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Sunday, February 14, 2010

MGT411-Solved-MCQ-Bank Regulating the Financial System 1

Multiple Choice Questions

 

      1.   Empirical evidence points to the fact that:

            A)   Financial crises, though newsworthy, have no impact on economic growth.

            B)   Financial crises have a negative impact on economic growth only for the year of the crisis.

            C)   Financial crises have a negative impact on economic growth for years.

            D)   Financial crises can have a positive impact on economic growth as weak borrowers are weeded out.

 

Answer: C   LOD: 1   Page: 349  

            A-Head: Regulating the Financial System.

 

      2.   There is a tradeoff that a bank faces that can impact its likelihood of failure; this tradeoff is:

            A)   The more competitive the banking environment, the more likely the bank will fail.

            B)   The greater the regulation from government the more likely the bank will fail.

            C)   The more profitable the bank, the less liquid the bank will be and the more likely it will fail.

            D)   The larger the bank in asset size the more likely it will fail.

 

Answer: C   LOD: 2   Page: 351  

            A-Head: The Sources and Consequences of Runs, Panics and Crises.

 

      3.   Rumors of a bank failing, even if not true, can become a self-fulfilling prophecy because:

            A)   Customers will not want to obtain loans from this bank.

            B)   The rumors will cause people to not want to deposit in this bank.

            C)   Regulators will scrutinize the bank heavily looking for something wrong.

            D)   Depositors will rush to the bank to withdraw their deposits and the bank under normal situations would not have this amount of liquid assets on hand.

 

Answer: D   LOD: 2   Page: 352  

            A-Head: The Sources and Consequences of Runs, Panics and Crises.

 


      4.   What matters most during a bank run is:

            A)   The number of loans outstanding.

            B)   The solvency of the bank.

            C)   The liquidity of the bank.

            D)   All of the above.

 

Answer: C   LOD: 2   Page: 352  

            A-Head: The Sources and Consequences of Runs, Panics and Crises.

 

      5.   Contagion is:

            A)   The failure of one bank spreading to other banks through depositors withdrawing of funds.

            B)   The phenomenon of one bank loan that defaults will cause other bank loans to default.

            C)   The rapid contraction of investment spending that occurs when interest rates are increase by the Federal Reserve.

            D)   The rapid inflation that results from the printing of money.

 

Answer: A   LOD: 1   Page: 352  

            A-Head: The Sources and Consequences of Runs, Panics and Crises.

 

      6.   bank run involves:

            A)   Illegal activities on the part of the bank's officers.

            B)   A bank being forced into bankruptcy.

            C)   A large number of depositors withdrawing their funds during a short time span,.

            D)   A bank's return on assets being below the acceptable level.

 

Answer: C   LOD: 1   Page: 352  

            A-Head: The Sources and Consequences of Runs, Panics and Crises.

 

      7.   The federal government is concerned about the health of the banking system for many reasons, the most important of which may be:

            A)   Banks are where government bonds are traded.

            B)   A significant number of people are employed in the banking industry.

            C)   Many people earn the majority of their income from interest on bank deposits.

            D)   Banks are of great importance in enabling the economy to operate efficiently.

 

Answer: D   LOD: 2   Page: 352  

            A-Head: The Sources and Consequences of Runs, Panics and Crises.

 


      8.   When healthy banks fail due to widespread bank panics, those who are likely to be hurt are:

            A)   Government regulators.

            B)   Households and small businesses.

            C)   FDIC

            D)   The Federal Reserve.

 

Answer: B   LOD: 1   Page: 352  

            A-Head: The Sources and Consequences of Runs, Panics and Crises.

 

      9.   It is difficult for depositors to know the true health of banks because:

            A)   Regulations prohibit this information from being made public.

            B)   The financial statements of banks are too difficult for most people to understand.

            C)   Most of the information on bank loans is private and based on sophisticated models.

            D)   Banking is competitive and financial records of banks are not divulged to prevent competitor banks from having an advantage.

 

Answer: C   LOD: 2   Page: 352  

            A-Head: The Sources and Consequences of Runs, Panics and Crises.

 

    10.   Bank failures tend to occur most often during periods of:

            A)   Stock market run ups when, like many companies, banks tend to be overvalued.

            B)   During periods of high inflation when the fixed rate loans of many banks cause their real returns to decrease.

            C)   Recessions when many borrowers have a difficult time repaying loans and lending activity slows.

            D)   During times of wars and other civil unrest.

 

Answer: C   LOD: 2   Page: 353  

            A-Head: The Sources and Consequences of Runs, Panics and Crises.

 

    11.   Bank panics seem to begin with:

            A)   Rumors.

            B)   Wars.

            C)   Real economic events.

            D)   a and c

            E)   b and c

 

Answer: D   LOD: 1   Page: 353  

            A-Head: The Sources and Consequences of Runs, Panics and Crises.

 


    12.   Deflation can cause widespread bank crises:

            A)   Because the value of borrowers net worth falls but not their liabilities.

            B)   Borrowers default rates increase.

            C)   Bank balance sheets deteriorate as the level of economic activity decreases.

            D)   Information asymmetry problems increase during deflationary periods.

            E)   All of the above.

 

Answer: E   LOD: 2   Page: 354  

            A-Head: The Sources and Consequences of Runs, Panics and Crises.

 

    13.   The reasons for the government to get involved in the financial system include each of the following, EXCEPT:

            A)   To protect the bank's monopoly position.

            B)   To protect investors.

            C)   To ensure the stability of the financial system.

            D)   To protect bank customers from monopolistic exploitation.

 

Answer: A   LOD: 1   Page: 354  

            A-Head: The Government Safety Net.

 

    14.   The government is obligated to protect small investors because:

            A)   Large investors can better afford losses.

            B)   Many small investors cannot adequately judge the soundness of their bank.

            C)   There is inadequate competition to ensure a bank is operating efficiently.

            D)   Banks are often run by unethical managers who will often exploit small investors.

  http://groups.google.com/group/vuZs

Answer: B   LOD: 1   Page: 354  

            A-Head: The Government Safety Net.

 

    15.   The government, often through the Federal Reserve, will regulate bank mergers, sometimes denying the proposed merger. Often the reason given for the denial is to protect small investors. What are small investors being protected from?

            A)   With a larger bank the bank is likely to take greater risk and may fail.

            B)   In order to pay for the merger, the bank may seek higher returns putting the depositors' funds at greater risk.

            C)   Mergers can increase the monopoly power of banks and the bank may seek to exploit this power by raising prices and earning unwarranted profits.

            D)   Bank runs hurt larger banks more than smaller banks.

 

Answer: C   LOD: 2   Page: 354  

            A-Head: The Government Safety Net.


    16.   The financial system is inherently more unstable than most other industries due to:

            A)   In most other industries customers disappear at a faster rate; in banking they disappear slowly so the damage is done before the real problem is identified.

            B)   Banks deal in paper profits, not in real profits.

            C)   A single firm failing in banking can bring down the entire system; this isn't true in most other industries.

            D)   a and b

 

Answer: C   LOD: 2   Page: 355  

            A-Head: The Government Safety Net.

 

    17.   The government's role of lender of last resort is directed to:

            A)   Large manufacturing firms that employ thousands of people.

            B)   Depositors, this is role the government plays when they insure depositors' balances in banks that fail.

            C)   Developing countries that are trying to build their financial systems.

            D)   Banks that experience sudden deposit outflows.

 

Answer: D   LOD: 1   Page: 356  

            A-Head: The Government Safety Net.

 

    18.   The government provides deposit insurance; this insurance protects:

            A)   Large corporate deposit accounts, but only the amounts that exceed the $100,000 deductible.

            B)   Depositors for up to $100,000 should a bank fail.

            C)   The deposits of banks in their Federal Reserve accounts.

            D)   The deposits that people have but only for federally chartered banks.

 

Answer: B   LOD: 1   Page: 357  

            A-Head: The Government Safety Net.

 

    19.   The government's providing of deposit insurance and functioning as the lender of last resort has significantly:

            A)   Decreased the incentive for bank managers to take on risk.

            B)   Increased the amount of regulation of banks required.

            C)   Increased the incentive for banks to take on risk.

            D)   b and c

            E)   a and b

 

Answer: D   LOD: 2   Page: 359  

            A-Head: The Government Safety Net.

 


    20.   One of the unique problems that banks face is:

            A)   They hold liquid assets to meet illiquid liabilities.

            B)   They hold illiquid assets to meet liquid liabilities.

            C)   They hold liquid assets to meet liquid liabilities.

            D)   Both banks' assets and liabilities are illiquid.

 

Answer: B   LOD: 1   Page: 355  

            A-Head: The Government Safety Net.

 

    21.   The inter-bank loans that appear on banks' balance sheets represent what proportion of bank capital?

            A)   Nearly ten percent.

            B)   Almost three-fourths.

            C)   Nearly half.

            D)   Less than two percent.

 

Answer: C   LOD: 1   Page: 355  

            A-Head: The Government Safety Net.

 

    22.   The fact that banks often make loans to other banks means:

            A)   One bank failing will not have a large impact on the financial industry.

            B)   The banking industry is really self-regulating.

            C)   One bank's failure can be contagious and spread to other banks.

            D)   b and c

 

Answer: C   LOD: 2   Page: 355  

            A-Head: The Government Safety Net.

 

    23.   If your stockbroker gives you bad advice and you lose your investment:

            A)   The government will reimburse you similar to reimbursing depositors if a bank fails.

            B)   The government will not reimburse you for the loss; you are not protected from bad advice by your stockbroker.

            C)   These losses would be covered under FDIC.

            D)   Your investment would only be covered if the stockbroker was employed by a bank.

 

Answer: B   LOD: 2   Page: 357  

            A-Head: The Government Safety Net.

 


    24.   The best way for a government to stop the failure of one bank from turning into a bank panic is to:

            A)   Make sure solvent institutions can meet the withdrawal demands of depositors.

            B)   Declare a bank holiday until solvent banks can acquire adequate liquidity.

            C)   Limit the withdrawals of depositors.

            D)   Provide zero-interest rate loans to all banks regardless of net worth.

 

Answer: A   LOD: 2   Page: 356  

            A-Head: The Government Safety Net.

 

    25.   The need for a lender of last resort was identified as far back as:

            A)   The start of the Great Depression in 1929.

            B)   1913, when the Federal Reserve was created.

            C)   1873, by British economist Walter Bagehot.

            D)   in 1776 by the first U.S. Secretary of the Treasury, Alexander Hamilton.

 

Answer: C   LOD: 1   Page: 356  

            A-Head: The Government Safety Net.

  http://groups.google.com/group/vuZs

    26.   The creation of the Federal Reserve in 1913:

            A)   Provided the opportunity for lender of last resort but not the guarantee that it would be used.

            B)   Guaranteed the Federal Reserve would always act as lender of last resort.

            C)   Eliminated bank panics in the U.S.

            D)   Was in response to the Great Depression in the U.S.

 

Answer: A   LOD: 2   Page: 356  

            A-Head: The Government Safety Net.

 

    27.   If the lender of last resort function of the government is to work to minimize a crisis, it must be:

            A)   Reserved only for those banks that are most deserving.

            B)   Used on a limited basis.

            C)   Credible, with banks knowing they can get loans quickly.

            D)   Only available during economic downturns.

 

Answer: C   LOD: 2   Page: 357  

            A-Head: The Government Safety Net.

 


    28.   The first test of the Federal Reserve as lender of last resort occurred:

            A)   With the attack on Pearl Harbor by the Japanese.

            B)   With the widespread failures of Savings and Loans in the 1980's.

            C)   With the introduction of flexible exchange rates in the U.S. in 1971.

            D)   With the stock market crash in 1929.

 

Answer: D   LOD: 1   Page: 356  

            A-Head: The Government Safety Net.

 

    29.   One lesson learned from the bank panics of the early 1930's is:

            A)   The lender of last resort function almost guarantees that bank panics are a thing of the past.

            B)   The mere existence of a lender of last resort will not keep the financial system from collapsing.

            C)   Only the U.S. Treasury can be a true lender of last resort.

            D)   The financial system will collapse without a lender of last resort.

 

Answer: B   LOD: 2   Page: 357  

            A-Head: The Government Safety Net.

 

    30.   During a bank crisis:

            A)   Officials at the Federal Reserve find it easy to sort out solvent from insolvent banks.

            B)   It is important for regulators to be able to distinguish insolvent from illiquid banks.

            C)   It is easy to determine the market prices of bank's assets.

            D)   A bank will go to the central bank for a loan before going to other banks.

            E)   a and d

 

Answer: B   LOD: 2   Page: 357  

            A-Head: The Government Safety Net.

 

    31.   A moral hazard situation arises in the lender of last resort function because:

            A)   A central bank finds it difficult to distinguish illiquid from insolvent banks.

            B)   A central bank usually will only make a loan to a bank after it becomes insolvent.

            C)   A central bank usually undervalues the assets of a bank in a crisis.

            D)   The central bank is the first place a bank facing a crisis will turn.

 

Answer: A   LOD: 2   Page: 357  

            A-Head: The Government Safety Net.

 


    32.   When the Federal Reserve was unable to stem the bank panics of the 1930s, Congress responded by:

            A)   Taking over the lender of last resort function and assigning this function to the U.S. Treasury.

            B)   Ordering the printing of tens of billions of dollars of additional currency.

            C)   Creating the FDIC and offering deposit insurance.

            D)   Declaring a bank holiday and closing banks for 30 days.

 

Answer: C   LOD: 1   Page: 357  

            A-Head: The Government Safety Net.

 

    33.   With deposit insurance:

            A)   Depositors do not need to involve themselves with the risk taking by bank managers.

            B)   The deposits of a bank customer are insured up to some stated maximum value.

            C)   There is a creation of potential moral hazard by bank managers.

            D)   All of the above.

 

Answer: D   LOD: 2   Page: 357  

            A-Head: The Government Safety Net.

 

    34.   One reason customers do not care about the quality of their bank's assets is:

            A)   Most people cannot distinguish an asset from a liability.

            B)   The quality of a bank's assets changes almost daily.

            C)   They assume the bank only has high quality assets.

            D)   With deposit insurance, there isn't any real reason to care; their deposits are protected even if the bank fails.

 

Answer: D   LOD: 2   Page: 357  

            A-Head: The Government Safety Net.

 


    35.   On November 20, 1985, the Bank of New York needed to use the lender of last resort function due to:

            A)   A run on the bank started by a rumor that the president of the bank embezzled tens of millions of dollars from the bank.

            B)   A computer error caused the bank's records to wipe out the balances of all of its customers.

            C)   A rumor that the bank was about to be taken over by FDIC due to insolvency.

            D)   A computer error that made it impossible for the bank to keep track of its Treasury bond trades.

 

Answer: D   LOD: 1   Page: 357  

            A-Head: The Government Safety Net.

 

    36.   The payoff method used by the FDIC to address the insolvency of a bank is when the FDIC:

            A)   Pays the owners of the bank for the losses they would otherwise face.

            B)   Pays off all depositors the balances in their accounts so no depositor suffers a loss, though the owners of the bank may suffer losses.

            C)   Pays off the depositors up to the current $100,000 limit, so it is possible that some depositors will suffer losses.

            D)   Takes all of the assets of the bank, sells them pays off the liabilities of the bank in full and then replenishes their fund with any remaining balance.

 

Answer: C   LOD: 2   Page: 357  

            A-Head: The Government Safety Net.

 

    37.   Under the purchase and assumption method of dealing with a failed bank, the FDIC:

            A)   Finds another bank to take over the insolvent bank.

            B)   Takes over the day to day management of the bank.

            C)   Sells the failed bank to the Federal Reserve.

            D)   Sells off the profitable loans of the failed bank in an open auction.

 

Answer: A   LOD: 2   Page: 358  

            A-Head: The Government Safety Net.

 


    38.   Considering the methods available to the FDIC for dealing with a failed bank, the depositors of the failed bank should:

            A)   Be indifferent between the two since it really does not matter to them which method is used.

            B)   Prefer the purchase and assumption method since the deposits over $100,000 will also be protected.

            C)   Prefer the payoff method because they will have access to their funds earlier.

            D)   Prefer the payoff method since a lot less paperwork is involved for the depositor.

 

Answer: B   LOD: 2   Page: 358  

            A-Head: The Government Safety Net.

 

    39.   Under the purchase and assumption method, the FDIC usually finds they:

            A)   Can sell the failed bank for more than the bank is actually worth.

            B)   Can sell the bank at a price equaling the value of the failed banks assets.

            C)   Have to sell the bank at a negative price since the bank is insolvent.

            D)   Cannot sell the bank and almost always have to revert to the payoff method for dealing with a failed bank.

 

Answer: C   LOD: 2   Page: 358  

            A-Head: The Government Safety Net.

 

    40.   Many states had their own insurance fund to protect depositors. One problem with these state funds is:

            A)   They are monopolies in their own state and extract extremely high prices for the insurance they provide.

            B)   State funds are highly inefficient they cannot achieve the economies of scale a federal fund can achieve.

            C)   State funds do not have regulators as knowledgeable as the regulators at FDIC.

            D)   No state fund is large enough to withstand a run on all of the banks it insures.

 

Answer: D   LOD: 2   Page: 359  

            A-Head: The Government Safety Net.

 


    41.   Deposit insurance only seems to be viable at the federal level. This is likely due to the fact that:

            A)   No state fund is large enough to withstand a run on all banks it insures.

            B)   A run on the banks within a state may be contained before it spreads countrywide.

            C)   The U.S. Treasury backs the FDIC and can therefore withstand virtually any crisis.

            D)   All of the above.

 

Answer: D   LOD: 2   Page: 359  

            A-Head: The Government Safety Net.

  http://groups.google.com/group/vuZs

    42.   The limit on FDIC insured deposits is currently $100,000. In inflation adjusted dollars, the real limit since the inception of FDIC has:

            A)   Decreased by 10%.

            B)   Stayed constant.

            C)   Increased by 20%.

            D)   Decreased by 50%

            E)   None of the above.

 

Answer: E   LOD: 2   Page: 361  

            A-Head: The Government Safety Net.

 

    43.   The most recent increase has deposit accounts insured for up to $100,000. The feeling among many economists is that the last increase was:

            A)   Warranted because it saved taxpayers tens of millions of dollars.

            B)   A disaster because it gave many shaky institutions an opportunity to use high interest rates to attract more insured deposits.

            C)   Overdue because it was needed to keep pace with inflation.

            D)   Needed to reduce the risk of moral hazard.

 

Answer: B   LOD: 2   Page: 360  

            A-Head: The Government Safety Net.

 


    44.   In the ten years after the FDIC limit was increased to $100,000:

            A)   More than four times the number of banks and savings and loans failed than did during the first 46 years of FDIC's existence.

            B)   Less than one-fourth the number of banks and savings and loans failed than during the first 46 years of FDIC's existence.

            C)   The cost to taxpayers of failed institutions in that period was negligible because FDIC was in place.

            D)   a and c

 

Answer: A   LOD: 2   Page: 360  

            A-Head: The Government Safety Net.

 

    45.   Which of the following statements is most correct?

            A)   The higher the deposit insurance limit the lower the risk of moral hazard.

            B)   The higher the deposit insurance limit the greater the risk of moral hazard.

            C)   Deposit insurance limits do not impact moral hazard, they impact adverse selection.

            D)   Increasing the deposit insurance limits above $100,000 would increase coverage for over 50 percent of all depositors.

 

Answer: B   LOD: 2   Page: 360  

            A-Head: The Government Safety Net.

 

    46.   One argument for not raising the deposit insurance limit above $100,000 is:

            A)   It would mainly benefit large banks.

            B)   Over 50% of all depositors would get an increase in coverage.

            C)   It mainly benefits a small percentage of depositors who are capable of monitoring the risks their banks take.

            D)   It would likely raise the interest rates banks would have to offer to depositors.

 

Answer: C   LOD: 2   Page: 360  

            A-Head: The Government Safety Net.

 

    47.   Since the 1920's, the ratio of assets to capital has almost tripled for commercial banks. Many economists believe this is the direct result of:

            A)   Lower quality management in banks.

            B)   The increase in branch banking.

            C)   Allowing banks to offer non-bank services.

            D)   Government provided deposit insurance.

 

Answer: D   LOD: 2   Page: 359  

            A-Head: The Government Safety Net.


    48.   The moral hazard problem caused by government safety nets:

            A)   Is greater for larger banks.

            B)   Is greater for smaller banks.

            C)   Is pretty constant across banks of all sizes.

            D)   Only exists for banks with high leverage ratios.

 

Answer: A   LOD: 2   Page: 359  

            A-Head: The Government Safety Net.

 

    49.   The government's too big to fail policy applies to:

            A)   Certain highly populated states where a bank run impacts a large percent of the total population.

            B)   Large banks whose failure would certainly start a widespread panic in the financial system.

            C)   Large corporate payroll accounts held by some banks where many people would lose their income.

            D)   Banks that have branches in more than two states.

 

Answer: B   LOD: 1   Page: 359  

            A-Head: The Government Safety Net.

 

    50.   The government's too big to fail policy:

            A)   Increases the scrutiny of the bank's risk by large corporate depositors.

            B)   Reduces the risk faced by depositors with accounts less than $100,000.

            C)   Reduces the risk faced by depositors with accounts exceeding $100,000.

            D)   Reduces the moral hazard problem of insuring large banks.

            E)   c and d

 

Answer: C   LOD: 2   Page: 359  

            A-Head: The Government Safety Net.