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Monday, January 25, 2010

MGT411 Money and Banking Solved MCQ Bank 3

 

 

 

 

Collectively, reserves, cash items in process of collection, and deposits at other banks, are referred to as ____________in a bank balance sheet.

a.  secondary reserves

*b.  cash items

c.  liquid items

d.  compensating balances

 

Which of the following is a bank regulatory agency?

a. Comptroller of the Currency

b.  Federal Reserve System

c.  Federal Deposit Insurance Corporation

*d.  All of the above

 

When economists argue that banking regulations have been a mixed blessing, they are referring to the fact that

a.  bank regulations foster competition at the expense of the banking system safety.

*b.  bank regulations foster banking system safety at the expense of competition.

c.  branch banking, while desired by consumers, leads to less competition

d.  bank regulations foster competition by limiting branching.

 

The U.S. banking system has been labeled a dual system because

a.  banks offer both checking and savings accounts.

b.  it actually includes both banks and thrift institutions.

*c.  it is regulated by both federal and state governments.

d.  it was established during the Civil War, thus making it necessary to create separate regulatory       bodies for the North and South.

 

The most important developments that have reduced banks' cost advantages in the past thirty years include;

a.  the elimination of Regulation Q ceilings.

b.  the competition from money market mutual funds.

c.  the competition from junk bonds.

d.  all of the above.

*e.  only (a) and (b) of the above.

 

Moral hazard is an important feature of insurance arrangements because the existence of insurance

a.  reduces the incentives for risk taking.

b.  is a hindrance to efficient risk taking.

c. caused the private cost of the insured activity to increase.

d.  does all of the above.

*e.  does none of the above.

 

Deposit insurance

a.  attracts risk-prone entrepreneurs to the banking industry.

b.  encourages bank managers to take on greater risks than they otherwise would.

c.  increases the incentives of depositors to monitor the riskiness of their banks' asset portfolios.

d.  does all of the above.

*e.  does only (a) and (b) of the above.

 

Regular bank examinations help to reduce the ____ problem, but also help to indirectly reduce the _____problem because, given fewer opportunities to take on risk, risk-prone entrepreneurs will be discouraged from entering the banking industry.

a.  adverse selection; adverse selection

b.  adverse selection; moral hazard

*c.  moral hazard; adverse selection

d.  moral hazard; moral hazard

 

If the FDIC decides that a bank is too big to fail, it will use the

a.  payoff method, effectively covering all deposits-even those that exceed the $100,000 ceiling.

b.  payoff method, covering only those deposits that do not exceed the $100,000 ceiling.

*c. purchase and assumption method, effectively covering all deposits-even those that exceed             the $100,000 ceiling.

d.  purchase and assumption method, covering only those deposits that do not exceed the       $100,000 ceiling.

 

The too-big-to-fail policy

a.  puts small banks at a competitive disadvantage relative to large banks in attracting large      depositors.

b.  treats large depositors of small banks inequitably when compared to depositors of large banks.

c.  ameliorates moral hazard problems.

d.  does all of the above.

*e.  does only (a) and (b) of the above.

 

Eliminating deposit insurance has the disadvantage of

a.  reducing the stability of the banking system due to an increase in the likelihood of bank runs.

b.  not being a politically feasible strategy.

c.  encouraging banks to engage in excessive risk taking.

d.  all of the above.

*e.  only (a) and (b) of the above.

 

When a bank is well-capitalized, the bank has_____to lose if it fails and is thus_____likely to pursue risky activities.

a.  more: more

*b.  more; less

c.  less; more

d.  less; less

 

One problem with the too-big-to-fail policy is that it_____the incentives for_____by big banks.

*a.  increases; moral hazard

b.  decreases: moral hazard

c.  increases: adverse selection

d.  decreases: adverse selection

 

Suppose that the FDIC increases the deposit insurance premiums of banks.  Banks will have the incentive to pass the higher insurance premiums to their household depositors in the form of a lower interest rate on deposits or higher service charges on their accounts.  This will especially occur when the household supply curve of deposits is

a.  highly elastic with respect to interest-rate changes

b.  somewhat elastic with respect to interest-rate changes

c.  somewhat inelastic with respect to interest-rate changes

*d.  highly inelastic with respect to interest-rate changes

Loans made by the Federal Reserve to depository institutions are in the form of:

*a.  reserves

b.  cash

c.  float

d.  capital accounts

 

Technically, the Federal Reserve System is owned by:

a.  the U.S. Treasury

b.  the Department of Commerce

c.  the World Bank

*d.  the commercial banks that are Federal Reserve members

 

The predominant source of the net income of the Federal Reserve derives from:

a.  priced services it makes available to depository institutions

b.  loans to depository institutions

*c.  its portfolio of U.S. government securities

d.  profits earned in the foreign exchange market

 

Members of the Board of Governors of the Federal Reserve System obtain their positions through:

a.  appointment by the directors of the Federal Reserve banks

b.  appointment by the Chairman of the Board of Governors

*c.  appointment by the U.S. President and approval by the Senate

d.  appointment by the U.S. Senate and approval by the President

 

Voting members of the Federal Open Market Committee include the following:

a.  the 7 members of the Board of Governors and the 12 Federal Reserve district bank presidents

b.  the 12 members of the Board of Governors and the 7 Federal Reserve district bank presidents

*c.  the 7 members of the Board of Governors and 5 of the 12 Federal Reserve district bank

presidents

d.  none of the above accurately describe the voting members of the Federal Open Market Committee

 

When the Federal Open Market Committee approves its directive, it is then presented to:

a.  the Chairman of the Board of Governors

b.  the Chairman of the Federal Open Market Committee

*c.  the manager of the System Open Market Account

d.  the president of the Federal Reserve Bank of New York

 

The Federal Reserve pays to the U.S. Treasury approximately what portion of its gross income?

a.  10 percent

b.  50 percent

c.  75 percent

*d.  90 percent

 

A major factor contributing to the political independence of the Federal Reserve is:

*a.  the Fed is financially independent of congressional appropriations

b.  members of the Board of governors are appointed by the president of the United States

c.  members of the Board of Governors may serve only two terms

d.  all of the above are contributing factors

 

The Federal Reserve System was created:

a. to conduct monetary policy for purposes of stabilizing the economy

b. primarily to hold large quantities of the ever expanding government debt

*c. to provide liquidity to the banking system in time of crisis

d. to supervise all national banks

 

The primary motivation behind the creation of the Federal Reserve System was the desire to

*a.  lessen the occurrence of bank panics.

b.  stabilize short-term interest rates.

c.  eliminate state regulated banks.

d.  finance World War I.

 

The regional Federal Reserve banks

a.  establish the discount rate.

b.  ration discount loans to banks.

c.  clear checks.

*d.  do all of the above.

 

While the regional Federal Reserve banks "establish" the discount rate, in truth, the discount rate is determined by

a.  Congress.

b.  the president of the United States.

*c.  the Board of Governors.

d.  the Federal Reserve Advisory Council.

 

A majority of the Federal Open Market Committee is comprised of

a.  the 12 Federal Reserve Bank presidents.

b.  the five voting Federal Reserve bank presidents.

*c.  the seven members of the Board of Governors.

d.  none of the above.

 

Monetary policy is determined by

a.  the Board of Governors.

b.  the Federal Reserve banks from each district.

*c.  the Federal Open Market Committee.

d.  the Federal Reserve Advisory Council.

 

Power within the Federal Reserve is essentially located in

a.  New York.

*b.  Washington, D.C.

c.  Boston.

d.  San Francisco.

 

While the Fed enjoys a relatively high degree of independence for a government agency, it feels political pressure from the president and Congress because

a.  Fed members desire reappointment every 3 years.

b.  the Fed must go to Congress each year for operating revenues.

*c.  Congress could limit Fed power through legislation.

d.  of all of the above.

e.  of only (b) and (c) of the above.

 

Supporters of keeping the Federal Reserve independent from both the executive and legislative branches of government believe that a less independent Fed would

a.  pursue overly expansionary monetary policies.

b.  be more likely to pursue policies consistent with the political business cycle.

c.  ignore short-run problems in favor of longer-run concerns.

*d.  do only (a) and (b) of the above.

 

When Hometown Bank grants new loans in the amount of $10,000, this leads to an expansion of the money supply by:

*a.  $10,000

b.  $10,000 times the initial excess reserves in the banking system

c.  $10,000 times the reciprocal of the reserve requirement

d.  zero

 

Assume you win a lottery and receive a check for $1 million.  Assuming the reserve requirement is 20 percent, then the impact of your depositing your check in your bank is to:

a.  increase its reserves by $1 million

b.  increases its required reserves by $200,000

c.  increase its excess reserves by $800,000

*d.  do all of the above

 

Given a 15 percent reserve requirement, Federal Reserve purchases of $1000 million of U.S. Treasury securities from dealers results in:

*a.  an increase in reserves of $1000 million

b.  an initial increase in the money supply of $6666.7 million

c.  an initial increase in excess reserves of $150 million

d.  an eventual increase in the money supply of $1 million

If banks in a given week expand loans by $300 million and sell off $200 million in Treasury bills to the public, the net effect on the money supply (M1) is to:

a.  increase it by $300 million

b.  increase it by $500 million

*c.  increase it by $100 million

d.  do none of the above

 

Banks create money when they:

a.  reduce loans and sell securities

b.  expand loans and sell securities

c.  reduce loans and buy securities

*d.  expand loans and buy securities

 

Which of the following directly increases the money supply?

a.  the public withdraws cash from banks

b.  the public deposits cash into banks

c.  banks sell securities to dealers

*d.  none of the above

 

The simple deposit expansion multiplier is equal to:

a.  one minus the reserve requirement percentage

b.  one time the reserve requirement percentage

*c.  one divided by the reserve requirement percentage

d.  none of the above

 

The demand for the monetary base is composed of demand by:

a.  banks and the U.S. Treasury

b.  banks and the Federal Reserve

*c.  banks and the public

d.  the Treasury and the Federal Reserve

 

Suppose you deposit $100 of currency into your commercial bank savings account.  This action does what to the monetary base?

*a.  leaves it unchanged

b.  increases it $100

c.  decreases it $100

d.  does none of the above

 

The monetary base is comprised of

a.  currency in circulation and Federal Reserve notes.

b.  currency in circulation and government securities.

*c.  currency in circulation and reserves.

d.  reserves and government securities.

 

The sum of vault cash and bank deposits with the Fed minus required reserves is called

a.  the monetary base.

b.  the money supply.

*c.  excess reserves.

d.  total reserves.

 

When the Fed simultaneously purchases government bonds and extends discount loans to banks,

a.  the money supply unambiguously falls.

*b.  the money supply unambiguously rises.

c.  the net effect on the money supply cannot be determined because the two Fed actions counteract each other.

d.  the Fed action has no effect on the money supply.

 

When the Fed simultaneously extends discount loans and sells government bonds,

a.  the money supply unambiguously increases.

b.  the money supply unambiguously falls.

*c.  the net effect on the money supply cannot be determined without further information because       the two Fed actions counteract each other.

d.  the Fed action has no effect on the money supply.

 

When the Fed wants to reduce reserves in the banking system, it will

a.  purchase government bonds.

b.  extend discount loans to banks.

c.  print more currency.

*d.  sell government bonds.

 

The simple deposit multiplier is equal to 4 when the required reserve ratio is equal to

*a.  0.25.

b.  0.40.

c.  0.05.

d.  0.15.

 

The First National Bank of Galata has $150 in excess reserves.  If the required reserve ratio is 10%, how much extra can the First national Bank lend?

a. $1500

b. $750

*c. $150

d. $0

 

If excess reserves in the banking system amount to $75 and the required reserve ratio is 0.20, checkable deposits could potentially expand by

a. $75.

b. $750.

c. $37.5

*d. $375.

 

If a member of the nonbank public purchases a government bond from the Federal Reserve with currency, then

a.  both the monetary base and reserves will fall.

b.  both the monetary base and reserves will rise.

*c.  the monetary base will fall, but reserves will remain unchanged.

d.  the monetary base will fall, but currency in circulation will remain unchanged.

e.  none of the above will occur.

 

Which of the following are found on the asset side of the Federal Reserve's balance sheet?

a.  Treasury securities

b.  Treasury deposits

c.  Discount loans

d.  Both (a) and (b) of the above

*e.  Only (a) and (c) of the above.

 

Which of the following are found on the liability side of the Federal Reserve's balance sheet?

a.  Cash items in the process of collection.

*b.  Deferred availability cash items.

c.  Gold.

d.  All of the above.

e.  Only (b) and (c) of the above.

 

When float increases,

a.  currency in circulation falls.

b.  the monetary base falls.

*c.  the monetary base rises.

d.  the monetary supply falls.

e.  none of the above.

 

A reduction in which of the following leads to an increase in the monetary base?

*a.  U.S. Treasury deposits at the Fed when it makes tax refunds

b.  Float

c.  Discount loans

d.  All of the above

 

When comparing the simple model of multiple deposit creation with the money supply model that accounts for depositors' currency drains and bank's precautionary balances of excess reserves, the more complicated model indicates that

a.  an increase in the monetary base that goes into loans is not multiplied to arrive at the change in the money supply.

*b.  the money multiplier is negatively related to the currency drain ratio.

c.  the money multiplier is positively related to the precautionary excess reserves ratio.

d.  the money multiplier is positively related to the required reserve ratio.

e.  Only (a) and (b) of the above.

 

The money multiplier increases in value as the

a.  currency ratio increases.

b.  excess reserves ratio increases.

*c.  required reserve ratio decreases.

d.  required reserve ratio increases.

 

Depositors often withdraw more currency from their bank accounts during the Christmas season.  Therefore, one would predict that

*a.  the money multiplier will tend to fall during Christmas season.

b.  the money multiplier will tend to rise during Christmas season.

c.  discount borrowing will tend to fall during Christmas season.

d.  none of the above will occur.

 

The Fed lacks complete control over the monetary base because

a.  it cannot set the required reserve ratio on checkable deposits.

b.  it cannot perfectly predict the amount of discount borrowing by banks.

c.  it cannot perfectly predict shifts from deposits to currency.

d.  all of the above are true.

* e.  only (b) and (c) are true.

 

The more complex money multiplier is smaller than the simple deposit multiplier when

a.  the currency drain ratio is greater than zero.

b.  the precautionary excess reserves ratio is greater than zero.

c.  the required reserve ratio on checkable deposits is greater than zero.

*d.  both (a) and (b) of the above occur.

 

The money multiplier is negatively related to

a.  the excess reserves ratio.

b.  the currency ratio.

c.  the required reserve ratio on checkable deposits.

*d.  all of the above.

e.  only (a) and (b) of the above.

 

For a given level of the monetary base, a drop in the excess reserve ratio means

*a.  an increase in the money supply.

b.  an increase in the monetary base.

c.  an increase in the nonborrowed base.

d.  all of the above.

e.  only (b) and (c) of the above.

 

If a bank reduce its holdings of excess reserves by making loans,

a.  the monetary base will decrease.

*b.  the money supply will increase.

c.  both (a) and (b) of the above will occur.

d.  neither (a) nor (b) of the above will occur.

 

The banking system's precautionary excess reserves ratio is

a.  negatively related to both the market interest rate and expected deposit outflows.

b.  positively related to both the market interest rate and expected deposit outflows.

c.  positively related to the market interest rate and negatively related to expected deposit outflows.

*d.  negatively related to the market interest rate and positively related to expected deposit outflows.

 

If the required reserve ratio is one-fourth, excess reserves are not held, and checkable deposits are $1200 billion, then the money multiplier is

a.  2.5.

b.  3.0.

c.  3.5.

*d.  4.0.

An important routine function of a Federal Reserve Bank is to

a.       supervise the liquidation of the assets of bankrupt commercial banks

b.      help large banks develop financial relationships with smaller banks

c.       advise banks as to the most profitable ways of buying securities

d.      *  provide facilities by which banks may clear and collect checks

Open market operations are of two types:

a.  defensive and offensive.

b.  dynamic and reactionary.

c.  actionary and passive.

*d.  dynamic and defensive.

 

If the Federal Reserve wants to inject reserves into the banking system, it will usually

*a.  purchase government securities.

b.  raise the discount rate.

c.  sell government securities.

d.  lower reserve requirements.

e.  do either (a) or (b) of the above.

 

To temporarily increase reserves in the banking system, the Fed engages in

*a.  a repurchase agreement.

b.  a reverse repo.

c.  a matched sale-purchase transaction.

d.  none of the above.

 

When float increases, causing a temporary increase in reserves in the banking system, the Fed can offset the effects of float by engaging in

a.  a repurchase agreement.

b.  an interest rate swap.

*c.  a matched sale-purchase transaction.

d.  none of the above.

 

The type of discount loan extended by the Fed to banks that experience financial difficulties and do not qualify as fulfilling "generally sound financial condition" is called 

a.  primary credit.

b.  seasonal credit.

*c.  secondary credit.

d.  installment credit.

 

Changes in the reserve requirements (required reserve ratio) are infrequently used for changing the money supply because

*a.  reserve requirements changes tend to be too powerful and costly for banks to adjust to.

b.  reserve requirement changes tend to be ineffective.

c.  reserve requirement changes must be approved by the president.

d.  of  only (a) and (c) of the above.

 

A reduction in reserve requirements causes the money supply to rise, since the change causes

a.  the money multiplier to fall.

*b.  the money multiplier to rise.

c.  total reserves to fall.

d.  total reserves to rise.

 

Because the discount rate is kept above the federal funds interest rate,

a.  the Fed must ration discount loans on a first-come, first-serve basis.

*b.  banks have the incentive to borrow from other banks before borrowing from the Fed.

c.  the Fed refuses to extend discount credit to banks that are not members of the Federal Reserve System.

d.  none of the above occurs.

 

Under 100% reserve banking, the money multiplier will be

a.  0.

*b.  1.

c.  10.

d.  100.

 

Advantages of tying the discount rate to the federal funds rate would include

a.  increasing the confusion concerning the Fed's intentions about future monetary policy because of the uncertainty about what a change in the discount rate is intended to signal.

b.  reducing the large fluctuations in the money multiplier from even small changes in the discount rate.

*c.  simplifying the Fed's administration of the discount window. 

d.  only (a) and (c) of the above.

 

When the Fed engages in a matched sale-purchase with a bank, it first ______ securities which the bank agrees to______ back to the Fed within a few days.

a.  buys; buy

b.  buys; sell

c.  sells; buy

*d.  sells; sell

 

When the Fed wants to decrease bank reserves on a temporary basis, it engages in a _______.

a.  outright purchase of securities from banks

b.  outright sale of securities from banks

*c. reverse repurchase agreement with banks

d.  repurchase agreement with banks

 

 

The Fed extends______ to financially sound banks that experience unexpected withdrawals of funds by depositors.

*a.  primary credit loans

b.  seasonal credit loans

c.  secondary credit loans

d.  emergency loans

 

If either Treasury deposits or foreign deposits at the Fed are predicted to_______, a ______ open market ______ would be needed to offset the expected decrease in the monetary base.

a.  rise; dynamic; purchase

b.  fall; dynamic; sale

*c.  rise; defensive; purchase

d.  fall; defensive; purchase

 

When the Fed raises the discount rate, as it did on May 16, 2000, the_____ curve in the market for reserves shifts to the______, thereby causing the federal funds interest rate to________.

a. supply; right; fall

b. supply; right; rise

*c. supply; left; rise

d. demand; right; fall

e.  demand; left; rise

 

Even if the Fed could completely control the money supply, not everyone would be happy with monetary policy, since

*a.  the Fed is asked to achieve many goals, some of which are incompatible with one another.

b.  the goals that are stressed by the Fed do not include high employment, making labor unions a vocal critic of Fed policies.

c.  the Fed places primary emphasis on exchange rate stability, often to the detriment of domestic conditions.

d.  its mandate requires it to keep Treasury security prices high.  

 

Because timely information on the price level and economic growth is generally unavailable, the Fed has adopted a strategy of

a.  targeting the exchange rate, since the Fed has the ability to control this variable.

b.  targeting the price of gold, since it is closely related to economic activity.

*c.  using an intermediate target such as an interest rate.

d.  stabilizing the consumer price index, since the Fed has a high degree of control over the CPI.

 

Which of the following is true about the Federal Reserve System?

*a.  There are 12 regional Federal Reserve Banks

b.  The head of the U.S. Treasury also chairs the Federal Reserve Board

c.  There are 14 members of the Federal Reserve Board

d.  The Federal Reserve receives its operating funds from the federal government

 

Many economists questions the desirability of targeting real interest rates by pointing out that

a.  the Fed does not have direct control over real interest rates.

b.  changes in real interest rates have little effect on economic activity.

c.  real interest rates are extremely difficult to measure.

d.  all of the above are correct.

*e.  only (a) and (c) of the above are correct.

 

The Federal Reserve regulates the money supply mainly by

a.       controlling the production of coins and paper money issued by the U.S. mint

b.      altering the reserve requirements of commercial banks

c.       issuing discount loans to financially troubled commercial banks

d.      *altering the reserve of banks through purchases/sales of government securities

 

Open market operation change

a.        The size of the monetary multiplier, but not commercial bank reserves

b.      *Commercial bank reserves, but not the size of the monetary multiplier

c.       Neither commercial bank reserves nor the size of the monetary multiplier

d.      Both commercial bank reserves and the size of the monetary multiplier

A decrease in the required reserve ratio increases

a.        The total reserves of commercial banks

b.      The required reserves of commercial banks

c.       *The excess reserves of commercial banks

d.      The actual reserves of commercial banks

The interest rate that banks charge one another on overnight loans is called the

a.       *Federal funds rate

b.      Prime lending rate

c.       Subprime lending rate

d.      Discount rate

To decrease the federal funds rate, the Fed can

a.       *Buy securities from banks or the public

b.      Sell securities to banks or the public

c.       Increase the discount rate

d.      Increase the prime interest rate

If the Fed was attempting to decrease demand-pull inflation, the proper policies would be to

a.       Sell government securities, raise reserve requirements, and lower the discount rate

b.      Sell government securities, lower reserve requirements, and lower the discount rate

c.       Buy government securities, raise reserve requirements, and raise the discount rate

d.      *Sell government securities, raise reserve requirements, and raise the discount rate

Which of the following best describes the cause-effect chain of a restrictive (tight) monetary policy?

a.        A decrease in the money supply will lower the interest rate, increase investment spending, and increase aggregate demand and GDP

b.      *A decrease in the money supply will raise the interest rate, decrease investment spending, and decrease aggregate demand and GDP

c.        An increase in the money supply will raise the interest rate, decrease investment spending, and decrease aggregate demand and GDP

d.      An increase in the money supply will lower the interest rate, decrease investment spending, and increase aggregate demand and GDP

Opponents of the Federal Reserve's adoption of an inflation targeting strategy argue that it would

a.        Result in the federal government "crowding out" private investment spending

b.      Expand the Federal Reserve's monetary powers beyond reasonable limits

c.       Reduce the size of the banking system's money multiplier

d.      *limit the Fed's ability to engage in countercyclical monetary policy

 

If the Federal Reserve is targeting interest rates, during an economic downturn it will

a.        Use open market purchases to lower interest rates

b.      * Use open market sales to increase interest rates

c.        Avoid open market operations so as not to interfere with the adjustment of interest rates

d.      Impose limits on the interest rates banks may charge on credit cards

Which of the following is not considered to be a goal of monetary policy?

a.       *Fair wages

b.      High employment

c.       Price stability

d.      Economic growth

A decrease in Federal Reserve float will

a.        Increase excess reserves of commercial banks

b.      Increase required reserves of commercial banks

c.       *Increase the federal funds rate

d.      Decrease the federal funds rate

In the federal funds market diagram, an open market sale by the Fed

a.        Shifts the supply curve of reserves to the right

b.      *Shifts the supply curve of reserves to the left

c.       Shifts the demand curve for reserves to the right

d.      Shifts the demand curve for reserves to the left

Temporary, short-term discount loans to banks in areas in which agriculture and tourism are important are known as

a.        Primary credit

b.      Secondary credit

c.       *Seasonal credit

d.      Extended credit

The Federal Reserve's Open Market Trading Desk is another name for security traders at the Federal Reserve Bank of

a.        San Francisco

b.      Chicago

c.       Atlanta

d.      *New York

The margin requirement set by the Federal Reserve is the

a.       *Proportion of the purchase price of a security that an investor must pay in cash

b.      Difference between the interest rate banks may charge on loans and the interest rate they pay to depositors

c.       Same thing as the required reserve ratio on checking deposits

d.      Difference banks must maintain between the value of their assets and the value of their liabilities

Under the Federal Reserve Act, which banks must be members of the Federal Reserve System?

a.        All commercial banks

b.      *National banks

c.       State banks

d.      All banks with capital in excess of $100 million