ECO320 Money & Banking Mid Term Exam Answer

Question 1
During the 2000s, banks became complacent about making mortgage loans because
Answer
 
 there was not a single bank failure in the decade.
 
 bank stocks performed better than the rest of the stock market.
 
 the banks counted on housing prices to keep appreciating.
 
 the government eliminated the FDIC.
5 points
Question 2
The Federal Reserve creates money by
Answer
 
 printing bills and dropping them from helicopters.
 
 giving dollar bills to banks to circulate.
 
 changing a number in its computer system.
 
 spending money on government purchases.
5 points
Question 3
In the long run, the Federal Reserve can affect
Answer
 
 inflation.
 
 output.
 
 unemployment.
 
 the exchange rate.
5 points
Question 4
The nominal interest rate minus the expected inflation rate equals the
Answer
 
 potential interest rate.
 
 natural interest rate.
 
 true interest rate.
 
 real interest rate.
5 points
Question 5
A contract that makes the owner of a security a part owner of the company that issued the security is known as
Answer
 
 a debt security.
 
 an equity security.
 
 a bond.
 
 an option.
5 points
Question 6
The market in which a security is sold from one investor to another is known as
Answer
 
 the stock market.
 
 the primary market.
 
 the secondary market.
 
 the open market.
5 points
Question 7
A contract whereby a borrower, who seeks to obtain money from someone, promises to compensate the lender in the future is known as
Answer
 
 a warrant.
 
 an exchange rate.
 
 a derivative security.
 
 a financial security.
5 points
Question 8
Investors who wish to reduce their risk should
Answer
 
 buy stocks of small companies.
 
 diversify.
 
 buy stocks of large companies.
 
 keep large amounts of cash.
5 points
Question 9
M2 includes
Answer
 
 large-denomination time deposits.
 
 term repurchase agreements.
 
 institution only money-market-mutual-funds.
 
 M1.
5 points
Question 10
Outside money is
Answer
 
 money created by the government or by nature.
 
 money created by the private sector, such as checking accounts at banks.
 
 money that has value only because the government decrees that it has value.
 
 checks that are in the process of clearing but have not cleared yet.
5 points
Question 11
A type of inside money that allows a shopper to prepay some amount and then spend it at will is a ____ card.
Answer
 
 debit
 
 credit
 
 commodity
 
 stored-value
5 points
Question 12
The demand for U.S. currency increased in the early 1990s mainly because
Answer
 
 banks began charging higher ATM fees.
 
 demand increased from Eastern Europe.
 
 people began hoarding coins.
 
 interest rates declined, reducing the opportunity cost of holding cash.
5 points
Question 13
The amount of money you would need to invest today to yield a given future amount is called
Answer
 
 future value.
 
 present value.
 
 the rate of discount.
 
 the discount factor.
5 points
Question 14
A debt security that pays interest forever and never repays the principal is
Answer
 
 a fiduciary obligation.
 
 a federal funds loans.
 
 a perpetuity.
 
 a junk bond.
5 points
Question 15
A perpetuity is a debt security
Answer
 
 with just one payment.
 
 that pays interest forever and never repays the principal.
 
 that makes a regular interest payment until maturity, at which time the face value is repaid (so there is no amortization).
 
 that makes the same dollar payment every year, amortizing the principal.
5 points
Question 16
Interest-rate risk is the risk of a change in the price of a security in the secondary market because of a change in the
Answer
 
 probability of a default.
 
 profitability of the issuer.
 
 macroeconomy.
 
 market interest rate.
5 points
Question 17
A basis point equals
Answer
 
 one hundredth of a percentage point.
 
 one tenth of a percentage point.
 
 one half of a percentage point.
 
 ten percentage points.
5 points
Question 18
If you observe that the current yield curve is inverted, it is likely that the state of the business cycle is that
Answer
 
 an economic expansion has just begun.
 
 an economic expansion has been going on for several years.
 
 a recession is about to begin.
 
 a recession is nearly over.
5 points
Question 19
When an economic expansion has just begun, you are likely to observe that
Answer
 
 the yield curve is sharply upward sloping.
 
 the yield curve is somewhat upward sloping.
 
 the yield curve is flat or inverted.
 
 the yield curve is upward sloping for short times to maturity, then downward sloping for longer times to maturity.
5 points
Question 20
When a recession is about to begin, you are likely to observe that
Answer
 
 the yield curve is sharply upward sloping.
 
 the yield curve is somewhat upward sloping.
 
 the yield curve is flat or inverted.
 
 the yield curve is upward sloping for short times to maturity, then downward sloping for longer times to maturity.
5 points
Question 21
The nominal interest rate adjusted for expected inflation is the
Answer
 
 expected real interest rate.
 
 realized real interest rate.
 
 after-tax real interest rate.
 
 yield curve.
5 points
Question 22
The amount of interest paid on a debt security in dollar terms as a percent of the principal is called the
Answer
 
 expected real interest rate.
 
 realized real interest rate.
 
 after-tax real interest rate.
 
 nominal interest rate.
5 points
Question 23
For every dollar’s worth of goods and services bought today, the amount of money it will take in N years to buy the same amount of goods and services when the average future inflation rate is πe €is called the ________ inflation discount factor.
Answer
 
 realized
 
 future
 
 expected
 
 past
5 points
Question 24
If the expected inflation rate was 4 percent and the actual inflation rate was 6 percent, then
Answer
 
 borrowers gained in real terms at the expense of lenders.
 
 lenders gained in real terms at the expense of borrowers.
 
 borrowers and lenders were not affected.
 
 the government lost because it collected less in taxes.
5 points
Question 25
The biggest disadvantage to a stockholder of receiving dividends is
Answer
 
 receiving cash flow.
 
 depositing dividend checks.
 
 hiring accountants.
 
 paying taxes.
5 points
Question 26
A mutual fund that mimics a stock index, such as the S&P 500, is called
Answer
 
 a hedge fund.
 
 an index fund.
 
 a participation pool.
 
 a mutual mutual.
5 points
Question 27
A theory that investors use all the information available to them about companies future prospects in determining their buying and selling decisions is called ________ expectations.
Answer
 
 rational
 
 irrational
 
 adaptive
 
 realized
5 points
Question 28
In the CAPM, if a stock has a beta coefficient near one, then
Answer
 
 the stock's return is less volatile than the market's average return.
 
 the stock's return is about as volatile as the market's average return.
 
 the stock's return is more volatile than the market's average return.
 
 the stock's risk is greater than its expected return.
5 points
Question 29
A bank offers credit cards with a 25 percent interest rate, when its competitors' cards have just a 15 percent interest rate. Despite the high rate, the bank finds itself losing money because many of its customers fail to repay the balances on their cards. The bank's losses are most likely to have occurred because of
Answer
 
 bad management.
 
 the lock-in effect.
 
 redlining.
 
 adverse selection.
5 points
Question 30
A bank's vault cash plus deposits at the Federal Reserve equal its
Answer
 
 government securities.
 
 transactions deposits.
 
 reserves.
 
 required reserves.
5 points
Question 31
When people or firms that are worse-than-average risks are most likely to enter a contract that is offered to everyone, the problem is called
Answer
 
 irrational expectations.
 
 adverse selection.
 
 opportunity cost.
 
 moral hazard.
5 points
Question 32
A bank's reserves equal its
Answer
 
 government securities.
 
 transactions deposits.
 
 vault cash plus deposits at the Federal Reserve.
 
 cash assets plus government securities.