tesfatsi@iastate.edu
FINAL EXAM: 70 QUESTIONS TOTAL L. Tesfatsion
Econ 353/Section 2
April 30, 2001
1-2 A "recession" is defined to be a period of time during which________.
A. real wages are low.
B B. real GDP is declining.
C. the current account is in deficit.
D. the real money supply is low.
2-2 According to time series data presented in Mishkin (Chapter 1):
A. Over 1970-1999, U.S. stock prices dramatically increased.
B. Over 1970-1999, U.S. interest rates fluctuated substantially.
C. Over 1970-1999, the U.S. aggregate price level dramatically increased.
D D. All of the above.
E. Only A and C.
3-2 The primary ways in which "dealers" DIFFER from "brokers" are as
follows:
A. Dealers take positions in the financial assets they trade.
B. Dealers make profits by buying assets low and selling assets high.
C. Dealers engage in asset transformation.
D. all of the above.
E E. only A and B above.
4-2 The primary ways in which "financial intermediaries (FIs)" DIFFER from
"brokers" are as follows:
A. FIs facilitate the flow of funds from lenders to borrowers.
B. FIs engage in asset transformation.
C. FIs make profits by charging relatively high interest rates to
borrowers and paying relatively low interest rates to lenders.
D. All of the above.
E E. Only B and C above.
5-2 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 D. Only A and C of the above are true.
E. Only A and B of the above are true.
6-2 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. U.S. Treasury bills are examples of coupon bonds.
D D. Only A and B of the above.
E. Only A and C of the above
7-2 Which of the following is a PRIMARY market?
A. The New York Stock Exchange
B B. The U.S. Treasury auction market for newly issued bills, notes, and bonds
C. The foreign exchange market
D. The U.S. over-the-counter stock market (including Nasdaq)
E. Only B and C.
8-2 A financial institution that plays a major role in the sale of
newly issued securities is
A. a stock exchange.
B B. an investment bank.
C. a savings and loan.
D. a commercial bank.
9-2 Which of the following statements is TRUE:
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 transaction 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.
10-2 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.
11-1 Which of the following statements accurately describe the three
different aggregate money measures used in the U.S. -- M1, M2, and M3:
A. M1 is the narrowest measure of money and corresponds most closely to the
theoretical definition of money as a generally accepted means of payment.
B. Although M1, M2 and M3 tend to move together, there have been time
periods during which large discrepancies have arisen (especially
between M1 and the remaining two measures M2 and M3).
C. Initial estimates of M1, M2, and M3 are frequently subject to
substantial revisions after more data become available.
D D. All of the above are true.
12-2 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
2
A. $60/(1 + .05)
B. $60/(1 + .10)
2
C C. $10/(1 + .05) + $50/(1 + .05)
D. [$10 * 0.05 + $50 * 0.05] divided by 2
13-2 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 annual interest rate that, when used to calculate the present
value of the stream ($40,$290), results in a present value equal to $250.
D. i equals the coupon payment $40 divided by the purchase price $235.
14-2 Which of the following is FALSE 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 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
15-2 Which of the the following statements is TRUE:
A. The return rate on a bond is not necessarily equal to 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 are true.
16-2 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 will tend to ____.
A. excess demand for; fall
B B. excess demand for; rise
C. excess supply of; fall
D. excess supply of; rise
17-2 If there is a sudden DECREASE today in the inflation rate that
borrowers expect for next year, then (all else equal) this will tend to
__________ the supply of bonds today, because borrowers will now foresee a
rise in ____________.
A. increase; the real value of their future interest payments
B B. decrease; the real value of their future interest payments
C. increase; the real value of their future interest earnings.
D. decrease; the real value of their future interest earnings.
18-2 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
19-2 Suppose the bond market is currently in equilibrium. Suddenly Alan
Greenspan at the Fed predicts that the inflation rate will be HIGHER next
year than currently anticipated, and the public believes him. Then the
theory presented in Mishkin Chapter 5 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 decrease; a definite decrease
B. a definite increase; a definite increase
C C. a definite decrease; either an increase or a decrease
D. either an increase or a decrease; a definite decrease
20-2 If a factor increases the demand for _______ goods relative to ______
goods, the domestic currency (measured in foreign currency units) will tend
to appreciate.
A. foreign; domestic
B. foreign; foreign
C. domestic; domestic
D D. domestic; foreign
21-2 A depreciation of a country's domestic currency _______ the cost of
foreign goods relative to domestic goods, which can lead to domestic
inflation as domestic producers raise their prices in turn. 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
22-2 In a world divided between a home country HC and the rest of the world
ROW, the purchasing power parity condition 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
23-2 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. the HC and ROW aggregate price levels are the same
C. 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
D. all of the above
E E. only A and C above
24-2 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 A. fall by 1 percent
B. rise by 1 percent
C. fall by 3 percent
D. rise by 3 percent
25-2 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
26-2 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 C. 5 percent.
D. -5 percent
27-2 As conventionally defined in GDP national income accounting in the
United States, the _________ keeps track of __________________ .
A. capital account; net exports, net factor payments, and net transfers
B. current account; net trades in financial assets and existing real assets
C C. capital account; net trades in financial assets and existing real assets
D. current account; net official reserve transactions
28-2 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
29-2 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 B. is less than; a net borrower from
C. is greater than; a net borrower from
D. is less than; a net lender to
30-2 Letting CA = HC current account, NKA = HC "nonofficial" capital account,
BP = net change in HC official reserve assets (ROW currency reserves), 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
31-2 Letting CA = HC current account, NKA = HC "nonofficial" capital account,
BP = net change in HC official reserve assets (ROW currency reserves), 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
32-2 If the U.S. is in a balance of payments EQUILIBRIUM, this means
A. U.S. exports equal U.S. imports
B B. the net change in U.S. official reserve assets is zero
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
33-2 A balance of payments DEFICIT for the HC implies that
A. HC national saving is less than HC total investment.
B. there is an excess demand for ROW currency relative to HC currency.
C. the HC central bank is selling ROW currency in exchange for HC currency.
D D. all of the above
E. only B and C.
34-2 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.
35-2 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 B. short on cash but not insolvent; moral hazard problems.
C. experiencing purchasing power parity problems; adverse selection problems.
D. experiencing debt deflation; debt problems
36-2 Of the four sources of external funds listed below, the most important
source of external funds for American businesses during the 1990s was
A A. bank loans
B. foreign investment
C. corporate bond issue
D. equity issue
37-2 An investor who takes out a loan usually has better information about
the potential risks and returns of the investment projects he plans to undertake
than does the lender. This inequality of information is called
A. moral hazard
B B. asymmetric information
C. information costs
D. adverse selection
38-2 Because of adverse selection problems in financial markets, lenders
A. prefer to lend to borrowers willing to pay high interest rates.
B. typically require collateral before making a loan.
C. may refuse loans to borrowers with low net worth.
D. All of the above.
E E. Only B and C
39-2 Because of moral hazard problems in financial markets,
A. lenders sometimes demand to participate in the management of
the corporations who borrow from them.
B. lenders frequently write complicated contracts with many covenant
restrictions.
C. lenders more readily lend to borrowers with high net worth.
D D. All of the above.
E. Only A and B.
40-2 In the U.S., banks are generally better able than corporate securities
dealers to reduce information problems because
A. dealers have a harder time eliminating free-rider problems.
B. banks can require loan contracts to include collateral requirements.
C. bank loans tend to be private contractual agreements, which gives
banks a greater incentive to engage in information gathering.
D D. All of the above.
E. Only A and B above.
41-2 The "economic development" of a country refers to improvements in
__________ that permit higher standards of living for its people.
A. its balance of payments
B B. the infrastructure, organization, and governance of its economy
C. its unemployment rate
D. the size of its GDP
42-2 The economic growth and development of a country are impeded when the
flow of funds from savers to lenders is disrupted, which can result from
A. a weak legal system.
B. absence of standard accounting practices.
C. inadequate or inappropriate government regulation.
D D. All of the above.
43-2 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 feedback effects that amplify problems and worsen the crisis.
D. All of the above
E E. Only A and B above
NOTE: The use of "prone to" in this question makes it trickier than intended --
a better phrasing would have been "troubled by." Technically, given the
meaning of prone, E is the correct answer; but D answers will also be accepted.
44-2 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.
45-2 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
46-2 According to Mishkin, ___________ during 1929-1933 contributed to the
severity of the U.S. financial crisis during the Great Depression since it
resulted in ___________.
A. a sharp contraction in the U.S. real money supply; a liquidity shortage.
B B. a decline in the U.S. aggregate price level; severe debt deflation
C. a sharp contraction in U.S. real interest rates; lower bond returns
D. All of the above
E. Only A and C.
47-2 According to Mishkin, basic ways in which the financial crisis in
Mexico during 1994-1995 was SIMILAR to a typical financial crisis occurring
in the U.S. during the nineteenth and twentieth centuries include:
A. the financial crisis was partly caused by a decline in the stock market.
B. the financial crisis was partly caused by a rise in interest rates.
C. a speculative currency attack led to a foreign exchange crisis.
D. All of the above.
E E. Only A and B.
48-2 The international rescue package provided to Mexico following its
financial crisis in 1994--1995 has both advocates and critics. Advocates say
it proves the importance of helping countries whose financial institutions
are _____________, but critics argue that it can worsen _____________.
A. experiencing temporary reserve shortages; purchasing power parity problems.
B B. in need of liquidity assistance but not insolvent; moral hazard problems.
C. insolvent but still functioning; balance of payment problems.
D. experiencing debt deflation; inflation.
49-2 The _______ of a bank appear on its balance sheet as part of its
assets and are an important aspect of its _______________ .
A. checkable deposits; asset management
B B. reserves; liquidity management
C. loans; liability management
D. back-up lines of credit; capital adequacy management
50-2 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.
51-2 The Federal Deposit Insurance Corporation (FDIC) 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 C. 1933 Glass-Steagall Act; help prevent bank panics.
D. 1913 Federal Reserve Act; promote a safer, more stable banking system.
52-2 According to Mishkin, 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.
53-2 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.
54-2 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
55-2 Which of the following types of provision(s) ARE included in the 1994
Riegle-Neal Banking and Branching Efficiency Act:
A. U.S. banks are prohibited from engaging in domestic interstate branching.
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. Only A and B.
56-2 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 B of the above.
57-2 According to Mishkin, key factors that triggered the U.S. 1980s
financial crisis included
A. regulations imposed in the early 1980s that prevented banks/thrifts from
charging interest on deposit accounts and so decreased their profits.
B. financial innovations such as money market funds that drained deposits
from banks and thrifts
C. increased government insurance protection for deposit accounts
that led to increased moral hazard problems.
D. all of the above.
E E. only B and C above.
58-2 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.
59-2 According to Mishkin, financial engineering of new products typically
takes place in response to ___________ .
A. changed demand/supply conditions for financial services and products
B. recessions.
C. new regulations that are perceived to restrict profitable activities.
D. inappropriate monetary policy.
E E. Both A and C.
60-2 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.
61-2 A automated teller machine (ATM) 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.
62-2 The increased volatility in interest rates in the U.S. in the 1970s
was a primary reason for the development of
A. bank credit cards.
B B. adjustable-rate mortgages.
C. junk bonds.
D. commercial paper.
63-2 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.
64-2 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
65-2 Recent Basel Accord restrictions regarding bank capital (net worth)
ratios help to reduce _________ problems for bank depositors by __________.
A. risk diversification; forcing banks to pool their risks.
B. adverse selection; encouraging regulatory forbearance.
C C. moral hazard; discouraging holding of assets with highly risky returns
D. free riding; enforcing reasonable payments for information acquisition.
66-2 Key government safety net protections that have been provided to
financial institutions in the U.S. to prevent bank panics include
A. truth in lending, anti-discrimination, and community involvement laws.
B. separation of commercial banking from securities activities.
C. branching restrictions.
D D. lender of last resort protection and deposit insurance.
67-2 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.
68-2 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; impose requirements on bank capital ratios
D. All of the above.
E. Only B and C of the above.
69-2 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 bank depositors
and the banks receiving these deposits.
D D. All of the above
70-2 Recent efforts to restructure the U.S. financial system have
significantly WEAKENED
A. capital (net worth) requirements and disincentives for risk taking.
B. lender of last resort protections and deposit insurance.
C C. separation of commercial banking from securities activities.
D. truth in lending, anti-discrimination, and community involvement laws.
E. All but B.