge a different discount rate.
Q2) In the federal funds market diagram, a decrease in the required reserve ratio
A)shifts the demand curve for reserves to the left.
B)increases the federal funds rate.
C)results in a multiple expansion of deposits, which increases the equilibrium level of reserves held by banks.
D)shifts the supply curve for reserves to the right.
Q3) The Fed's inability to instantaneously observe changes in inflation and economic growth result in
A)information lag.
B)impact lag.
C)policy lag.
D)jet lag.
Q4) What is a matched sale-purchase transaction (also known as a reverse repo)?
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Chapter 16: The International Financial System and Monetary Policy
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Sample Questions
Q1) How does a sterilized intervention by the Fed in foreign exchange market differ from an unsterilized intervention?
Q2) A purchase of foreign assets by a central bank has the same impact on the monetary base as:
A)an open market purchase of government securities
B)an open market sale of government securities
C)an increase in the discount rate
D)a reduction in the interest on reserves
Q3) The exchange rate system followed by the United States is known as
A)the gold standard.
B)a fixed exchange rate system.
C)a flexible exchange rate system.
D)a barter system.
Q4) The trade balance is
A)by definition, identical to the current account balance.
B)is a major portion, but not the only component, of the current account balance.
C)almost invariably larger than the financial account balance.
D)the largest component of the financial account.
Q5) Discuss the problems associated with the imposition of capital controls.
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Chapter 17: Monetary Theory I: The Aggregate Demand and Aggregate Supply Model
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Sample Questions
Q1) If the expected price level increases at the same time that the federal government cuts taxes, in the short run
A)aggregate output and the price level will both increase.
B)aggregate output will increase, but the price level will fall.
C)aggregate output and the price level will both fall.
D)the price level will increase, but aggregate output may either increase or decrease.
Q2) According to Robert Gordon, what led to the decline in unemployment in the 1940s?
A)structural barriers to expanding output and employment disappeared once a sufficiently large increase in aggregate demand had taken place
B)decline in unionization of the workforce
C)President Truman moving away from the policies implemented by President Roosevelt
D)the strengthening of property rights following the end of the New Deal
Q3) How does an increase in interest rates affect net exports?
Q4) According to some economists, what contributed to the unusual uncertainty that adversely affected aggregate supply during the recovery following the recession of 2007-2009?
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Page 19
Chapter 18: Monetary Theory II: The IS-MP Model
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Sample Questions
Q1) A decline in the output gap causes the demand for real balances
A)to rise and the interest rate to fall.
B)to fall and the interest rate to rise.
C)and the interest rate to fall.
D)and the interest rate to rise.
Q2) The LM curve slopes upward to the right because
A)the demand for money plus the demand for nonmoney assets must equal the supply of money plus the supply of nonmoney assets.
B)a higher real interest rate is associated with a higher level of the output gap in money market equilibrium.
C)a higher real interest rate is associated with a higher level of saving in goods market equilibrium.
D)in equilibrium the actual real interest rate must increase one-for-one with expected real interest rate.
Q3) The IS curve depicts the relationship between
A)aggregate output and the real interest rate.
B)investment demand and the real interest rate.
C)investment demand and the level of current output.
D)national saving and the level of current output.
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Page 20