tesfatsi@iastate.edu
ANSWER OUTLINE
FINAL EXAM: 60 Questions Total L. Tesfatsion
Econ 353/Section 1
May 2, 2000
1-1 A __________ is a government institution that has responsibility
for the amount of money and credit supplied in an economy as a whole.
A. commercial bank
B B. central bank.
C. national bank
D. treasury department
E. none of the above.
2-1 The Federal Reserve System was established by the __________ in response
to the ___________________.
A A. Federal Reserve Act of 1913; public desire for a safer banking system.
B. Glass-Steagall Act of 1933; Great Depression
C. Central Banking Act of 1782; strong U.S. desire for centralized banking.
D. National Banking Act of 1863; abuses of state-chartered banks.
E. none of the above.
3-1 The Federal Deposit Insurance Corporation was established by the
____________ in response to ________________.
A. 1989 Financial Institutions Reform, Recovery, and Enforcement Act
(FIRREA); the 1980s financial crisis in the U.S.
B. 1982 Depository Institutions Act; pressures for deregulation.
C C. 1933 Glass-Steagall Act; financial troubles in the Great Depression.
D. 1913 Federal Reserve Act; earlier U.S. financial crises (e.g., in 1907).
E. none of the above
4-1 The presence of so many commercial banks in the U.S. is most likely
the result of
A. consumers' strong desire for dealing with only locally owned banks.
B. adverse selection and moral hazard problems that give local banks a
competitive advantage over larger banks.
C C. past regulations that restricted the ability of U.S. commercial banks
to branch across state lines.
D. all of the above.
E. none of the above.
5-1 Key ways in which banking in the U.S. differs from banking in European
countries such as the United Kingdom and Spain include:
A. these European countries impose separation restrictions that
prohibit banks from engaging in various securities activities
B. since World War II, U.S. regulations have successfully prevented
any bank failures.
C C. banking in these European countries tends to be highly concentrated.
D. the U.S. does not permit branches of foreign banks to be established
within its domestic borders.
E. all of the above.
6-1 Which of the following is NOT a provision of the 1933 Glass-Steagall Act:
A A. the establishment of a new system of Federally-chartered banks
B. a requirement that Fed members buy Federally-provided deposit insurance.
C. investment banks are prohibited from commercial banking activities.
D. commercial banks are prohibited from dealing in corporate securities.
E. none of the above
7-1 People who were AGAINST the elimination of provisions requiring the
separation of U.S. commercial banking from securities activities argued that
this elimination
A. would result in conflict-of-interest problems for the banks
B. would give banks an unfair advantage against securities
firms because banks receive government deposit insurance subsidies.
C. would encourage banks to engage in higher-risk activities.
D D. all of the above
E. only B and C of the above.
8-1 According to Mishkin, key factors that triggered the financial
crisis in the U.S. in the early 1980s included
A. financial innovations such as money market mutual funds and junk bonds
that seriously eroded the profitability of traditional banking
B. an increasingly liberalized financial regulatory environment that
permitted banks/thrifts to engage in higher-risk activities
C. decreases in mandated federal deposit insurance coverage and a
strengthening of the restrictions against interest paid on deposits.
D. all of the above.
E E. only A and B above.
9-1 According to Mishkin, FDIC bank regulators did not perform well during
the U.S. financial crisis in the 1980s in the following respects:
A. FDIC bank regulators lacked the expertise and funds to oversee newly
permitted higher-risk forms of lending.
B. FDIC bank regulators practiced regulatory forbearance -- they let
insolvent banks stay in operation.
C. the FDIC adopted a "too big to fail" policy, which resulted in
assistance being unfairly distributed across large and small banks.
D D. all of the above.
E. only A and B above.
10-1 Financial engineering of new products typically takes place in
response to ___________ .
A. recessions.
B. regulations that are perceived to restrict profitable activities.
C. inappropriate monetary policy.
D. changed supply/demand conditions for financial services and products
E E. both B and D.
11-1 A NOW (Negotiable Order of Withdrawal) account is an example of a
__________ whose development in the U.S. was stimulated by a desire to get
around ______ .
A. monetary payment system; Fed control of the money supply.
B. nonbank bank; provisions of the 1933 Glass-Steagall Act.
C C. financial innovation; restrictions on deposit account interest rates
D. depository institution; U.S. reserve requirements.
E. none of the above
12-1 An automated teller machine is an example of a __________ whose
development in the U.S. was stimulated by a desire to get around ______ .
A A. financial innovation; branching restrictions.
B. monetary payment system; Fed control of the money supply.
C. nonbank bank; provisions of the 1933 Glass-Steagall Act.
D. depository institution; U.S. reserve requirements.
E. none of the above
13-1 A bank holding company is an example of a ______ whose development in
the U.S. was stimulated in part by a desire to get around __________ .
A. thrift; U.S. chartering restrictions.
B B. financial innovation; pre-1994 U.S. branching restrictions.
C. savings and loan institution; provisions of the 1933 Glass-Steagall Act.
D. nonbank bank; U.S. reserve requirements.
E. none of the above
14-1 Examples of key financial innovations that have contributed to the
recent decline in traditional banking activities in the U.S. include
__________
A. Securitization
B. Money market mutual funds
C. Junk bonds
D D. All of the above
E. Only B and C of the above
15-1 Participants in securities markets in the United States are required
to adhere to standard accounting principles and to disclose information about
their sales, assets, and earnings. The government agency that enforces these
regulations is called the
A A. Securities and Exchange Commission
B. Federal Deposit Insurance Corporation
C. National Accountancy Commission
D. Securities Supervision and Accountancy Board
E. none of the above
16-1 Bank regulation is difficult because
A. complete and accurate information regarding the activities and
financial conditions of individual banks is difficult to acquire.
B. small differences in regulatory details can have large unintended
consequences as banks enage in loophole mining.
C. as regulations become more careful and precise, taking into account
individual situations, they become more costly to impose and enforce.
D D. all of the above.
E. none of the above
17-1 Chartering restrictions imposed on bank applicants have both
advantages and disadvantages. Advantages include ________ while
disadvantages include ____________.
A. guarantees that community needs are satisfied; increased competition.
B. eased entry into banking; costly periodic bank examinations.
C C. protection against unqualified applicants; reduced competition
D. regulatory forbearance; costly state verification.
E. none of the above
18-1 Consumer protection laws imposed on financial institutions in the U.S.
have stressed
A. lender of last resort protection and deposit insurance
B B. truth in lending, anti-discrimination, and community involvement
C. minimal capital balance requirements and disincentives for risk taking
D. branching restrictions and separation of commercial banking from
securities activities
E. none of the above
19-1 Asset and net worth restrictions imposed on financial institutions in
the U.S. to reduce moral hazard problems have stressed
A. lender of last resort protection and deposit insurance
B. truth in lending, anti-discrimination, and community involvement
C C. minimal capital balance requirements and disincentives for risk taking
D. branching restrictions and separation of commercial banking from
securities activities
E. none of the above
20-1 Key Government safety net provisions in the U.S. include the following:
A. the Fed insures commercial banks against loan defaults.
B B. the FDIC sells low-cost deposit insurance to commercial banks.
C. the Comptroller of the Currency prevents free-riding problems.
D. the Securities and Exchange Commission prevents loophole mining.
E. all of the above.
21-1 Some of the more important types of banking regulations that have
been imposed on U.S. banks in the past include _______ , which _________.
A. portfolio restrictions; restrict the holding of investment portfolios
B B. branching restrictions; restrict banks from branching across state lines
C. lending restrictions; restrict the amount loaned to any one borrower.
D. all of the above.
E. only B and C above.
22-1 Some of the financial reforms introduced by the U.S. in 1991 as a
result of the 1980s U.S. financial crisis include:
A. the FDIC was required to show more forbearance (patience) when
banks first exhibited signs of distress.
B. the FDIC was encouraged to apply a "too big to fail" policy.
C C. FDIC deposit insurance premiums were required to be risk based.
D. all of the above.
E. none of the above
23-1 The reforms in bank capital requirements introduced subsequent to the
1980s financial crisis in the U.S. have both disavantages and advantages.
Disadvantages include ________ while advantages include ____________.
A. more incentive for risky lending ; simpler reporting requirements.
B B. costlier enforcement; less incentive for banks to engage in risky lending.
C. increased adverse selection problems; decreased enforcement costs.
D. all of the above.
E. only A and C above.
24-1 Recent efforts to restructure the U.S. financial system have
significantly weakened
A. truth in lending, anti-discrimination, and community involvement laws
B B. branching restrictions and restrictions requiring the separation of
commercial banking from securities activities
C. minimal capital balance requirements and disincentives for risk taking
D. lender of last resort protections and deposit insurance
E. none of the above
25-1 Market-value accounting (i.e., valuing assets and liabilities on
bank balance statements by their current market value) has a number of
advantages over historical-cost accounting (i.e., valuing assets and
liabilities on bank balance statements by their purchase cost), including:
A. it is easier to implement.
B. it is more difficult for regulators and politicians to practice
regulatory forbearance when bank loans go bad.
C. it is more difficult for bank officials to hide insolvencies
when loans go bad.
D. all of the above.
E E. only B and C above
26-1 The increasing reliance that commercial banks with FDIC insured
deposits are placing on off-balance-sheet activities to increase their
profits is a concern to financial regulators because
A. these activities tend to increase the risk exposure of the banks
B. these activities are more difficult for the regulators to monitor
C. these activities increase moral hazard problems between
tax-payers and the banks.
D D. all of the above
E. none of the above
27-1 Countries with poorly developed financial systems tend to be more
prone to financial crises because
A. They have fewer safeguards against events that trigger financial crises
B. Their responses to events that trigger financial crises tend to be
inadequate or inappropriate
C. Once a financial crisis takes hold, such countries have fewer ways to
combat negative reinforcing feedback effects that can worsen the crisis.
D D. All of the above
E. Only A and B above
28-1 One possible justification for government intervention in financial
markets is to prevent or discourage circular-flow breakdowns due to
A. self-fulfilling pessimism on the part of firms, leading to
low demand for loans.
B. self-fulfilling pessimism on the part of financial lending
institutions, leading to low supply of loans ("credit crunches").
C. self-fulfilling pessimism on the part of consumers, resulting in bank
panics and bank failures.
D D. all of the above.
E. none of the above.
29-1 According to Mishkin, key factors that can trigger financial
crises include
A. sudden increases in prices that cause debt deflation
B. sudden increases in uncertainty that discourage lenders
C. sudden declines in corporate net worth that discourage lenders
D. all of the above
E E. only B and C above
30-1 According to Mishkin, an important factor leading up to the Mexican
financial crisis of 1994-1995 was
A. the failure of the Mexican oil monopoly.
B. the ratification of the North American Free Trade Agreement.
C C. increasing loan losses at Mexican banks.
D. the failure to ratify the North American Free Trade Agreement.
E. none of the above.
31-1 The International Monetary Fund (IMF) was established by the ________
to maintain fixed exchange rates and to provide loans to member countries
to help with _____________.
A. 1956 Banking Act; severe reserve shortages due to bank panics
B B. 1945 Bretton Woods Agreement; temporary balance of payments problems.
C. 1933 Glass-Steagall Act; purchasing power parity problems
D. 1989 Monetary Reconstruction Act; long-term development projects.
E. none of the above
32-1 Advocates of the International Monetary Fund (IMF) argue that IMF loans
help out countries whose financial institutions are _____________, but critics
argue that this help can worsen _________ in the future.
A. experiencing purchasing power parity problems; adverse selection problems
B B. short on cash but not insolvent; moral hazard problems.
C. insolvent but still functioning; balance of payment problems.
D. experiencing debt deflation; debt deflation.
E. none of the above
33-1 An appreciation of a country's domestic currency _______ the cost of
foreign goods relative to domestic goods. Consequently, central banks
sometimes attempt to offset appreciations of their domestic currency by
_______ their own currency in the foreign exchange market.
A. raises; selling
B B. lowers; selling
C. raises; buying
D. lowers; buying
E. none of the above
34-1 In a world divided between a home country HC and the rest of the world
ROW, the purchasing power parity condition in level form asserts that
A. the HC inflation rate will equal the ROW inflation rate over time
B. the HC nominal exchange rate will stay constant over time
C. the aggregate price levels in the HC and ROW will stay equal over time
D D. the HC real exchange rate will stay constant over time
E. none of the above
35-1 The purchasing power parity (PPP) theory is unable to fully explain
exchange rate movements because
A. currencies are subject to speculative attacks.
B. not all countries produce similar bundles of goods and services.
C. aggregate price levels differ across countries.
D. all of the above.
E E. only A and B above.
36-1 If the inflation rate in Ireland is 7 percent during 2000, and the
inflation rate in Thailand is 5 percent during 2000, then the theory of
purchasing power parity predicts that, during 2000, the value of the Thai
currency (bahts) measured in terms of Irish currency (punts) -- i.e., the
number of Irish punts per Thai baht -- will
A. rise by 12 percent
B B. rise by 2 percent
C. fall by 2 percent
D. fall by 12 percent
E. none of the above
37-1 Given a world divided between HC and ROW, the interest parity condition
is _________ condition that predicts a short-run relationship between _____
in the HC and ROW.
A. a balance of payments; borrowing and lending
B. an accounting; savings and investment
C C. an equilibrium (arbitrage); interest rates
D. bond market clearing; interest rates and loanable fund amounts
E. none of the above
38-1 Given a world divided between HC and ROW, according to the interest
parity condition, a ROW saver attempting to decide between holding a bank
deposit account in ROW and a bank deposit account in the HC with the same
_______ will choose the account with the highest ________.
A. expected return; yield to maturity
B B. risk; expected return rate
C. risk; liquidity
D. default risk; insurance
E. none of the above
39-1 Which item(s) below would be directly entered as items in the U.S.
CURRENT account:
A. A Mexican citizen's purchase of a U.S. government bond
B. U.S. foreign aid to Zimbabwe
C. Purchases by Japanese tourists of compact discs (CDs) newly produced
within the borders of the U.S.
D. Interest income received by U.S. holders of a Norwegian bond issue
E E. All but A
40-1 If the HC is running a current account surplus, then HC national saving
_______ HC total investment and the HC is ___________ ROW.
A. is greater than; a net borrower from
B B. is greater than; a net lender to
C. is less than; a net lender to
D. is less than; a net borrower from
E. none of the above
41-1 Letting CA = HC current account, NKA = HC "nonofficial" capital account,
BP = HC official reserve transactions, and KA = HC capital account given by
KA = NKA-BP, the balance of payments ACCOUNTING IDENTITY for the HC requires
that the sum of _________ and ___________ equals zero.
A. CA; BP
B. CA; NKA
C C. CA; KA
D. KA; BP
E. none of the above
42-1 Letting CA = HC current account, NKA = HC "nonofficial" capital account,
BP = HC official reserve transactions, and KA = HC capital account given by
KA = NKA-BP, the balance of payments EQUILIBRIUM CONDITION for the HC requires
that the sum of _________ and ___________ equals zero.
A. CA; BP
B B. CA; NKA
C. CA; KA
D. KA; BP
E. none of the above
43-1 If the U.S. is in a balance of payments EQUILIBRIUM, this means
A. U.S. government expenditures are equal to U.S. tax revenues
B. U.S. net exports equal U.S. net imports
C. in net terms, the U.S. is neither borrowing from nor lending to ROW
D D. U.S. currency reserves are not changing, implying the U.S. central bank
is neither buying nor selling currency in the foreign exchange market
E. none of the above
44-1. When the current price of bonds is ABOVE the equilibrium price of
bonds in the bond market, then there is an ________ bonds and the price of
bonds can be expected to ____.
A. excess demand for; fall
B. excess demand for; rise
C C. excess supply of; fall
D. excess supply of; rise
E. none of the above
45-1 If there is a sudden INCREASE today in the inflation rate that
borrowers and lenders expect for next year, then (all else equal) this will
tend to discourage ________ today, because they will now foresee a drop in
___________.
A. lenders; the real value of their future interest payment costs
B. borrowers; the real value of their future interest payment costs
C C. lenders; the real value of their future interest receipts
D. borrowers; the real value of their future interest receipts
E. none of the above
46-1 If a sudden DECREASE occurs in period T in the yield to maturity that
borrowers and lenders expect will hold for bonds from period T+1 to period
T+2, then (all else remaining equal) one would expect to see _______ in the
demand for bonds in period T because of ________.
A. an increase; a higher expected capital gain from T+1 to T+2
B. a decrease; a lower expected capital gain from T to T+1
C C. an increase; a higher expected capital gain from T to T+1
D. a decrease; a lower expected capital gain from T+1 to T+2
E. none of the above
47-1 If the bond market is currently in equilibrium, and suddenly Alan
Greenspan at the Fed announces that he has good reason to believe that the
inflation rate will be LOWER next year than currently anticipated, then the
theory presented in Mishkin Chapter 6 predicts that the effect on the bond
market today will be __________ in the equilibrium price of bonds and
__________ in the equilibrium quantity of bonds sold.
A. a definite drop; a definite drop
B. a definite rise; a definite rise
C. either a rise or a drop; a definite rise
D D. a definite rise; either a rise or a drop
E. none of the above.
48-1 Consider assets A, B, C with risk and expected return rate attributes
as follows: A = (.04 risk, .08 return), B = (.02 risk, .06 return), and
C = (.03 risk, .05 return). Which of the following statements is
DEFINITELY TRUE according to the risk-return theory of asset choice:
A. Asset A is preferable to asset B
B B. Asset B is preferable to asset C
C. Asset C is preferable to asset A
D. Asset B is preferable to asset A
E. none of the above
49-1 If you already own stock in Hardees Hamburgers, then the additional
purchase of stock in ________ should help to reduce your ________ risk.
A. Wendy's Hamburgers; nonsystematic
B. Compaq Computer Corporation; systematic risk
C. Kentucky Fried Chicken; systematic risk
D D. Apple Computer Company; nonsystematic risk
E. none of the above
50-1 The __________ of an asset portfolio P measures the extent to which
P's expected return rate varies directly with the expected return rate of
__________, hence it constitutes a measure of P's systematic risk.
A. market price; the risk-free asset
B. standard deviation; the market portfolio
C. liquidity; the risk-free asset
D D. beta; the market portfolio
E. volatility; each asset in the market portfolio
51-1 If the beta of an asset portfolio P _______, then (all else equal) the
Capital Asset Pricing Model (CAPM) predicts that P's expected return rate
should _______.
A. decreases; be higher
B. increases; be lower
C C. increases; be higher
D. increases; be more volatile (fluctuate more)
E. none of the above
52-1 Arbitrage pricing theory (APT) postulates that the expected return
rate of an asset portfolio can be explained by __________ of systematic
risk as reflected by movements in ______________.
A. two sources; its current yield and its capital gain or loss
B. a single source; the expected return rate of the market portfolio
C C. multiple sources; factors such as the inflation rate and yield spread
D. a single source; its price relative to the market portfolio price
E. none of the above
53-1 Which of the following statements are TRUE for fixed payment loans?
A. The borrower is required to make all principal plus interest payments
in one fixed payment occurring at the maturity date.
B. Installment loans and mortgages are frequently of the fixed payment type.
C. The borrower repays the loan by making the same fixed payment in every
payment period
D. Only A and B of the above
E E. Only B and C of the above
54-1 Which of the following statements are TRUE for coupon bonds?
A. The borrower makes a fixed coupon payment in every payment period until
the maturity date, at which time the borrower also pays the face value.
B. The borrower makes principal plus interest payments in the form of one
coupon payment occurring at the maturity date.
C. Corporate bonds generally take the form of coupon bonds.
D. All of the above
E E. Only A and C above
55-1 Letting "*" denote multiplication, if the annual interest rate is 8 percent,
then the present value of a payment stream ($40, $10) with $40 to be received
at the end of the first year and $10 to be received at the end of the second
year is given by
A. $40/(1 + .08) + $10/(1 + .08)
B B. $40/(1 + .08) + $10/(1 + .08)@2
C. $40/(1 + .08) + $50/(1 + .08)@2
D. [$40 * 0.08 + $10 * 0.08] divided by 2
56-1 The (annual) yield to maturity i on a coupon bond with a purchase
price $190, a face value $200, a 2-year coupon payment stream ($30,$30),
and a 2-year maturity is calculated as follows:
A. i equals the present value of the coupon payment stream ($30, $30)
B. i equals the coupon payment $30 divided by the face value $200
C. i equals the coupon payment $30 divided by the purchase price $190.
D D. i equals the annual interest rate that, when used to calculate the present
value of the stream ($30,$230), results in a present value equal to $190.
57-1 Which of the following are TRUE for the current yield ic of a coupon bond?
A. The ic is the coupon payment divided by the purchase price of the bond.
B. For a consol bond, the ic equals the yield to maturity.
C. The ic is a closer approximation for the yield to maturity the longer
the time to maturity, and also the closer the bond price is to its face
value, all else equal.
D D. All of the above are true
E. Only A and B above
58-1 Which of the the following are TRUE statements:
A. The return rate on a bond can differ from the interest rate on the bond.
B. The return rate on a coupon bond can be expressed as the sum of the
current yield and the rate of capital gain or loss
C. Measured from time T to time T+1, the return rate on a coupon bond will
be greater than the current yield when the price of the bond rises
between T and T+1.
D D. All of the above are true.
E. Only A and B above are true.
59-1 Which of the following are TRUE statements:
A. The change from a barter to a monetary economy increases efficiency
by discouraging specialization in the production of goods and services.
B B. The change from a barter to a monetary economy increases efficiency
by reducing the number of prices needed to implement exchange.
C. The change from a barter to a monetary economy increases efficiency
by increasing the amount of time and effort spent on each transaction.
D. All of the above are true.
E. Only A and B are true.
60-1 In the U.S., the evolution of the means of payment from commodity
money to backed paper money to checkable deposits and to electronic money and
beyond can best be understood as a consequence of
A. government mandates regarding means of payment that were designed to
ensure the overall safety of the payments system.
B B. financial innovations introduced by private agents in order to
increase their profits.
C. government mandates regarding means of payment that were designed to
promote the overall efficiency of the payments system.
D. financial innovations introduced by government to ensure the overall
safety of the payments system.
E. none of the above