35 multiple questions (money and bank)

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Money and Banking Spring 2019 Exam IV First Name Zuning Last Name This exam counts 85% of your overal Ecam IV grade MULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers the question. 1) When housing prices began to decline after their peak in 2006, many subprime borrowers found that their mortgages were underwater." This meant that A) disintermediation has occurred B) they were held liable for building homes in a flood zone and would not receive federal assistance C) the value of the house fell below the amount of the mortgage. D) the amount that they owed on their mortgage was less than the value of their house. 2) The current account of the US blance of payments A) has been negative nearly every year since the mid 1980's. B) has cycled in the positive range and negative range since the 1990's C) has been positive nearly every year since the mid 1980's D) includes net income from abroad plus the capital account of the US balance of payments 3) The shadow banking industry is considered to be more financially fragile than the commercial (depository) banking industry because A) unlike bank depositors, the investors providing investment banks and hedge funds with short-term loans have no federal insurance against loss of principal B) unlike commercial banks, shadow banks borrow short term and lend long term C) underwriting initial public offerings increases risk and contributes to financial fragility D) unlike commercial banks, investment banks do not have off-balance sheet investments that allow them to hedge against risk 4) Since the 1980's A) the capital account of the US has been positive B) all of the answers are correct C) the net international investment position of the US has been negative D) foreign liabilities have exceeded foreign assets in the US 5) The nine directors of the Federal Reserve Banks are split into three categories: are professional bankers are leaders from industry, and are to represent the public interest and are not allowed to be officers, employees, or stockholders of banks. A) 3;3; 3 B) 5; 2; 2 C) 2,5; 2 D) 4;2;3 6) The process of transforming otherwise illiquid financial assets into marketable capital market instruments is known as A) internationalization B) securitization. C) program trading D) arbitrage. 7) The US deficit on its balance of trade means that A) the US has a capital account surplus, indicating the inflow of foreign funds B) interest rates in the US are higher than they would be if the balance of trade were positive C) there is no connection between the balance of trade (export-imports) and the capital account D) the US has a capital account deficit, indicating the ouellow of foreign funds 8) Banks have a maturity mismatch since A) some of their loans are short term while others are long term B) some of their borrowings are short term while others are long term. C) they borrow short term, but lend long term. D) they borrow long term, but lend short term. 9) The shadow banking system refers to A) commercial banks B) nonbank financial institutions such as investment banks and hedge funds. C) community banks D) pawn shops and institutions that offer payday loans. 10) The monetary base is A) can be increased or decreased through actions that the central bank takes B) composed of the fiat money issued by the central bank C) the total amount of currency in general circulation in the hands of the public plus the reserves of commercial banks D) all of the answers are correct 11) Over the past three decades A) profits have increased faster than nominal GDP B) profits, like real wages, have experienced stagnant growth C) nominal GDP has increased faster than profits D) capacity utilization has remained constant 12) A major disruption in financial markets characterized by sharp declines in asset prices and firm failures is called a A) free-rider problem B) "lemons problem C) fiscal imbalance D) financial crisis. 13) The Federal Reserve was functioning as a lender of last resort when it created A) Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 B) DIDMA - The Depository Institutions Deregulation and Monetary Control Act C) EMU - Emergency Monetary Fund - D) TALF - The Term Asset-Backed Securities Loan Facility 14) By the summer of 2008, about what percent of subprime mortgages were overdue by at least 30 days? A) 10% B) 25% C) 34% D) 50% 2 15) The majority of members of the Federal Open Market Committee are A) presidents of member banks C) members of the Federal Advisory Council B) Federal Reserve Bank presidents D) the seven Federal Reserve overnors 16) The Federal Deposit Insurance Corporation (FDIC) was created: A) when the Federal Reserve was created in 1914. B) in 1933 as a part of the Glass-Steagall Act. C) in 1927 as a part of the McFadden Act. D) prior to the stock market crash of 1929. 17) What does it mean for a money market mutual fund to break the buck? A) It incurs losses on its investments. B) It is unable to meet the demand for withdrawals by investors C) It increases its fees to more than 1% of net asset value. D) The value of its share declines below $1. 18) Firms that are designated as systemically important financial institutions (SIFLs) are subject to all of the following additional Federal Reserve regulations except A) higher capital standards B) stricter liquidity requirements. C) interest rate ceilings on time deposits. D) providing a plan for orderly liquidation if necessary 19) Shadow banks borrow short-term funds that are not federally insured and use them for long-term investment, and therefore to runs similar to those that occurred during the financial crisis. A) no longer, are no longer vulnerable B) continue to, are no longer vulnerable C) continue to; are vulnerable D) no longer; are vulnerable 20) Once the financial crisis of 2007-09 was underway, A) The Federal Reserve, Treasury, Congress and US President responded slowly to address the situation B) none of these answers is correct C) The Fed aggressively raised short-term interest rates in order to stimulate savings D) The US government sold its shares of Fannie Mae and Freddie Mac to private investors 21) A possible sequence for the three stages of a financial crisis in an advanced economy might be leads to leads to A) asset price declines, banking crises; unanticipated decline in price level B) banking crises, increase in uncertainty, increase in interest rates C) banking crises; increase in interest rates; unanticipated decline in price level D) unanticipated decline in price level; banking crises; increase in interest rates 22) Shadow banks include A) commercial banks, savings and loans, and investment banks B) insurance companies, real estate companies, and financial services companies C) commercial banks, investment banks, and the central bank D) investment banks, mutual funds, and hedge funds 23) What happened to real interest rates during the early 1930s? A) They rose due to deflation B) They declined as nominal interest rates declined. C) They declined due to defiation D) They rose as nominal interest rates rose 24) "Too big to fail" policy is A) a policy that regulates the hedge fund industry B) a policy that restricts the leverage at large commercial banks to 25% C) a policy under which the federal government does not allow large financial firms to fail, for fear of damaging the financial system D) a policy that allows the US government to adjust its exchange rates when it experiences balance of trade deficits 25) The principal-agent view of central bank behavior predicts that A) the Fed acts to increase its power, influence, and prestige as an organization subject to traints placed by principals (the president and Congress) B) the Fed acts in the public's best interest in its pursuit of monetary policy C) the Chair of the Board of Governors really runs the show and exercises his power unilaterally D) the 12 district banks of the Federal Reserve system will undermine the Board of Governor's dictates regarding monetary policy 26) The financial panic of 1907 resulted in such widespread bank failures and substantial losses to depositors that the American public finally became convinced that A) the Federal Reserve System had failed to serve as a lender of last resort. B) a central bank was needed to prevent future panics. C) the First Bank of the United States had failed to serve as a lender of last resort. D) the Second Bank of the United States had failed to serve as a lender of last resort 27) A pays out cash flows from subprime mortgage -backed securities in different tranches, with the highest-rated tranch paying out first, while lower ones paid out less if there were losses on the mortgage-backed securities. A) Discount bond B) Collateralized debt obligation (CDC) C) Negotiable CD D) Adjustable-rate mortgage 28) A substantial decrease in the aggregate price level that reduces firms' net worth may stall a recovery from a recession. This process is called A) insolvency. B) illiquidity. C) debt deflation D) moral hazard. 29) Members of the Board of Governors serve A) at the discretion of the Federal Reserve Chairman B) four-year terms C) at the discretion of the President of the United States. D) fourteen year terms. 30) Underwriting involves A) selling stock more cheaply than conventional stockbrokers. B) insuring the life or health of individuals. C) issuing stock and using the proceeds to buy bonds. D) guaranteeing a price for new capital to the issuing firm. 31) The Dodd-Frank Act from 2010 A) all of the answers are correct B) created the Financial Stability Oversight Committee C) created the Consumer Financial Protection Bureau D) instituted the Volcker Rule which restrickts banks from making speculative investments that do not benefit their customers 32) Suppose an investment bank is buying $50 million in long-term mortgage-backed securities, and finances the investment by borrowing 80% and paying for the other 20% out of equity. What is the bank's leverage? A) 1.25 B) 4 C) 5 D) 10 33) Each regional Federal Reserve Bank is owned by A) those who purchase its stock on the open market. B) the taxpayers in its district. C) the member banks in its district. D) the Federal Deposit Insurance Corporation. 34) One consequence of stagnant real wages in the US since the mid 1970's has been A) a rise of household debt as a percentage of disposable personal income B) a rise in personal savings C) a fall of household debt as a percentage of disposable personal income D) a fall in US imports and subsitution of US-made products 35) Which of the following is not a member of the Federal Open Market Committee (FOMC)? A) Five reserve bank presidents B) The entire board of governors C) The chairman of the SEC (Securities and Exchange Commission) D) All of the above are members of the FOMC.
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MONEY AND BANKING ANSWERS
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