tesfatsi@iastate.edu
ANSWER OUTLINE
FINAL EXAM: 60 QUESTIONS TOTAL L. Tesfatsion
Econ 353/Section 2
May 5, 2000
1-2 The regulatory system that has evolved in the United States whereby banks
are chartered either at the state level or the national level, is known as a
A. bilateral regulatory system
B. two-tiered regulatory system
C. tiered regulatory system
D D. dual banking system
E. none of the above
2-2 The Federal Reserve System is the ___________ for the United
States, defined to be a government agency responsible for __________.
A. national bank; ensuring money demand equals money supply.
B B. central bank; money and credit supplied in the economy as a whole.
C. Treasury; carrying out open market exchanges of government securities.
D. financial comptroller; regulatory oversight of government reserves.
3-2 The central banking system of the U.S. was established by the
____________ in order to ________________.
A. 1989 Financial Institutions Reform, Recovery, and Enforcement Act
(FIRREA); prevent future crises like the 1980s U.S. financial crisis.
B. 1982 Depository Institutions Act; promote more orderly lending.
C. 1933 Glass-Steagall Act; help prevent another Great Depression
D D. 1913 Federal Reserve Act; promote a safer banking system.
E. none of the above
4-2 A key reason why the U.S. has a large number of commercial banks in
comparison with other industrialized countries is
A. the vigorous competition within the U.S. commercial banking industry.
B B. past U.S. regulations that restricted branching across state lines.
C. strong U.S. consumer preference for locally owned banks.
D. the efficiency with which U.S. banks are run.
E. all of the above.
5-2 Key ways in which banking in the U.S. differs from banking in European
countries such as the United Kingdom and Spain include:
A. central banks in these European countries tend to be more independent
of political pressures than the U.S. central bank (i.e., the Fed).
B B. banking in these European countries tends to be highly concentrated.
C. commercial banks in these European countries are prohibited from
engaging in various securities activities.
D. foreign banks are not permitted to compete against U.S. domestic banks.
E. all of the above.
6-2 Which of the following types of provision(s) ARE included in the 1994
Riegle-Neal Banking and Branching Efficiency Act:
A. U.S. commercial banks are prohibited from dealing in corporate securities.
B. U.S. banks are prohibited from branching abroad.
C C. earlier legislation prohibiting U.S. banks from engaging in domestic
interstate branching is repealed.
D. all of the above.
E. only B and C of the above.
7-2 People who favored the ELIMINATION of provisions separating U.S.
commercial banking from securities activities argued that this elimination
A A. would permit U.S. banks to better compete with securities firms.
B. would increase bid-asked spreads for securities dealers
C. would decrease the risk exposure of banks by diversifying
their activities.
D. all of the above.
E. only A and C of the above.
8-2 According to Mishkin, key factors that triggered the financial crisis
in the U.S. in the early 1980s included
A. financial innovations such as NOW accounts that drained deposits
from banks and thrifts
B. deregulation that gave banks/thrifts the ability to raise interest
rates on deposit accounts and engage in higher-risk activities
C. government safety net provisions that led to moral hazard problems.
D D. all of the above.
E. only A and B above.
9-2 According to Mishkin, FDIC bank regulators did not perform well during
the U.S. financial crisis in the 1980s in the following respects:
A. they substantially weakened government safety net provisions.
B. they practiced regulatory forbearance -- i.e., insolvent
firms were permitted to stay in operation.
C. they engaged in a "too big to fail" policy, which resulted in
assistance being unfairly distributed across large and small banks.
D. all of the above.
E E. only B and C above.
10-2 Financial engineering of new products typically takes place in
response to ___________ .
A. changed demand/supply conditions for financial services and products
B. recessions.
C. regulations that are perceived to restrict profitable activities.
D. inappropriate monetary policy.
E E. both A and C.
11-2 A money market mutual fund is an example of a __________ whose
development in the U.S. was stimulated by a desire to get around ______ .
A. nonbank bank; provisions of the 1933 Glass-Steagall Act.
B. depository institution; U.S. reserve requirements.
C C. financial innovation; restrictions on deposit account interest rates
D. monetary payment system; Fed control of the money supply.
E. none of the above
12-2 A nonbank bank is an example of __________ whose development in the
U.S. was stimulated by a desire to get around ______ .
A A. a financial innovation; branching restrictions.
B. a monetary payment system; Fed control of the money supply.
C. an electronic payment system; provisions of the 1933 Glass-Steagall Act.
D. a depository institution; U.S. reserve requirements.
E. none of the above
13-2 The increased volatility in interest rates in the U.S. in the 1980s
was a primary reason for the development of
A. bank credit cards.
B B. adjustable-rate mortgages.
C. junk bonds.
D. commercial paper.
E. none of the above
14-2 Examples of key financial innovations that have contributed to the
recent decline in traditional banking activities in the U.S. include _____ .
A. The rise of the commercial paper market
B. Securitization
C. Money market mutual funds
D D. All of the above
E. Only B and C of the above
15-2 In the United States, the government agency that requires firms
participating in securities markets to adhere to standard accounting
principles and to disclose information about their sales, assets, and
earnings is the
A. Federal Trade Commission
B B. Securities and Exchange Commission
C. Federal Reserve System
D. Oversight Directorship for Securities Markets
E. none of the above
16-2 Bank supervision is difficult because
A. bank regulators and politicians with fixed terms of office have
strong incentives to engage in regulatory forbearance.
B. deposit insurance and other safety net provisions give depositors less
incentive to push for careful monitoring and enforcement of regulations.
C. it is difficult to ensure complete and accurate information disclosure.
D D. all of the above
E. none of the above
17-2 Bank chartering requirements help to reduce _________ problems for
bank depositors, and restrictions on bank asset holdings help to reduce
_________ problems for bank depositors.
A. risk diversification; risk pooling
B. regulatory forbearance; adverse selection
C C. adverse selection; moral hazard
D. free riding; economies of scale
E. none of the above
18-2 Key government safety net protections provided to financial institutions
in the U.S. to prevent bank panics include
A. truth in lending, anti-discrimination, and community involvement laws
B. minimal capital balance requirements and disincentives for risk taking
C. branching restrictions and separation of commercial banking from
securities activities
D D. lender of last resort protection and deposit insurance
E. none of the above
19-2 Consumer protection laws imposed on financial institutions in the U.S.
have stressed
A. branching restrictions and separation of commercial banking from
securities activities
B. minimal capital balance requirements and disincentives for risk taking
C. lender of last resort protection and deposit insurance
D D. truth in lending, anti-discrimination, and community involvement
E. none of the above
20-2 A key form of government safety net provision in the U.S. is the
A A. lender-of-last-resort role the Fed plays in relation to commercial banks.
B. ensurance of an adequate money supply by the Comptroller of the Currency.
C. enforcement of debt obligations by the Securities and Exchange Commission.
D. insurance against loan defaults the Fed provides to commercial banks.
E. none of the above
21-2 Some of the more important types of banking regulations that have
been imposed on U.S. banks include _________, which _____________.
A. chartering restrictions; restrict branching across state lines.
B. disclosure requirements; require public disclosure of the financial
condition of each applicant seeking a loan from a commercial bank.
C C. capital requirements; place minimum requirements on bank capital.
D. all of the above.
E. only B and C of the above.
22-2 Some of the financial reforms introduced by the U.S. in 1991 as a
result of the 1980s U.S. financial crisis include:
A. FDIC deposit insurance premiums were required to be risk based.
B. banks were given greater discretion with regard to their asset choices.
C. the FDIC was required to show less forbearance (patience) when
banks first exhibited signs of distress.
D. all of the above.
E E. only A and C above.
23-2 Reforms in bank capital requirements introduced subsequent to the
1980s financial crisis in the U.S. have both advantages and disadvantages.
Advantages include ________ while disadvantages include ____________.
A. simpler reporting requirements; less discouragement to risky lending.
B B. decreased moral hazard; supervision and enforcement are more difficult.
C. enforcement is less costly; adverse selection problems are increased.
D. all of the above.
E. only A and C above.
24-2 Recent efforts to restructure the U.S. financial system have
significantly weakened
A A. branching restrictions and restrictions requiring the separation of
commercial banking from securities activities
B. minimal capital balance requirements and disincentives for risk taking
C. lender of last resort protections and deposit insurance
D. truth in lending, anti-discrimination, and community involvement laws
E. none of the above
25-2 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. making it more difficult for bank officials to hide insolvencies
when loans go bad.
B. making it more difficult for regulators and politicians to practice
regulatory forbearance when bank loans go bad.
C. it is easier to implement.
D. all of the above.
E E. only A and B above
26-2 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 are more difficult for the regulators to monitor
B. these activities tend to increase the risk exposure of the banks
C. these activities increase moral hazard problems between
tax-payers and the banks.
D D. all of the above
E. none of the above
27-2 Countries with poorly developed financial systems tend to be more
prone to financial crises because
A. Their responses to events that trigger financial crises tend to be
inadequate or inappropriate
B. They have fewer safeguards against events that trigger financial crises
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
28-2 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 consumers, resulting
in bank panics and bank failures.
B. self-fulfilling pessimism on the part of financial lending
institutions, leading to low credit supply ("credit crunches").
C. self-fulfilling pessimism on the part of firms, leading to
low credit demand.
D D. all of the above.
E. none of the above.
29-2 According to Mishkin, key factors that can trigger financial crises
include
A. sudden increases in interest rates that worsen adverse selection
B. sudden increases in net worth that increase lender risk aversion
C. bank panics leading to massive deposit withdrawals (disintermediation)
D. all of the above
E E. only A and C above
30-2 According to Mishkin, one of the key factors that resulted in the
prolonged and serious nature of the financial crisis during the Great
Depression was ___________, triggered in part by _____________ .
A. a balance of payments deficit; an increase in the U.S. exchange rate
B B. price deflation; decreased lending to households and firms
C. contractions in the real money supply; negative exchange rate shocks.
D. inflation; increases in the nominal money supply.
E. none of the above
31-2 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. 1933 Glass-Steagall Act; purchasing power parity problems
C. 1989 Monetary Reconstruction Act; long-term development projects.
D D. 1945 Bretton Woods Agreement; temporary balance of payments problems.
E. none of the above
32-2 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. insolvent but still functioning; balance of payment problems.
B. experiencing purchasing power parity problems; adverse selection problems.
C. experiencing debt deflation; debt deflation.
D D. short on cash but not insolvent; moral hazard problems.
E. none of the above
33-2 A depreciation of a country's domestic currency _______ the cost of
foreign goods relative to domestic goods. Consequently, central banks
sometimes attempt to offset depreciations of their domestic currency by
_______ their own currency in the foreign exchange market.
A. lowers; selling
B. raises; selling
C. lowers; buying
D D. raises; buying
E. none of the above
34-2 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 nominal exchange rate will stay constant over time
B B. the HC real exchange rate will stay constant over time
C. the HC real interest rate will stay constant over time
D. the value of GDP in the HC and ROW will stay equal over time
E. none of the above
35-2 In order for the purchasing power parity condition to reduce to a
straightforward application of the "law of one price," the following
conditions need to hold:
A. HC and ROW produce the same bundle of goods and services
B. information about availability and prices of goods and services is
freely available to everyone in the HC and ROW and there are no trade
barriers between the HC and ROW
C. the HC and ROW aggregate price levels are the same
D. all of the above
E E. only A and B above
36-2 If the inflation rate in Malaysia is 1 percent during 2000, and the
inflation rate in South Africa is 2 percent during 2000, then the theory of
purchasing power parity predicts that, during 2000, the value of the South
African currency (rands) measured in terms of the Malaysian currency
(ringgits) -- i.e., the number of ringgits per rand -- will
A. rise by 1 percent
B. rise by 3 percent
C. fall by 3 percent
D D. fall by 1 percent
E. none of the above
37-2 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. an equilibrium (arbitrage); interest rates
B. an accounting; savings and investment
C. a balance of payments; borrowing and lending
D. bond market clearing; interest rates and loanable fund amounts
E. none of the above
38-2 If the average nominal interest rate on bank deposit accounts
in the ROW is 3 percent, and if the HC nominal exchange rate E with
respect to ROW is expected to depreciate by 2 percent, then interest
parity predicts that the average nominal interest rate on HC bank
deposit accounts should be about
A. -1 percent.
B. 1 percent
C. -5 percent
D D. 5 percent.
E. none of the above
39-2 Which item(s) below would be directly entered as items in the U.S.
CAPITAL account:
A. Purchases by Japanese tourists of compact discs (CDs) newly produced
within the borders of the U.S.
B B. A Mexican citizen's purchase of a U.S. government bond
C. U.S. foreign aid to Zimbabwe
D. Interest income received by U.S. holders of a Norwegian bond issue
E. All but B
40-2 If the HC is running a current account deficit, then HC national saving
_______ HC total investment and the HC is ___________ ROW.
A. is greater than; a net lender to
B. is greater than; a net borrower from
C. is less than; a net lender to
D D. is less than; a net borrower from
E. none of the above
41-2 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. KA; BP
B. CA; BP
C. CA; NKA
D D. CA; KA
E. none of the above
42-2 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. KA; BP
B. CA; BP
C C. CA; NKA
D. CA; KA
E. none of the above
43-2 If the U.S. is in a balance of payments EQUILIBRIUM, this means
A. U.S. net exports equal U.S. net imports
B B. U.S. currency reserves are not changing, implying the U.S. central bank
is neither buying nor selling currency in the foreign exchange market
C. U.S. government expenditures are equal to U.S. tax revenues
D. in net terms, the U.S. is neither borrowing from nor lending to ROW
E. none of the above
44-2 When the current price of bonds is BELOW 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 B. excess demand for; rise
C. excess supply of; fall
D. excess supply of; rise
E. none of the above
45-2. If there is a sudden DECREASE 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 rise in
____________.
A. lenders; the real value of their future interest payment costs
B B. borrowers; the real value of their future interest payment costs
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
46-2 If a sudden INCREASE 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 B. a decrease; a lower expected capital gain from T to T+1
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
47-2 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 HIGHER 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 C. a definite drop; either a rise or a drop
D. either a rise or a drop; a definite drop
E. none of the above.
48-2 Consider assets A, B, C with risk and expected return rate attributes
as follows: A = (.02 risk, .06 return), B = (.04 risk, .08 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 A is preferable to asset C
C. Asset B is preferable to asset C
D. Asset C is preferable to asset A
E. None of the above
49-2 If you already own stock in Nike Shoe Corporation, then the additional
purchase of stock in _______ should help to reduce your ________ risk.
A. Chase Manhattan Bank; systematic
B B. General Motors Corporation; nonsystematic
C. New Balance Shoe Company; nonsystematic
D. Adidas Shoe Corporation; systematic
E. none of the above
50-2 The ________ of an asset portfolio P measures the extent to which
P's expected return rate varies directly with the __________ the market
portfolio, hence it constitutes a measure of P's systematic risk.
A. market price; riskiness of
B B. beta; the expected return rate of
C. standard deviation; the standard deviation of
D. liquidity; the market price of
E. volatility; expected return rate of each asset in
51-2 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. increases; be lower
B B. decreases; be lower
C. decreases; be higher
D. decreases; be more volatile (fluctuate more)
E. none of the above
52-2 Arbitrage pricing theory (APT) postulates that the ____________ of
an asset portfolio can be explained ___________.
A. expected return; by arbitrage conditions relating its price to its yield
B B. expected return rate; by multiple sources of systematic risk.
C. expected return rate; entirely by movements in the market portfolio value
D. systematic risk; entirely by movements in the market portfolio risk
E. none of the above
53-2 Which of the following statements are TRUE for fixed payment loans?
A. Installment loans and mortgages are frequently of the fixed payment type.
B. The borrower is required to make all principal plus interest payments
in one fixed payment occurring at the maturity date of the loan.
C. The borrower repays the loan by making the same fixed payment in every
payment period
D. Only A and B of the above are true.
E E. Only A and C of the above are true.
54-2 Which of the following statements are TRUE for coupon bonds?
A. The owner of a coupon bond receives a coupon payment in every
payment period plus the face value of the bond at the maturity date.
B. U.S. Treasury bonds and notes are examples of coupon bonds.
C. Corporate bonds generally take the form of coupon bonds.
D D. All of the above
E. Only A and B of the above
55-2 Letting "*" denote multiplication, if the annual interest rate is 5 percent,
then the present value of a payment stream ($10, $50) with $10 to be received
at the end of the first year and $50 to be received at the end of the second
year is given by
A. $10/(1 + .05) + $60/(1 + .05)@2
B. $10/(1 + .10) + $50/(1 + .10)
C C. $10/(1 + .05) + $50/(1 + .05)@2
D. [$10 * 0.05 + $50 * 0.05] divided by 2
56-2 The (annual) yield to maturity i on a coupon bond with a purchase
price $235, a face value $250, a 2-year coupon payment stream ($40,$40),
and a 2-year maturity is calculated as follows:
A. i equals the present value of the coupon payment stream ($40,$40)
B B. i equals the annual interest rate that, when used to calculate the present
value of the stream ($40,$290), results in a present value equal to $235.
C. i equals the coupon payment $40 divided by the purchase price $235.
D. i equals the coupon payment $40 divided by the face value $250
57-2 Which of the following is FALSE for the current yield ic of a coupon bond:
A. The ic is defined to be 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 more closely approximates the yield to maturity the longer
the bond's time to maturity, all else equal
D D. The ic more closely approximates the yield to maturity the larger the
gap between the bond's purchase price and its face value, all else equal
E. None of the above
58-2 Which of the the following statements is (are) TRUE:
A. The return rate on a bond will not necessarily equal the interest
rate on that 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 falls
between T and T+1.
D. All of the above are true.
E E. Only A and B above are true.
59-2 Which of the following are TRUE statements:
A. The change from a barter to a monetary economy increases efficiency
by encouraging specialization in the production of goods and services.
B. The change from a barter to a monetary economy increases efficiency
by reducing transactions costs.
C. The change from a barter to a monetary economy increases efficiency
by reducing the number of prices needed to implement exchange.
D D. All of the above are true.
E. Only B and C are true.
60-2 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
promote the overall efficiency of the payments system.
B. government mandates regarding means of payment that were designed to
ensure the overall safety of the payments system.
C C. financial innovations introduced by private agents in order to
increase their profits.
D. financial innovations introduced by government to ensure the overall
safety of the payments system.
E. none of the above