Midterm2

When the amount of direct and indirect financing are summed, the result is usually:
A. Greater than 100% of GDP
B. Equal to GDP
C. Less than GDP
D. Approximately 50% of GDP

A: Greater than 100% of GDP

Which of the following is not a role of a financial institution acting as a financial intermediary?
A. Pooling the resources of small savers
B. Formulating oversight regulations
C. Providing ways to diversify risk
D. Supplying liquidity

B: Formulating oversight regulations

If financial intermediaries did not have the ability to pool the resources of small savers:
A. Borrowers needing large amounts of money would find it more costly to obtain the funds
B. The economy would grow faster
C. People would likely save more
D. The

A: Borrowers needing large amounts of money would find it more costly to obtain the funds

The fact that a financial intermediary can hire a lawyer to write one contract that works for many customers is an example of:
A. Economies of scale
B. The law of diminishing marginal returns
C. The law of increasing opportunity cost
D. The law of demand

A: Economies of scale

Since one function of financial intermediaries is to provide liquidity:
A. They must keep all of their funds in short-term securities
B. They keep almost all of their funds in cash
C. They must know approximately how much liquidity their customers will ne

C: They must know approximately how much liquidity their customers will need each day and have these funds available

Mutual funds are attractive because:
A. They provide high returns from purchasing the financial securities of a few select companies
B. They provide the investor with greater diversification at a lower cost than what most investors could obtain individual

B. They provide the investor with greater diversification at a lower cost than what most investors could obtain individually

Most individuals save at banks rather than lend directly because:
A. The bank creates information asymmetry
B. Moral hazard exists only when individuals make loans directly to borrowers, it does not occur when banks issue loans
C. Banks through economies

C. Banks through economies of scale can reduce the cost of information asymmetry

Which of the following is not true of adverse selection?
A. It exists because information is perfect
B. It describes the problem a lender faces in identifying loan applicants as good or bad risk borrowers
C. It arises because borrowers have more informati

A. It exists because information is perfect

9. Two problems that arise from asymmetric information are:
A. Adverse selection and diseconomies of scale
B. Moral hazard and the free-rider problem
C. Moral hazard and adverse selection
D. The free-rider problem and adverse selection

C. Moral hazard and adverse selection

Which of the following is a problem of moral hazard?
A. A lender cannot distinguish good risk from bad risk borrowers
B. An individual who purchases auto insurance begins to leave his or her keys in the car while running into a store
C. Life insurance com

B. An individual who purchases auto insurance begins to leave his or her keys in the car while running into a store

One reason lenders usually require a lot of information from loan applicants is to avoid:
A. The problems of moral hazard
B. The problem of adverse selection
C. Being harmed by symmetric information
D. Charges of discrimination in lending

B. The problem of adverse selection

Recent history has shown that the government regulations requiring the disclosure of information from public corporations have:
A. All but eliminated the problems from asymmetric information
B. Reduced but not eliminated the problems from asymmetric infor

B. Reduced but not eliminated the problems from asymmetric information

The principal-agent problem is:
A. A form of adverse selection
B. When stockholders are not acting in the best interest of managers
C. A form of moral hazard
D. Due to managers not being able to monitor stockholder behavior

C. A form of moral hazard

Providing stock options to corporate managers was an idea designed to:
A. Hide increases in pay of corporate executives from stockholders
B. Align managers' interest with the stockholders' interest
C. Treat adverse selection
D. Treat the free-rider proble

B. Align managers' interest with the stockholders' interest

The moral hazard that can result from debt financing is mainly due to the:
A. Borrower not working as hard once he or she obtains the loan
B. Borrower wanting to refinance the loan
C. Borrower taking greater risk in hopes of obtaining a larger return
D. E

C. Borrower taking greater risk in hopes of obtaining a larger return

Often a bank will require a loan officer to make personal visits on customers with loans outstanding. This is encouraged because:
A. The bank worries about another bank trying to steal their customers
B. The bank wants to make sure the business is busy
C.

C. This is an effective monitoring technique and should reduce moral hazard

Considering the balance sheet for all commercial banks in the U.S., the largest category of assets is:
A. Cash items
B. U.S. Government Securities
C. Required reserves
D. Loans

D. Loans

Considering the balance sheet for all commercial banks in the U.S., the largest category of liabilities is:
A. Borrowing from other banks in the U.S.
B. Savings deposits and time deposits
C. Checkable deposits
D. Borrowings from non-banks in the U.S.

B. Savings deposits and time deposits

Considering the balance sheet for all commercial banks in the U.S., the net worth of banks is:
A. About 5 times the total assets
B. About 1/11 of total assets
C. Just about the same as total assets
D. About the same as total liabilities

B. About 1/11 of total assets

A bank's reserves include:
A. Vault cash
B. U.S. Treasury Securities
C. The bank's loan portfolio
D. U.S. Treasury bills and vault cash

A. Vault cash

Secondary reserves for banks are:
A. The same as the bank's net worth
B. Mainly the bank's liquid securities
C. Vault cash
D. Deposits the bank has at the Federal Reserve

B. Mainly the bank's liquid securities

One thing that is common for all bank loans is that they are:
A. Securitized
B. Liquid
C. Part of the banks' assets
D. Unsecured

C. Part of the banks' assets

Checkable deposits have decreased since the 1970's mainly because:
A. Regulators allowed higher rates to be paid on these accounts and banks found them to be highly unprofitable
B. People prefer to use credit cards rather than writing checks
C. These depo

C. These deposit accounts offer little or no interest so depositors find them to be expensive

Which of the following is a bank liability?
A. Mortgage loans
B. Demand deposits
C. Reserves
D. U.S. Treasury securities

B. Demand deposits

Repurchase agreements are usually used by banks that:
A. Have a need for long-term financing
B. Need cash for a very short period of time
C. Have negative net worth
D. Cannot obtain financing from any other source

B. Need cash for a very short period of time

Suppose that a bank initially has a leverage ratio of 8 to 1. If this bank increases its capital by $1million and its assets by $10 million, then the bank's:
A. Risk increases and its leverage decreases
B. Liabilities decrease and its leverage increases
C

D. Leverage and risk increases

If a bank has $100 million in assets and a net worth of $10 million, its debt-to-equity ratio is:
A. 10 to 1
B. 5 to 1
C. 9 to 1
D. 0.1 to 1

C. 9 to 1

Everything else equal, if the ratio of bank assets to bank capital increases, the bank's return on equity should:
A. Remain constant
B. Decrease
C. Increase
D. Cannot be determined from the information provided

C. Increase

Net interest income for a bank is:
A. The difference between gross income and net income after taxes
B. The interest banks earn from uses of funds
C. The difference between interest income and interest expense
D. The difference between interest income and

C. The difference between interest income and interest expense

A bank's Return on Equity (ROE) is calculated by:
A. Dividing the bank's net profit after taxes by the bank's capital
B. Dividing the banks liabilities by the bank's capital
C. Taking the bank's assets plus the net profit after taxes and dividing this sum

A. Dividing the bank's net profit after taxes by the bank's capital

A late-night news report says the president of a local bank is about to be arrested for embezzling money from the bank at which he works. This causes most of the depositors to line up in front of the bank the next morning wanting to withdraw their deposit

A. Liquidity risk

The difference between a bank's reserves and its required reserves is:
A. Profits
B. Net interest income
C. Excess reserves
D. Vault cash

C. Excess reserves

If a bank has deposits of $250 million, reserves that total $30 million and has a required reserve rate of 10 percent:
A. The bank is short of required reserves
B. The bank has excess reserves of $27.5 million
C. The bank has excess reserves of $5 million

C. The bank has excess reserves of $5 million

A bank that does not want to hold a lot of excess reserves but wants to manage liquidity risk is likely to:
A. Hold a lot in highly liquid securities
B. Make sure that most of its assets are in small business loans
C. Have a high ratio of loans to securit

A. Hold a lot in highly liquid securities

If Bank A sells some its loans to Bank B for cash, everything else equal:
A. Bank A's assets decrease and Bank B's assets increase
B. Bank A becomes less liquid while Bank B becomes more liquid
C. Banks A's total assets do not change, but Bank A is more l

C. Banks A's total assets do not change, but Bank A is more liquid

A bank that meets deposit withdrawal by borrowing additional funds will alter:
A. The asset side of their balance sheet
B. The liabilities side of the balance sheet
C. The amount of bank capital
D. The asset and liabilities side of the balance sheet

B. The liabilities side of the balance sheet

In recent years the U.S. banking structure has changed in such a way that there are now:
A. More banks
B. Fewer branches
C. Fewer banks but more banks with branches
D. Fewer banks and fewer banks with branches

C. Fewer banks but more banks with branches

If someone wants to start a bank today they would have to:
A. Obtain a charter from the federal government
B. Simply have $5 million as startup capital, a charter is no longer needed
C. Obtain a charter either from the federal or state government
D. Obtai

C. Obtain a charter either from the federal or state government

The Glass-Steagall Act of 1933:
A. Required commercial banks to sell off their investment banking operations
B. Eliminated the FDIC
C. Required federally chartered banks to meet the branching restrictions of the states
D. Required all state banks to get f

A. Required commercial banks to sell off their investment banking operations

The actual results of the McFadden Act included:
A. Increased efficiency of banking across the country
B. A tight network of interconnected banks across the country
C. A safety net that allowed small inefficient banks to continue to operate
D. The elimina

C. A safety net that allowed small inefficient banks to continue to operate

Bank holding companies developed:
A. To get around the limitations on bank branching
B. So foreign banks could open branches in the U.S.
C. To circumvent the regulation by the Office of the Comptroller of the Currency
D. So that unit banks could combine i

A. To get around the limitations on bank branching

One of the results of the Reigel-Neal Interstate Banking and Branching Efficiency Act of 1994 was:
A. A reversal of the branching restrictions of the McFadden Act
B. An increase in the number of banks in the U.S.
C. A decrease in the average size of banks

A. A reversal of the branching restrictions of the McFadden Act

The Gramm-Leach-Bliley Act of 1999:
A. Repealed the Reigle-Neal Interstate Banking and Branching Efficiency Act
B. Repealed the Glass-Steagall Act's prohibition of mergers between commercial banks and insurance or securities firms
C. Repealed the McFadden

B. Repealed the Glass-Steagall Act's prohibition of mergers between commercial banks and insurance or securities firms

Which of the following is not a reason to create large financial holding companies?
A. Financial holding companies offer a wide array of services under one brand name
B. Financial holding companies need only one CEO, one Board of Directors, and one accoun

D. Financial holding companies are exempt from having to pay for FDIC insurance on deposits

In the U.S. today:
A. Most banks are federally chartered
B. Most banks are state chartered
C. There are approximately equal numbers of state and federally chartered banks
D. All new banks are federally chartered

B. Most banks are state chartered

The Federal Deposit Insurance Corporation (FDIC) was created:
A. In 1933 as a part of the Glass-Steagall Act
B. When the Federal Reserve was created in 1914
C. Prior to the stock market crash of 1929
D. In 1927 as a part of the McFadden Act

A. In 1933 as a part of the Glass-Steagall Act

Which of the following statements most accurately describes the state of banking in the U.S.?
A. A large number of large banks and a small number of small banks
B. A large number of large and small banks
C. A small number of large and small banks
D. A lar

D. A large number of small banks and a small number of large banks

Citigroup is an example of:
A. An Edge Act corporation
B. A foreign bank
C. A financial holding company
D. A unit bank

C. A financial holding company

Universal banks are:
A. Firms that engage in banking services across many countries
B. Firms that engage a wide array of financial and non-financial activities
C. Banks that make direct investment in non-financial firms
D. Multinational corporations that

C. Banks that make direct investment in non-financial firms

What matters most during a bank run is:
A. The number of loans outstanding
B. The solvency of the bank
C. The liquidity of the bank
D. The size of the bank's assets

C. The liquidity of the bank

Having a maximum cap of $250,000 on deposit insurance means that:
A. Small depositors have incentives to monitor and discipline their banks.
B. Large depositors have incentives to monitor and discipline their banks.
C. Moral hazard problems associated wit

B. Large depositors have incentives to monitor and discipline their banks.

An economic rationale for government protection of small investors is that:
A. Large investors can better afford losses
B. Many small investors cannot adequately judge the soundness of their bank
C. There is inadequate competition to ensure a bank is oper

B. Many small investors cannot adequately judge the soundness of their bank

The financial system is inherently more unstable than most other industries due to the fact that:
A. While in most other industries customers disappear at a faster rate, in banking they disappear slowly so the damage is done before the real problem is ide

C. A single firm failing in banking can bring down the entire system; this isn't true in most other industries

One of the unique problems that banks face is:
A. They hold liquid assets to meet illiquid liabilities
B. They hold illiquid assets to meet liquid liabilities
C. They hold liquid assets to meet liquid liabilities
D. Both their assets and their liabilities

B. They hold illiquid assets to meet liquid liabilities

The existence of a lender of last resort creates moral hazard for bank managers because:
A. They have an incentive to take too much risk in their operations
B. Officials are likely to undervalue the bank's portfolio of assets
C. They are less likely to ap

A. They have an incentive to take too much risk in their operations

The payoff method used by the FDIC to address the insolvency of a bank is when the FDIC:
A. Pays the owners of the bank for the losses they would otherwise face
B. Pays off all depositors the balances in their accounts so no depositor suffers a loss, thou

C. Pays off the depositors up to the current $250,000 limit, so it is possible that some depositors will suffer losses

Under the purchase-and-assumption method of dealing with a failed bank, the FDIC:
A. Finds another bank to take over the insolvent bank
B. Takes over the day to day management of the bank
C. Sells the failed bank to the Federal Reserve
D. Sells off the pr

A. Finds another bank to take over the insolvent bank

Since the 1920's, the ratio of assets to capital has almost tripled for commercial banks. Many economists believe this is the direct result of:
A. Lower quality management in banks
B. The increase in branch banking
C. Allowing banks to offer non-bank serv

D. Government provided deposit insurance

The government's too-big-to-fail policy applies to:
A. Certain highly populated states where a bank run impacts a large percent of the total population
B. Large banks whose failure would certainly start a widespread panic in the financial system
C. Large

B. Large banks whose failure would certainly start a widespread panic in the financial system

Following the consolidation that resulted from the 2007-2009 financial crisis in the US, the 4 largest commercial banks share of total deposits was:
A. 75%
B. 50%
C. 40%
D. 25%

C. 40%

One monopoly that modern central banks have is in:
A. Regulating other banks
B. Making loans to banks
C. Issuing U.S. Treasury securities
D. Issuing currency

D. Issuing currency

Many governments give their central bank control over issuing currency because:
A. Printing currency can be profitable for a government so government officials may have a strong incentive to print too much
B. Having large amounts of currency can lead to l

A. Printing currency can be profitable for a government so government officials may have a strong incentive to print too much

In its role as the bankers' bank, a central bank performs each of the following, except:
A. Providing loans during times of financial distress
B. Providing deposit insurance
C. Overseeing commercial banks and the financial system
D. Managing the payments

B. Providing deposit insurance

The Federal Reserve's Fedwire system is used mainly to provide:
A. A means for foreign banks to transfer funds to U.S. banks
B. An inexpensive and reliable way for financial institutions to transfer funds to one another
C. An inexpensive way for individua

B. An inexpensive and reliable way for financial institutions to transfer funds to one another

The specific goals of central banks include all of the following except:
A. High stock prices
B. Low and stable inflation
C. High and stable real growth
D. A stable exchange rate

A. High stock prices

Central banks often find:
A. They can efficiently pursue all of their goals simultaneously
B. There are tradeoffs that make pursuing all of their goals simultaneously impossible
C. The goal(s) they pursue will be determined by stock market behavior
D. The

B. There are tradeoffs that make pursuing all of their goals simultaneously impossible

The primary objective of most central banks in industrialized economies is:
A. High securities prices
B. Low unemployment
C. Price stability
D. A strong domestic currency

C. Price stability

The efficient allocation of resources requires:
A. That prices reflect the relative value of goods and services
B. That inflation not exceed three percent a year
C. Deflation
D. Prices to remain constant

A. That prices reflect the relative value of goods and services

The problem for a central bank setting a zero inflation policy would be:
A. The risk of high employment
B. It is impossible to have zero inflation
C. Firms would have to cut nominal wages to reduce labor cost
D. Economic growth would also have to be zero

C. Firms would have to cut nominal wages to reduce labor cost

In terms of economic growth, the central bank would like to:
A. Have the maximum growth rate possible
B. Keep the growth rate averaging zero
C. Keep the economy close to its potential or sustainable rate of growth
D. Balance every recession with a boom

C. Keep the economy close to its potential or sustainable rate of growth

Everything else equal, if the growth rate of a country exceeds its sustainable rate, the central bank:
A. Will keep interest rates low to keep the momentum
B. Will now identify this new rate as the sustainable rate and try to maintain it
C. Is likely to r

C. Is likely to raise interest rates to slow the rate of growth

Keeping interest rates stable is:
A. The most important goal for a central bank
B. The focus of the central bank, stable interest rates will result in all other goals being achieved
C. A secondary goal for central banks
D. Not a goal of the central bank

C. A secondary goal for central banks

Exchange-rate stability is likely to be a more important goal for the central banks of:
A. Emerging market economies than the central bank of the U.S.
B. The U.S. and Japan than most small developing countries
C. Countries where exports and imports make u

A. Emerging market economies than the central bank of the U.S.

General agreement among economists finds that they believe monetary policy is more effective when it is formed:
A. By an individual rather than a committee
B. In secrecy without the reasoning behind it being revealed for many years
C. To keep financial ma

D. Independently of political pressure

To be independent, a central bank must have:
A. Its policies overturned only by the president
B. Control of its own budget
C. The board members appointed for very short terms
D. The chairperson serve as a member of the President's cabinet

B. Control of its own budget

In the United States, one problem with central bank independence is:
A. It is almost impossible to obtain because Congress controls the budget of the Federal Reserve
B. The United States is a democracy and having an independent central bank is inconsisten

B. The United States is a democracy and having an independent central bank is inconsistent with a representative democracy

The Federal Reserve's policy regarding announcing its policy decisions has:
A. Always been to announce it immediately; that was part of the original Federal Reserve Act of 1913
B. Only recently gone to immediate announcement; until 1994 these policy decis

B. Only recently gone to immediate announcement; until 1994 these policy decisions were secret

One reason for having a monetary policy framework is:
A. It makes clear what specific goals the central bankers are pursuing
B. It provides leeway for central bankers to change their goals without communicating the change and disrupting financial markets

A. It makes clear what specific goals the central bankers are pursuing

The ability to control inflation expectations is most closely related to a central bank's:
A. Transparency
B. Credibility
C. Accountability
D. Willingness to communicate

B. Credibility

For fiscal policymakers, one of the results of an independent central bank is:
A. To finance government spending the Treasury has to order more currency from the central bank
B. Fiscal policymakers always have to borrow to increase spending
C. Fiscal poli

D. Increased government spending has to be financed with either higher taxes or increased government borrowing

One thing that is true about economic policy in the U.S. is:
A. Fiscal and monetary policy never conflict
B. Monetary and fiscal policy often times conflict
C. Monetary policy ultimately controls fiscal policy since the Fed controls the money supply
D. Fi

B. Monetary and fiscal policy often times conflict

The Federal Reserve was created in:
A. 1929
B. 1913
C. 1909
D. 1945

B. 1913

Member banks of the Federal Reserve System include:
A. Only nationally chartered banks
B. All state chartered banks with assets exceeding $100 million
C. Nationally chartered banks and state chartered banks that decide to join
D. Nationally chartered bank

C. Nationally chartered banks and state chartered banks that decide to join

The number of regional Federal Reserve Banks is:
A. Nine
B. Seven
C. Five
D. Twelve

D. Twelve

How many members belong to the board of directors for each of the Reserve Banks of the Fed?
A. Seven
B. Nine
C. Twelve
D. Fourteen

B. Nine

Buying and selling U.S. Treasury Securities for the Fed's own portfolio is called:
A. Managing the float
B. Discount buying
C. Open market operations
D. Reserve adjustment
C. Open market operations

C. Open market operations

The Governors of the Federal Reserve System are appointed by the:
A. Member banks from their home district
B. Board of Directors of the Reserve Bank from their home district
C. President of the United States
D. Chairman of the Federal Reserve System

C. President of the United States

The Chairman of the Board of Governors:
A. Serves a four-year term that cannot be renewed
B. Is selected from the Board of Governors, appointed by the U.S. President
C. Serves the same four-year term as the U.S. President
D. Serves an eight-year term

B. Is selected from the Board of Governors, appointed by the U.S. President

The Board of Governors of the Fed performs each of the following functions, except:
A. Analyzing financial and economic conditions
B. Setting the reserve requirement
C. Approving bank merger applications
D. Making discount loans

D. Making discount loans

The Chairman of the FOMC is:
A. The Secretary of the Treasury
B. The Vice-Chairman of the Board of Governors
C. The Chairman of the Board of Governors
D. The President of the New York Fed

C. The Chairman of the Board of Governors

The interest rate that the FOMC currently chooses to control is:
A. The federal funds rate
B. The 30-year Treasury bond rate
C. The discount rate
D. The prime rate

A. The federal funds rate

The primary purpose of meetings of the FOMC is to:
A. Set the required reserve rate
B. Set the discount rate
C. Decide on the target interest rate
D. Set the prime rate

C. Decide on the target interest rate

The attendees at the FOMC meetings receive information prior to the meetings that is contained in books with colorful names. The information that is released to the public prior to the meetings is from the:
A. Blue book only
B. Beige book only
C. Blue and

B. Beige book only

Which of the books used at the FOMC meetings the Board staff's economic forecast for the next few years?
A. The blue book
B. The beige book
C. The green book
D. Both the beige and blue books

C. The green book

Once the FOMC meetings adjourn, the public is made aware of the FOMC's decision:
A. Immediately after the meeting
B. Forty-eight hours after the meeting adjourns
C. Within five business days
D. Twenty-four hours after the meeting adjourns

A. Immediately after the meeting

Criteria used to judge a central bank's independence include each of the following, except:
A. Budgetary independence
B. Long terms for members
C. Cabinet or ministry level of authority
D. Irreversible decisions

C. Cabinet or ministry level of authority

Most of the Fed's income is:
A. Paid to member banks in the form of a dividend
B. Sent to the FDIC to shore up the depositor insurance fund
C. Returned to the U.S. Treasury
D. Used to build the Fed's portfolio of securities

C. Returned to the U.S. Treasury

The objectives set for the Fed by Congress are:
A. Very specific; this adds to the Fed's accountability
B. By design, quite vague, allowing the Fed to really set its own goals
C. Specific regarding inflation, but vague on all other goals
D. Specific on th

B. By design, quite vague, allowing the Fed to really set its own goals