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Exam 3 – Money and Banking Fall 2008 – Cutler
MULTIPLE-CHOICE (each question is worth 1 point)
Please, answer each of the below questions by including the chosen letter answer in the table at the end of the
1) Although the FDIC was created to prevent bank failures, its existence encourages banks to
A)take too much risk.
B)hold too much capital.
C)open too many branches.
D)buy too much stock.
Answer: A
2) Deposit insurance has not worked well in countries with
A) a weak institutional environment.
B) strong supervision and regulation.
C) a tradition of the rule of law.
D) few opportunities for corruption.
Answer: A
3) The government safety net creates ________ problem because risk-loving entrepreneurs might find banking an
attractive industry.
A)an adverse selection
B)a moral hazard
C)a lemons
D)a revenue
Answer: A
4) If the FDIC decides that a bank is too big to fail, it will use the ________ method, effectively ensuring that
________ depositors will suffer losses.
A) payoff; large
B) payoff; no
C) purchase and assumption; large
D) purchase and assumption; no
Answer: D
5) The result of the too-big-to-fail policy is that ________ banks will take on ________ risks, making bank failures
more likely.
A) small; fewer
B) small; greater
C) big; fewer
D) big; greater
Answer: D
6) A well-capitalized bank has ________ to lose if it fails and thus is ________ likely to pursue risky activities.
A) more; more
B) more; less
C) less; more
D) less; less
Answer: B
7) To be considered well capitalized, a bank's leverage ratio must exceed ________.
A) 10%
B) 8%
C) 5%
D) 3%
Answer: C or B (per Basel accord)
8) Off-balance-sheet activities

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A) generate fee income with no increase in risk.
B) increase bank risk but do not increase income.
C) generate fee income but increase a bank's risk.
D) generate fee income and reduce risk.
Answer: C
9) The Act that required separation of commercial and investment banking was
A) the Federal Reserve Act.
B) the Glass-Steagall Act.
C) the Bank Holding Company Act.
D) the Monetary Control Act.
Answer: B
10) Agreements such as the ________ are attempts to standardize international banking regulations.
A)Basel Accord
B)UN Bank Accord
C)GATT Accord
D)WTO Accord
Answer: A
11) Although as many as half of the S&Ls in the U.S. had a negative net worth and were thus insolvent by the end of
1982, regulators adopted a policy of ________, which amounted to ________ capital requirements.
A)regulatory forbearance; raising
B)regulatory forbearance; lowering
C)regulatory agnosticism; raising
D)regulatory agnosticism; lowering
Answer: B
12) The Argentine banking crisis of 2001 resulted from Argentina's banks being required to
A)purchase large amounts of government debt.
B)pay back the value of failed loans.
C)make risky real estate loans.
D)make loans to only state-owned businesses.
Answer: A
13) The Japanese banking system went through a cycle of ________ in the 1990s similar to the one that occurred in
the U.S. in the 1980s.
A)regulatory forbearance
B)policy antagonism
C)regulatory ignorance
D)policy renewal
Answer: A
14) The evidence from banking crises in other countries indicates that
A)deposit insurance is to blame in each country.
B)a government safety net for depositors need not increase moral hazard.
C)regulatory forbearnace never leads to problems.
D)deregulation combined with poor regulatory supervision raises moral hazard incentives.
Answer: D
15) 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 First Bank of the United States had failed to serve as a lender of last resort.
B)the Second Bank of the United States had failed to serve as a lender of last resort.
C)the Federal Reserve System had failed to serve as a lender of last resort.
D)a central bank was needed to prevent future panics.
Answer: D
16) What makes the Federal Reserve so unique compared to other central banks around the world is its

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A) centralized structure.
B) decentralized structure.
C) regulatory functions.
D) monetary policy functions.
Answer: B
17) Member commercial banks have purchased stock in their district Fed banks; the dividend paid by that stock is
limited by law to ________ percent annually.
Answer: C
18) The Federal Reserve Bank of ________ plays a special role in the Federal Reserve System because it houses the
open market desk.
B)New York
D)San Francisco
Answer: B
19) All ________ are required to be members of the Fed.
A) state chartered banks
B) nationally chartered banks
C) banks with assets less than $100 million
D) banks with assets less than $500 million
Answer: B
20) The Federal Reserve entity that makes decisions regarding the conduct of open market operations is the
A) Board of Governors.
B) chairman of the Board of Governors.
C) Federal Open Market Committee.
D) Open Market Advisory Council
Answer: C
21) Members of Congress are able to influence monetary policy, albeit indirectly, through their ability to
A)withhold appropriations from the Board of Governors.
B)withhold appropriations from the Federal Open Market Committee.
C)propose legislation that would force the Fed to submit budget requests to Congress, as must other government
D)instruct the General Accounting Office to audit the foreign exchange market functions of the Federal Reserve.
Answer: C
22) As of the beginning of the year 2006, there are ________ countries that have representation on the Governing
Council of the European Central Bank.
B) eight
C) twelve
D) fifteen
Answer: D
23) The European Central Bank is located in
A) Berlin
B) Brussels
C) Geneva
D) Frankfurt
Answer: D

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