tesfatsi@iastate.edu
FINAL EXAM: 70 QUESTIONS TOTAL (ONE POINT EACH) L. Tesfatsion
Econ 353/Section 1
May 8, 2002
Q1. According to time series data presented in Mishkin (Chapter 1):
A. The U.S. aggregate price level sharply increased over 1950-2000.
B. U.S. stock prices dramatically rose over 1950-2000.
C. U.S. interest rates fluctuated substantially over 1950-2000.
D D. All of the above.
Q2. A BUSINESS CYCLE is a record of the
A. duration of a company from its founding date to its dissolution date.
B B. recurrent fluctuations that occur in time series data for key macro
variables such as real GDP.
C. currently hottest trends in consumer purchases.
D. average duration of product cycles, from introduction to obsolescence.
Q3. The U.S. government budget is said to be in DEFICIT whenever
A. the U.S. government has to rely on foreign borrowing to finance U.S.
investment.
B. U.S. government tax revenues exceed U.S. government expenditures.
C C. U.S. government expenditures exceed U.S. government tax revenues.
D. U.S. imports exceed U.S. exports.
Q4. By definition, FINANCIAL assets are
A. any assets held by a financial institution.
B. any assets sold by a broker, dealer, or financial intermediary.
C. any assets whose purchase must be financed by borrowing.
D D. claims against real assets.
E. claims against securities held by financial institutions.
Q5. A major function of financial intermediaries that (by definition) is
NOT also performed by dealers is
A. the sale of investment advice.
B. the holding of inventories of securities for future resale.
C C. financial asset transformation.
D. "making the market" by posting both purchase and sale prices for
financial assets.
E. matching buyers of financial assets with sellers of financial assets.
Q6. A type of financial institution that plays a major role in the sale of
securities in PRIMARY markets is
A. a commercial bank.
B. a stock exchange.
C C. an investment bank.
D. a dealer.
Q7. Which of the following can be described as a SECONDARY market transaction:
A You buy a Treasury bill in a U.S. Treasury auction.
B B. You buy a share of Microsoft on the Nasdaq.
C. Merrill Lynch underwrites an initial public offering of shares for Dotcom Corp.
D. Gateway Inc. buys commercial paper newly issued by Global Crossing Inc.
E. A venture capital firm supplies start-up funds to a new business.
Q8. Suppose a person has a chance to use $100 to buy either a debt instrument
issued by Dewey, Cheetum, and Howe (DCAH) Corporation or common stock shares
issued by DCAH. Specify which of the following statements is FALSE:
A. Purchasing the DCAH common stock shares is risky because, if DCAH goes
bankrupt, the claims of DCAH debt instrument holders have first priority.
B. Purchasing the DCAH common stock shares is risky even if DCAH remains
solvent, because the return rate obtained by holders of DCAH common stock
shares depends on uncertain future share prices and dividend payouts.
C. If DCAH remains solvent, the DCAH debt instrument holders will receive
a known stream of payments as determined by their debt contracts.
D D. In order to obtain the HIGHEST EXPECTED return rate, an investor should
definitely choose the DCAH debt instrument over the DCAH common stock shares.
Q9. Which of the following can be described as INDIRECT finance:
A. You make a loan to your classmate.
B B. Hunziker Inc. secures a construction loan from First National Bank.
C. The U.S. government buys IBM stock on the New York Stock Exchange.
D. A dealer buys a U.S. Treasury bill at a U.S. Treasury Auction.
E. An ISU pension fund manager buys Microsoft stock on the Nasdaq.
Q10. Checkable deposits in the U.S. satisfy the definition of money because
A. checkable deposits are federally insured.
B B. as a matter of social custom, checkable deposits are a generally accepted
means of payment for goods and services and for the repayment of debts.
C. checkable deposits are legal tender, hence mandated by government as money.
D. as a matter of law, people are required to accept checks as a means of
payment for goods and services and for the repayment of debts.
Q11. Which of the following statements about "fiat money" is/are TRUE:
A. Fiat money is unbacked paper money.
B. fiat money is legal tender.
C. Federal Reserve Notes (dollar bills) are an example of fiat money.
D D. All of the above are true.
E. Only A and B are true.
Q12. Which of the following statements is NOT true:
A. M1 is the narrowest measure of money used in the U.S. and corresponds
most closely to the theoretical definition of money.
B B. The three U.S. money measures M1, M2 and M3 always move closely
together, and hence are good substitutes for each other.
C. Initial estimates of M1, M2, and M3 are frequently subject to
significant revisions after more data become available.
D. The Federal Reserve induces changes in M2 through open market operations
(bond purchases and sales) in an attempt to set the Federal Funds rate
to targeted levels.
Q13 Letting "*" denote multiplication, if the annual interest rate is 8%,
then the PRESENT VALUE of a payment stream ($0,$40,$10) with $0 to be received
at the end of the FIRST year, $40 to be received at the end of the SECOND
year, and $10 to be received at the end of the THIRD year is given by
A. $40*(1 + .16) + $10*(1 + .24) C. $40/(1 + .08) + $10/(1 + .08)@2
B. $40/(1 + .16) + $10/(1 + .24) D D. $40/(1 + .08)@2 + $10/(1 + .08)@3
Q14. Letting"*" denote multiplication, the (ANNUAL) YIELD TO MATURITY i on
a three-year discount bond with a purchase price of $300 and a face value of
$400 is given by the following formula:
A. $400 = $300/(1+i)@3 C C. $300 = $400/(1+i)@3
B. i = 0 D. $300 = $400/(1+3i)
Q15. Consider a coupon bond that has an annual coupon payment C=$100, a face
value F=$4,000, and a maturity date January 1, 2005. Suppose you BUY this
bond on January 1, 2003 for Pb=$3000 and you SELL it on January 1, 2004 for
$3500. Which of the following statements is/are TRUE for this bond:
A. Your (annual) current yield on this bond from 1/1/2003 to 1/1/2004 is
equal to C=$100 divided by the purchase price Pb=$3000.
B. Your return rate on this bond from 1/1/2003 to 1/1/2004 can be expressed
as the sum of the current yield and the rate of your capital gain or loss.
C. Your return rate on this bond from 1/1/2003 to 1/1/2004 is LESS than
the current yield on the bond.
D. All of the above are true.
E E. Only A and B are true.
Q16. Which (if any) of the following statements is/are FALSE:
A. When the purchase price of a coupon bond equals its face value, its
coupon rate equals its yield to maturity.
B. When the purchase price of a coupon bond equals its face value, its
current yield equals its yield to maturity.
C. When the purchase price of a coupon bond is less than its face value,
then its coupon rate is less than its yield to maturity.
D. The purchase price and yield to maturity for a coupon bond are
inversely related (one is high when the other is low), all else
remaining constant.
E E. NONE of the above statements is false.
Q17. In which of the following situations would you prefer to be a LENDER:
A. The interest rate is 4% and the expected inflation rate is 3%
B B. The interest rate is 9% and the expected inflation rate is 7%
C. The interest rate is 13% and the expected inflation rate is 15%
D. The interest rate is 25% and the expected inflation rate is 26%
Q18. A bond market is said to be in EQUILIBRIUM when
A. the government is neither buying nor selling bonds at the current price
level for bonds (i.e., the government is not intervening in the market).
B. the price of bonds is falling (if there is an excess supply of bonds) or
rising (if there is an excess demand for bonds).
C C. the demand for bonds equals the supply of bonds at the current price
level for bonds.
D. the government has attained its Federal funds rate target level at its
current level of open market operations (bond purchases or sales).
Q19. If there currently is an EXCESS SUPPLY of corporate bonds, then the
theory in Mishkin Chapter 5 predicts that (all else equal) the current price
of corporate bonds is ______ than the equilibrium price and hence will_______.
A A. higher; be bid downwards until supply equals demand.
B. higher; be bid upwards until supply equals demand
C. lower; be bid upwards until supply equals demand.
D. lower; be bid downwards until supply equals demand.
Q20. If people revise UPWARD their expectations of the FUTURE yield to
maturity on bonds, the theory in Mishkin Chapter 5 predicts that (all else
equal) the CURRENT DEMAND CURVE for bonds will shift to the ________ because
_________.
A. left; borrowers will foresee higher real interest payments
B. right; borrowers will foresee lower real interest payments
C C. left; lenders will foresee a decrease in their capital gains
D. right; lenders will foresee an increase in their capital gains
Q21. An ARBITRAGE OPPORTUNITY is said to exist if
A. traders have a chance to invest in projects with high expected returns.
B B. traders have an opportunity to make profits for sure (i.e., without any
risk of loss) by engaging in a particular sequence of trades.
C. a conflict arising between traders can be resolved by an arbitration
process.
D. regulators are able to increase social welfare by suitably applied
rules and regulations.
Q22. The assumption that people exploit all available arbitrage opportunities
is frequently used in financial economics to derive conditions for prediction
purposes. Examples of such conditions include:
A. the purchasing power parity condition for prediction of movements in
exchange rates and inflation rates.
B. the interest parity condition for prediction of movements in exchange rates
and interest rates.
C. the law of one price for prediction of trade flows
D D. all of the above
Q23. It is important for the U.S. to keep track of its exchange rates with
its trading partners because
A. these exchange rates keep track of the differences in inflation rates
between the U.S. and its trading partners.
B B. these exchange rates measure the cost to U.S. citizens of imports from
these trading partners.
C. these exchange rates keep track of the net exchange (trade) volumes
between the U.S. and its trading partners.
D. these exchange rates keep track of borrowing and lending flows between the
U.S. and its trading partners.
Q24. All else equal, if the U.S. dollar APPRECIATES against the Mexican peso:
A. U.S. goods exported to Mexico will cost less in Mexico, so Mexicans
will buy more of them.
B. U.S. citizens will buy fewer Mexican goods.
C C. U.S. goods exported to Mexico will cost more in Mexico, so Mexicans
will buy fewer of them.
D. The U.S. will definitely be better off.
Q25. Given a world divided between HC and ROW, the PURCHASING POWER PARITY
condition in rates-of-change form asserts that the
A. the HC nominal exchange rate does not change over time.
B B. the rate of change in the HC nominal exchange rate is equal to the ROW
inflation rate minus the HC inflation rate.
C. the HC inflation rate equals the ROW inflation rate.
D. the HC nominal interest rate and the ROW nominal interest rate grow at
the same rate over time.
Q26. If the inflation rate in Canada during 2001 was 4 percent, and the
inflation rate in Mexico during 2001 was 2 percent, then the PURCHASING POWER
PARITY (PPP) condition predicts that, during 2001, the nominal exchange rate E
giving the value of the Canadian dollar in terms of Mexican pesos (i.e., the
number of pesos per Canadian dollar) should have
A A. fallen by 2 percent
B. fallen by 6 percent
C. risen by 2 percent
D. risen by 6 percent
Q27. The PURCHASING POWER PARITY (PPP) CONDITION, which relies on the "law of
one price" for its justification, is unable to explain exchange rate movements
with precision in the real world because
A. not all countries produce similar bundles of goods.
B. speculative movements into "attractive" currencies can partially or
fully offset exchange rate movements due to trade considerations alone.
C. aggregate price levels differ across countries.
D. all of the above.
E E. only A and B above.
Q28. Given a world divided between HC and ROW, key assumptions underlying
the INTEREST PARITY CONDITION include:
A. Faced with equally risky options, savers always attempt to maximize
their expected return rate.
B. Investment opportunities in the HC and ROW have the same risk
characteristics.
C. There are no barriers to currency flows between the HC and ROW.
D D. All of the above
Q29. If the average nominal interest rate on bank deposit accounts in the
ROW is 5 percent, and if the HC nominal exchange rate E with respect to ROW
is expected to depreciate by 3 percent, then the INTEREST PARITY CONDITION
predicts that the average nominal interest rate on HC bank deposit accounts
should be about
A. -8 percent
B B. 8 percent.
C. -2 percent
D. 2 percent.
Q30. In January of 1999, various European countries replaced their national
banks with a single European Central Bank and began phasing in the Euro as
their common currency and phasing out the use of their national currencies.
The potential benefits to these countries of these developments include:
A. a more flexible system of exchange rates between these countries.
B. the increased ability of these member countries to pursue independent
monetary policies.
C C. the possible emergence of the Euro as a strong rival of the U.S. dollar
with regard to its use as a reserve currency held around the world.
D. an increased focus on economic growth rather than just inflation control.
E. all of the above.
Q31. Which of the following items would be directly entered as an item in
the U.S. CAPITAL account:
A A. A loan of $10 million from the U.S. Citicorps Bank to Argentina.
B. Foreign aid to Afghanistan.
C. An Air France airline ticket bought by a U.S. citizen
D. Income earned by the McDonalds Corporation from its restaurants abroad.
E. Purchases of livestock by the U.S. government from private U.S. ranchers
Q32. In a two-country world divided between HC and ROW, the sum of HC
national saving and ROW saving must (as an accounting identity) be equal to
A. the HC current account.
B B. HC total investment.
C. HC real GDP.
D. the HC balance of payments.
E. HC net exports.
Q33. In a two-country world divided between HC and ROW, the HC current account
must (as an accounting identity) be equal to __________, hence the HC current
account is in DEFICIT if and only if _________ .
A. ROW saving; HC national saving is greater than HC total investment.
B. the HC balance of payments; the HC has a balance of payments deficit.
C. the HC real GDP; the HC is in a recession.
D D. ROW saving multiplied by -1; HC total investment is greater than
HC national saving.
Q34. Suppose the world is divided between HC and ROW. If the HC has a
balance of payments DEFICIT, this means
A. HC government expenditures are greater than HC tax revenues.
B B. the HC central bank is selling ROW currency reserves in exchange for HC
currency in the foreign exchange market.
C. the HC is borrowing from ROW to finance HC investment.
D. the HC central bank is selling HC currency reserves in exchange for ROW
currency in the foreign exchange market.
Q35. The reason that an HC with a persistent balance of payments DEFICIT
is said to be in a balance of payments CRISIS is that
A. eventually the HC government will be unable to sell all the bonds required
to finance the excess of its expenditures over its tax revenues.
B B. the HC central bank's ROW currency reserves will eventually run out, forcing
an HC currency devaluation, and speculators (anticipating this) might move
out of HC currency and into ROW currency putting further downward pressure
on the HC exchange rate.
C. the continual borrowing from ROW means that the HC is selling off its
financial and real assets to ROW and hence decreasing its future
productive capacity.
D. the HC central bank's HC currency reserves will eventually run out, forcing
a ROW currency devaluation, and speculators (anticipating this) might move
out of ROW currency and into HC currency putting further downward pressure
on the ROW exchange rate.
Q36. The International Monetary Fund (IMF) is a ________ whose primary
objective today is to ___________
A. United Nations (UN) agency; maintain orderly exchange rates and currency
flows among UN member countries.
B. U.S. government agency; ensure the orderly economic and financial
development of major U.S. trading partners.
C C. voluntary organization of member countries; act as a lender of last
resort for member countries who meet various IMF-specified conditions.
D. World Bank subsidiary; promote the growth of world trade.
Q37. Mishkin (Chapter 8) argues that, due largely to __________, the main
source of EXTERNAL funds for U.S. nonfinancial businesses is ________
A. current account deficit problems; loans from foreigners
B. effective SEC regulations; new securities issues (e.g., bonds, stocks)
C C. asymmetric information and transaction cost considerations; loans from
banks and other financial intermediaries.
D. free-riding problems; government loans.
Q38. ADVERSE SELECTION problems can arise with newly issued securities
because of
A. the inability of security purchasers to monitor fully the future
behavior of security issuers.
B B. the security purchasers' lack of detailed information about the
financial situation (e.g., default risk) of the security issuer
C. the possibility that other investors will be able to gain information
costlessly by observing the actions of security purchasers.
D. the time-varying nature of investors' preferences for asset holdings.
Q39. MORAL HAZARD problems can arise with newly issued securities because of
A A. the inability of security purchasers to monitor fully the future
behavior of security issuers.
B. the security purchasers' lack of detailed information about the
financial situation (e.g., default risk) of the security issuer
C. the possibility that other investors will be able to gain information
costlessly by observing the actions of security purchasers.
D. the time-varying nature of investors' preferences for asset holdings.
Q40. Some of the key reasons why banks and other financial intermediaries are
able to reduce asymmetric information problems and transaction costs include:
A. bank loans are typically made in private, which gives banks a strong
incentive to engage in costly information gathering about would-be
borrowers prior to making loans.
B. banks can include collateral requirements in loan contracts, which
act as a signal regarding the type of borrower (high or low risk) and
provide disincentives for borrowers to subsequently engage in more risky
behavior than anticipated under their loan contracts.
C. banks can spread their loan costs over large pools of depositors
(lenders)
D D. all of the above.
E. only B and C
Q41. Corporate debt claims are generally better able than equity claims to
reduce moral hazard problems for claim holders because
A. debt claim owners generally are active participants in corporate management.
B. debt claim contracts typically include strong covenants restricting
corporate management behavior.
C C. debt claims have pre-set payment obligations that are not conditioned
on corporate profit performance
D. all of the above.
Q42. Some of the key lessons learned from the Enron bankruptcy scandal include:
A A. the need for careful regulatory oversight of corporate off-balance-sheet
activities to reduce or prevent moral hazard problems for shareholders.
B. the need for more regulatory forbearance when corporations run into liquidity
problems and are unable to fulfill their obligations to their creditors.
C. the need for more government safety net provisions to protect corporate
managers who experiment with innovative new products and services.
D. the need for a corporation's auditors to be more closely aligned with
the goals of the corporation by requiring the auditors to own large
amounts of the corporation's stock shares.
E. all of the above
Q43. Policies adopted by some governments in emerging and transition countries
that HELP the efficient operation of their financial systems include:
A. establishment of a central banking system independent of political pressures.
B. development of an impartial and effectively applied legal system.
C. prohibition against regulatory forbearance for insolvent banks.
D D. all of the above.
E. Only A and B.
Q44. According to Mishkin, most financial crises in the U.S. have begun with
A. a steep stock market decline.
B. a sharp rise in interest rates.
C. an increase in uncertainty resulting from a failure of a major
financial or non-financial firm.
D. a deterioration in banks' balance sheets.
E E. all of the above
Q45. According to Mishkin, one of the key factors that worsened and prolonged
the U.S. Great Depression was ___________, which resulted in _____________ .
A. a sharp increase in inflation; a sharp decrease in the real money supply.
B. a sharp contraction in the real money supply; a sharp rise in interest rates.
C C. an unanticipated decline in the price level; increased debt burdens.
D. a sharp drop in real government spending; a sharp drop in real GDP.
Q46. An important factor that triggered the 1994-1995 Mexican financial
crisis was
A. OPEC oil price shocks.
B. failure of the IMF to provide support for economic development.
C. the ratification of the North American Free Trade Agreement (NAFTA).
D D. increasing loan losses at Mexican banks.
E. the Chiapas uprising.
Q47. Advocates of the International Monetary Fund (IMF) argue that the IMF
should help out countries such as Mexico during the 1994-1995 peso crisis
whose financial institutions are _____________, but critics argue that such
help, however well intentioned, can _________ .
A. experiencing purchasing power parity problems; lead to more volatile
exchange rate movements in the future as inflation worsens.
B B. suffering temporary liquidity problems; worsen moral hazard problems in
the future by bailing out lenders who engaged in speculative investments.
C. insolvent; worsen balance of payment problems in the future by
diminishing international reserves.
D. experiencing debt deflation; worsen debt deflation in the future as
prices keep rising.
Q48. The loans made by a bank appear on its balance sheet as part of its
__________ and the deposits of a bank appear on its balance sheet as part of
its _______________ .
A. liabilities; assets.
B. net worth; reserves.
C C. assets; liabilities.
D. securities; net worth.
Q49. "Fractional reserve banking" refers to a system of banking (such as in
the U.S.) in which
A. a fraction of the reserves held by a bank are in the form of foreign
currency and the remaining fraction are in the form of domestic currency.
B. only a fraction of the reserves held by a bank can earn interest.
C. only a fraction of the deposits loaned out by a bank can earn interest.
D D. a fraction of every deposited dollar must be held "in reserve" by the
bank, and only the remaining fraction can be loaned out at interest.
Q50. In fractional reserve banking systems, a bank can go bankrupt if a
"bank panic" arises -- that is, if
A. foreign reserves run out due to balance of payments problems.
B. worried bank managers move reserves into off-balance-sheet activities in
an attempt to earn higher profits.
C. worried bank managers switch from making loans to off-balance-sheet
activities in an attempt to earn higher profits.
D D. depositors lose confidence in the bank and attempt to withdraw their
funds all at once.
Q51. 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
Q52. The worldwide micro-enterprise (microcredit) movement inspired by the
Grameen Bank of Bangladesh (founded by Dr. Muhammad Yunus in 1976) departs
from traditional banking practices in its heavy reliance on __________ .
A. off-balance sheet activities such as credit lines to firms.
B. securities trading as well as commercial and household loans.
C. loan forgiveness and extensions supported by government funding.
D D. trust and peer pressure to ensure loan repayments rather than collateral
and other legal obligations.
E. private charitable donations to finance loans to poor people.
Q53. Overall, attempts to date to introduce Grameen Bank micro-enterprise
lending in the U.S. in a financially self-sufficient way have ____________.
One possible reason for this, pointed out by commentators, is __________.
A. been successful; the charismatic personality of the Grameen Bank founder.
B B. not been successful; relatively few people in the U.S. are self-employed,
suggesting it is more difficult in the U.S. to start a profitable business.
C. been successful; the widespread support of the movement in the U.S. by
people from all political persuasions, from left to right.
D. not been successful; competition from commercial banks and thrifts.
Q54. 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. Federalized banking system
B. bicameron banking system
C. tiered charter system
D D. dual banking system
Q55. A CENTRAL BANKING SYSTEM in the U.S. was not firmly established until
the ____________ due to persistent concerns about _____________.
A. 1933 Glass-Steagall Act; too much centralized control.
B. the National Banking Act of 1863; domination by northern states.
C C. 1913 Federal Reserve Act; the protection of states' rights.
D. 1982 Depository Institutions Act; the efficiency of free banking.
Q56. 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.
Q57. Until recently, the banking system in the U.S. differed from most
other industrialized countries because
A. bank branching across state lines was prohibited.
B. banks were prohibited from mixing commercial banking activities with
securities activities.
C. the U.S. central bank was not as politically independent as central
banks in most other industrialized countries.
D. All of the above.
E E. Only A and B.
Q58. The Glass-Steagall Act of 1933
A. established the Federal Deposit Insurance Corporation (FDIC) to provide
Federal insurance on commercial bank deposits.
B. imposed separation between commercial banking and securities activities.
C. prohibited payment of interest on checkable deposit accounts.
D. imposed interest-rate ceilings on time-deposit accounts (Regulation Q).
E E. all of the above.
Q59. The key provision of the 1994 Riegle-Neal Banking and Branching
Efficiency Act is that it:
A A. overturns (repeals) earlier legislation prohibiting U.S. banks from
branching across state lines.
B. prohibits U.S. commercial banks from branching across state lines.
C. prohibits U.S. commercial banks from branching abroad.
D. prohibits U.S. bank holding companies from owning banks in more
than one state.
Q60. The key feature of the Gramm-Leach-Bliley Act of 1999 is that it
A. repeals (abolishes) the 1977 Community Reinvestment Act.
B B. relaxes the the provisions of the 1933 Glass-Steagall Act requiring
separation of commercial banking and securities activities.
C. overturns the 1927 McFadden Act prohibiting interstate bank branching.
D. abolishes the interest rate ceilings imposed on time deposit accounts
by the 1933 Glass-Steagall Act.
Q61. According to Mishkin, the development of new financial products and
services, referred to as __________, typically takes place in response to
___________ .
A. financial free-riding; increased information costs.
B. financial expansion; inappropriate government monetary policy.
C C. financial engineering; changes in demand/supply conditions or regulations.
D. financial data mining; recessions.
Q62. _________, the process of transforming relatively illiquid financial
assets (e.g., mortgages) into more marketable securities, is an example of a
financial innovation that became feasible when improvements in computer
technology permitted reductions in record-keeping transaction costs.
A. Asset transformation
B B. Securitization
C. Risk pooling
D. Risk spreading
Q63. The increased volatility of __________ in the U.S. in the 1970s was a
primary reason for the development of __________ .
A. money demand; bank credit cards.
B. the inflation rate; junk bonds.
C C. interest rates; adjustable-rate mortgages.
D. the eurodollar market; commercial paper.
Q64. A bank holding company is an example of a financial innovation whose
development in the U.S. was primarily motivated by a desire to get around
__________ .
A. U.S. chartering restrictions.
B B. pre-1994 interstate bank branching restrictions.
C. provisions of the 1933 Glass-Steagall Act.
D. U.S. reserve requirements.
Q65. ___________ is an example of a financial innovation whose development
in the U.S. was primarily motivated by a desire to get around reserve
requirements and other prohibitions placed on checking deposit accounts.
A. Automated teller machines
B B. Money market mutual funds
C. Virtual banks
D. Adjustable-rate mortgages
Q66. Key factors that led to the 1980s U.S. financial crisis include:
A. financial innovations such as NOW accounts and money market mutual funds
paying high interest rates that drained deposits from banks and thrifts.
B. deregulation that gave banks/thrifts the ability to raise interest
rates on checkable deposit accounts and engage in higher-risk lending
activities in an attempt to finance these higher interest payments.
C. strengthening of government safety net provisions, leading to reduced
concern by banks about engaging in higher-risk lending activities.
D D. all of the above.
Q67. Factors that tended to worsen the 1980s U.S. financial crisis include:
A. the tendency for bank regulators to engage in regulatory forbearance.
B. the FDIC's "too big to fail" policy, which resulted in depositors at
larger banks being much better protected than depositors at smaller banks
even if the larger banks were not as financially sound.
C. bank regulators generally lacked the experience and expertise needed to
properly monitor the new types of activities permitted to banks and
thrifts by deregulatory acts in the early 1980s.
D D. all of the above
Q68. A major reform introduced in U.S. government safety net provisions in
1991 as a result of the 1980s U.S. financial crisis is that
A. FDIC deposit insurance was abolished to avoid moral hazard problems.
B B. FDIC premiums became "risk based," meaning that banks engaging in
higher-risk activities have to pay higher FDIC deposit insurance premiums.
C. regulators were required to proceed more cautiously and slowly before
shutting down banks thought to be insolvent, especially large banks.
D. interest rate ceilings on time deposit accounts were re-imposed.
Q69. U.S. consumer protection legislation has taken the following form(s):
A A. truth-in-lending, anti-discrimination, and community involvement laws
B. lender of last resort protections
C. minimum capital balance requirements for banks
D. separation of commercial banking from securities activities
Q70. Some commentators view the U.S. Community Reinvestment Act (CRA) of
1977 as the U.S. alternative to Grameen banking. Similarities between the
CRA Act and Grameen banking include _____ whereas differences include _____.
A. strong reliance on government loan subsidies; the Grameen bank largely
restricts its loans to men out of respect for local customs.
B. strong reliance on charitable donations to finance loans; loans under
the CRA are "re-investment" loans in the sense they are only given out
to those who have previously received a loan and successfully repaid it.
C C. an emphasis on local community lending; a satisfactory CRA rating is a
legal requirement U.S. banks must now satisfy to engage in many of the new
financial activities permitted under the 1999 Gramm-Leach-Bliley Act,
hence (unlike Grameen banking) the CRA is a top-down "stick" (threat of
penalty) approach to ensuring local community lending.
D. strong reliance on government regulatory oversight of loan repayments;
under the CRA, loans are primarily directed to women.