Money and Banking Exam Bank
Course Introduction
This course explores the fundamental principles and functions of money and the banking system within the modern economy. It examines the nature, creation, and role of money; the structure and operations of financial institutions; and the regulatory framework governing banking activity. Students will analyze the role of central banks, the implementation of monetary policy, and the interplay between interest rates, inflation, and economic growth. The course also covers contemporary issues in banking, including digital currencies and the evolving landscape of financial intermediation.
Recommended Textbook Financial Markets and Institutions 8th Edition by Frederic Mishkin
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27 Chapters
2334 Verified Questions
2334 Flashcards
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Page 2
Chapter 1: Why Study Financial Markets and Institutions?
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Sample Questions
Q1) Interest rates are important to financial institutions since an interest rate increase ________ the cost of acquiring funds and ________ the income from assets.
A) decreases; decreases
B) increases; increases C) decreases; increases
D) increases; decreases
Answer: B
Q2) Financial institutions are among the largest employers in the country and frequently pay very high salaries.
A)True
B)False
Answer: True
Q3) A financial intermediary borrows funds from people who have saved.
A)True
B)False
Answer: True
Q4) What is money?
Answer: NOT Answerd
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Chapter 2: Overview of the Financial System
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Sample Questions
Q1) Many common stocks are traded at organized exchanges,although a majority of the largest corporations have their shares traded over the counter.
A)True
B)False
Answer: False
Q2) Banks providing depositors with checking accounts that enable them to pay their bills easily is known as
A) liquidity services.
B) asset transformation.
C) risk sharing.
D) transaction costs.
Answer: A
Q3) Which of the following financial intermediaries are depository institutions?
A) A savings and loan association
B) A commercial bank
C) A credit union
D) All of the above
E) Only A and C of the above
Answer: D
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Page 4
Chapter 3: What Do Interest Rates Mean and What Is Their
Role in Valuation?
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Sample Questions
Q1) The interest rate that equates the present value of the cash flow received from a debt instrument with its market price today is the
A) simple interest rate.
B) discount rate.
C) yield to maturity.
D) real interest rate.
Answer: C
Q2) Financial economists consider the ________ to be the most accurate measure of interest rates.
A) simple interest rate
B) discount rate
C) yield to maturity
D) real interest rate
Answer: C
Q3) When the real interest rate is high,there are greater incentives to borrow and fewer incentives to lend.
A)True
B)False
Answer: False
Page 5
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Chapter 4: Why Do Interest Rates Change?
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Sample Questions
Q1) Determining asset prices using stocks of assets rather than flow is called
A) asset transformation.
B) expected return.
C) asset market approach.
D) market equilibrium.
Q2) When the demand for bonds ________ or the supply of bonds ________,interest rates fall.
A) increases; increases
B) increases; decreases
C) decreases; decreases
D) decreases; increases
Q3) When interest rates decrease,the demand curve for bonds shifts to the left.
A)True
B)False
Q4) In Figure 4.3,an increase in the interest rate from i? t? i? can be explained by A) a decrease in money growth.
B) an increase in money growth.
C) a decline in the price level.
D) an increase in the expected price level.
Q5) What is the difference between systematic and nonsystematic risk?
Page 6
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Chapter 5: How Do Risk and Term Structure Affect Interest
Rates?
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Sample Questions
Q1) A corporation suffering big losses might be more likely to suspend interest payments on its bonds,thereby
A) raising the default risk and causing the demand for its bonds to rise.
B) raising the default risk and causing the demand for its bonds to fall.
C) lowering the default risk and causing the demand for its bonds to rise.
D) lowering the default risk and causing the demand for its bonds to fall.
Q2) According to the expectations theory of the term structure,
A) yield curves should be equally likely to slope downward as to slope upward.
B) when the yield curve is steeply upward-sloping, short-term interest rates are expected to rise in the future.
C) when the yield curve is downward-sloping, short-term interest rates are expected to remain relatively stable in the future.
D) all of the above.
E) only A and B of the above.
Q3) ________ bonds are exempt from federal income taxes.
A) Corporate Aaa
B) U.S. Treasury
C) Corporate Baa
D) Municipal
Page 7
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Chapter 6: Are Financial Markets Efficient?
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Sample Questions
Q1) "Short selling" refers to the practice of buying a stock and holding it for only a short time before selling it.
A)True
B)False
Q2) In an efficient market,abnormal returns are not possible,even using inside information.
A)True
B)False
Q3) Technical analysis is a popular technique used to predict stock prices by studying past stock price data and searching for patterns such as trends and regular cycles.
A)True
B)False
Q4) The efficient market hypothesis applies to A) both the stock market and the foreign exchange market. B) the stock market but not the foreign exchange market. C) the foreign exchange market but not the stock market.
D) neither the stock market nor the foreign exchange market.
Q5) What is a rational bubble?
Q6) Give evidence both for and against market efficiency.
Page 8
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Chapter 7: Why Do Financial Institutions Exist?
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Sample Questions
Q1) A conflict of interest between providing impartial research about companies issuing securities and selling those same securities arises in
A) investment banking.
B) commercial banking.
C) accounting firms.
D) mutual funds.
Q2) Collateral is
A) property that is pledged to the lender if a borrower cannot make his or her debt payments.
B) a prevalent feature of debt contracts for households.
C) a prevalent feature of debt contracts for businesses.
D) all of the above.
E) only A and C of the above.
Q3) What is the free-rider problem? Describe some situations that this problem creates.
Q4) Conflicts of interest pose a problem because they
A) lower the quality of information.
B) increase problems of asymmetric information.
C) make the financial system less efficient.
D) do all of the above.
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Chapter 8: Why Do Financial Crises Occur and
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Sample Questions
Q1) Debt deflation refers to the decline in debt values as creditors agree to lower interest rates as an alternative to defaults.
A)True
B)False
Q2) Financial crises
A) are major disruptions in financial markets that are characterized by sharp declines in asset prices and the failures of many financial and nonfinancial firms.
B) occur when adverse selection and moral hazard problems in financial markets become more significant.
C) frequently lead to sharp contractions in economic activity.
D) are all of the above.
E) are only A and B of the above.
Q3) The failure of Ohio Life Insurance and Trust in 1857 did not signal the start of a recession due to prompt actions by the Fed.
A)True
B)False
Q4) Why was the shadow banking system important during the 2007-2009 U.S.financial crisis?
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10
Chapter 9: Central Banks and the Federal Reserve System
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Sample Questions
Q1) The Federal Reserve banks act as liaisons between the business community and the Federal Reserve System.
A)True
B)False
Q2) The Washington,D.C.Fed bank,with over 30 percent of the system's assets,is the most important Federal Reserve Bank.
A)True
B)False
Q3) What is the theory of bureaucratic behavior? What types of behavior does it predict the Fed might undertake?
Q4) Which of the following are true statements?
A) The FOMC usually meets every six weeks to set monetary policy.
B) The FOMC issues directives to the trading desk at the New York Fed.
C) Designers of the Federal Reserve Act did not envision the use of open market operations as a monetary policy tool.
D) All of the above are true statements.
E) Only A and B of the above are true statements.
Q5) Are central banks in other nations moving toward more or less independence? Why?
Q6) What are the factors that promote the independence of the Federal Reserve?
Page 11
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Chapter 10: Conduct of Monetary Policy: Tools, Goals, Strategy, and Tactics
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Sample Questions
Q1) When the Federal Reserve was created,its most important role was intended to be
A) a storage facility for the nation's gold.
B) a lender of last resort.
C) a regulator of bank holding companies.
D) none of the above.
Q2) Can the Fed control the money supply? Has it done so? What evidence can you provide to support your answer to each question?
Q3) Which of the following is not an operating target?
A) Nonborrowed reserves
B) Monetary base
C) Federal funds interest rate
D) Discount rate
E) All are operating targets
Q4) If the desired intermediate target is an interest rate,then the preferred operating target will be a(n)________ variable like the ________.
A) interest rate; three-month Treasury bill rate
B) interest rate; federal funds rate
C) reserve aggregate; monetary base
D) reserve aggregate; nonborrowed base
Page 12
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Chapter 11: The Money Markets
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Sample Questions
Q1) The primary function of large diversified brokerage firms in the money market is to
A) sell money market securities to the Federal Reserve for its open market operations.
B) make a market for money market securities by maintaining an inventory from which to buy or sell.
C) buy money market securities from corporations that need liquidity.
D) buy T-bills from the U.S. Treasury Department.
Q2) Activity in money markets increased significantly in the late 1970s and early 1980s because of
A) rising short-term interest rates.
B) regulations that limited what banks could pay for deposits.
C) both A and B of the above.
D) neither A nor B of the above.
Q3) Repos are
A) usually low-risk loans.
B) usually collateralized with Treasury securities.
C) low interest rate loans.
D) all of the above.
E) only A and B of the above.
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Chapter 12: The Bond Market
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Sample Questions
Q1) (I)The coupon rate is the rate of interest that the issuer of the bond must pay. (II)The coupon rate is usually fixed for the duration of the bond and does not fluctuate with market interest rates.
A) (I) is true, (II) false.
B) (I) is false, (II) true.
C) Both are true.
D) Both are false.
Q2) To sell an old bond when interest rates have ________,the holder will have to ________ the price of the bond until the yield to the buyer is the same as the market rate.
A) risen; lower
B) risen; raise
C) fallen; lower
D) risen; inflate
Q3) The current yield on a bond is a good approximation of the bond's yield to maturity when the bond matures in five years or less and its price differs from its par value by a large amount.
A)True
B)False
Q4) What role do restrictive covenants play in bond markets?
Page 14
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Chapter 13: The Stock Market
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Sample Questions
Q1) In the generalized dividend valuation model,a stock's value depends only on
A) its future dividend payments and its future price.
B) its future dividend payments and the required return on equity.
C) its future price and the required return on investments on equity.
D) its future dividend payments.
Q2) Suppose the average industry PE ratio for auto parts retailers is 20.What is the current price of Auto Zone stock if the retailer's earnings per share is projected to be $1.85?
A) $21.85
B) $37
C) $10.81
D) $9.25
Q3) (I)Firms issue common stock in far greater amounts than preferred stock. (II)In a given year,the total volume of stock issued is much less than the volume of bonds issued.
A) (I) is true, (II) false.
B) (I) is false, (II) true.
C) Both are true.
D) Both are false.
Q4) What is the role of specialists on a stock exchange?
Page 15
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Chapter 14: The Mortgage Markets
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Sample Questions
Q1) During the early years of a balloon mortgage loan,the lender applies
A) most of the monthly payment to the outstanding principal balance.
B) all of the monthly payment to the outstanding principal balance.
C) most of the monthly payment to interest on the loan.
D) all of the monthly payment to interest on the loan.
E) the monthly payment equally to interest on the loan and the outstanding principal balance.
Q2) Which of the following are useful for home buyers who expect their income to rise in the future?
A) GPMs
B) RAMs
C) GEMs
D) Only A and B are useful.
E) Only A and C are useful.
Q3) Why may Fannie Mae and Freddie Mac pose a threat to the health of the financial system?
Q4) In 2012,mortgage loans to farms represented the largest proportion of mortgage lending in the U.S.
A)True
B)False
Page 16
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Chapter 15: The Foreign Exchange Market
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Sample Questions
Q1) The expected return on dollar deposits in terms of foreign currency is the ________ the interest rate on dollar deposits and the expected appreciation of the dollar.
A) product of B) ratio of C) sum of
D) difference in
Q2) Forward exchange rates
A) involve the immediate exchange of bank deposits.
B) involve the exchange of bank deposits at some specified future date.
C) involve the immediate exchange of imports and exports.
D) none of the above.
Q3) If the 2005 inflation rate in Britain is 6 percent,and the inflation rate in the U.S.is 4 percent,then the theory of purchasing power parity predicts that,during 2005,the value of the British pound in terms of U.S.dollars will
A) rise by 10 percent.
B) rise by 2 percent.
C) fall by 10 percent.
D) fall by 2 percent.
E) do none of the above.
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Page 17
Chapter 16: The International Financial System
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Sample Questions
Q1) Which of the following appears in the capital account part of the balance of payments?
A) A gift to an American from his English aunt
B) A purchase by the Honda corporation of a U.S. Treasury bill
C) A purchase by the Bank of England of a U.S. Treasury bill
D) Income earned by the Honda corporation on its automobile plant in Ohio
Q2) If a central bank does not want to see its currency fall in value,it may pursue ________ monetary policy to ________ the domestic interest rate,thereby strengthening its currency.
A) expansionary; raise
B) contractionary; raise
C) expansionary; lower
D) contractionary; lower
Q3) The capital account describes ________.
A) international transactions that involve currently produced goods and services
B) the flow of capital between the U.S. and other countries
C) payments between the U.S. and other countries
D) current IOUs of the U.S.
Q4) What features of the European Monetary Union caused problems during the global financial crisis?
Page 18
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Chapter 17: Banking and the Management of Financial Institutions
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Sample Questions
Q1) In 2009 provisions for loan losses reached a new peak of ________ of total operating expenses.
A) 60%
B) 50%
C) 33%
D) 13%
Q2) In the late 1960s,
A) money market banks no longer needed to depend on checkable deposits as the primary source of bank funds.
B) banks aggressively set target goals for their asset growth.
C) the new management of liabilities created more flexibility.
D) all of the above.
Q3) Which of the following are reported as assets on a bank's balance sheet?
A) Discount loans from the Fed
B) Loans
C) Borrowings
D) Only A and B of the above
Q4) What costs do banks hope to avoid by holding excess reserves?
Q6) How did liability management change during the 1960s? Page 19
Q5) Explain how a capital crunch can lead to a credit crunch in our economy.
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Page 20
Chapter 18: Financial Regulation
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Sample Questions
Q1) The chartering process is especially designed to deal with the ________ problem,and restrictions on asset holdings help to reduce the ________ problem.
A) adverse selection; adverse selection
B) adverse selection; moral hazard
C) moral hazard; adverse selection
D) moral hazard; moral hazard
Q2) Discuss some of the problems of Basel 2 that the global financial crisis revealed.
Q3) Describe 2 of the 5 different categories of regulation found in the Dodd-Frank legislation of 2010.
Q4) What accounts for the problems facing China's four largest banks?
A) Large loans to inefficient, state-owned enterprises
B) Closing of unprofitable branches and laying off unproductive employees
C) Selling shares in the bank overseas to raise capital
D) All of the above
Q5) The Dodd-Frank legislation of 2010 finally resolved the status of GSEs such as Freddie Mac.
A)True
B)False
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Chapter 19: Banking Industry: Structure and Competition
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Sample Questions
Q1) A bank with a large credit-card customer base can market other financial products to these customers at a low cost.This is an example of
A) economies of scale.
B) economies of scope.
C) becoming a superregional bank.
D) none of the above.
Q2) Checkable deposits,a traditional source of low-cost funds for banks,have declined dramatically in importance,falling from over 60 percent of bank liabilities to less than 10 percent today.
A)True
B)False
Q3) Reserve requirements that force banks to keep a certain fraction of their deposits as reserves and restrictions on the interest rates that can be paid on deposits have been the major forces behind financial innovation.
A)True
B)False
Q4) Are bank consolidations and nationwide banking good things? Why?
Q5) Discuss some of the major milestones in the development of the U.S.banking system.
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Chapter 20: The Mutual Fund Industry
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Sample Questions
Q1) Describe the practices of late trading and market timing and explain how these practices harm a mutual fund's shareholders.
Q2) The net asset value of a mutual fund is the average market price of the stocks,bonds,and other assets the fund owns.
A)True B)False
Q3) Which of the following is an advantage to investors of an open-end mutual fund?
A) Once all the shares have been sold, the investor does not have to put in more money.
B) The investors can sell their shares in the over-the-counter market with low transaction fees.
C) The fund agrees to redeem shares at any time.
D) The market value of the fund's shares may be higher than the value of the assets held by the fund.
Q4) SEC research suggests that about three-fourths of mutual funds let privileged shareholders engage in market timing.
A)True B)False
Q5) Discuss the four primary classes of mutual funds available to investors.
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Chapter 21: Insurance Companies and Pension Funds
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Sample Questions
Q1) A whole life insurance policy pays a death benefit if the policyholder dies.
A)True
B)False
Q2) ________ companies get a tax advantage; most new insurance companies organize as ________ companies.
A) Mutual insurance; mutual insurance
B) Mutual insurance; stock
C) Stock; stock
D) Stock; mutual insurance
Q3) Why must insurance companies screen applicants so carefully?
Q4) In the case of an insurance policy,________ occurs when the existence of insurance encourages the insured party to take risks that increase the likelihood of an insurance payoff.
A) moral hazard
B) opportunism
C) adverse selection
D) shirking
Q5) Distinguish between different types of life insurance.
Q6) Who has the strongest incentive to monitor the performance of individual pension plans such as Keoghs and IRAs? Explain.
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Chapter 22: Investment Banks, Security Brokers and
Dealers, and Venture Capital Firms
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Q1) Which of the following best explains the difference between brokers and dealers?
A) Brokers are pure middlemen; dealers make markets by standing ready to buy and sell at given prices.
B) Dealers are pure middlemen; brokers make markets by standing ready to buy and sell at given prices.
C) Dealers link up buyers and sellers, but do not stand ready to buy and sell from their inventories of securities; brokers stand ready to buy and sell from their inventories of securities.
D) There is no difference between brokers and dealers.
Q2) Which of the following provides funds to companies not yet ready to sell securities to the public?
A) Investment banks
B) Securities brokers and dealers
C) Venture capital firms
D) None of the above
Q3) One disadvantage of the private placement of securities issues is the high cost of registering the issue.
A)True
B)False
Page 25
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Chapter 23: Risk Management in Financial Institutions
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Sample Questions
Q1) How do the concepts of adverse selection and moral hazard explain the credit risk management principles that banks adopt?
Q2) Provisions in loan contracts that proscribe borrowers from engaging in specified risky activities are called ________.
A) proscription bonds
B) collateral clauses
C) restrictive covenants
D) liens
Q3) Banks attempt to screen good credit risks from bad to reduce the incidence of loan defaults.To do this,banks
A) specialize in lending to certain industries or regions.
B) write restrictive covenants into loan contracts.
C) expend resources to acquire accurate credit histories of their potential loan customers.
D) do all of the above.
Q4) If a bank has more rate-sensitive liabilities than assets,then an increase in interest rates will reduce bank profits.
A)True
B)False
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Chapter 24: Hedging with Financial Derivatives
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Sample Questions
Q1) By selling short a futures contract of $100,000 at a price of 96,you are agreeing to deliver ________ face value securities for ________.
A) $100,000; $104,167
B) $96,000; $100,000
C) $100,000; $96,000
D) $100,000; $100,000
Q2) The main disadvantage of futures contracts as compared to options on futures contracts is that futures
A) remove the possibility of gains.
B) increase the transactions cost.
C) are not as effective a hedge.
D) do not remove the possibility of losses.
Q3) Options on individual stocks are referred to as ________.
A) stock options
B) futures options
C) American options
D) individual options
Q4) How would a firm use exchange rate futures to lock in current exchange rates?
Q5) Define and distinguish between call options and put options.
Q6) Distinguish between forward and futures contracts.
Page 27
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Chapter 25: Financial Crises In Emerging Market Economies
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Sample Questions
Q1) Financial crises
A) are major disruptions in financial markets that are characterized by sharp declines in asset prices and the failures of many financial and nonfinancial firms.
B) occur when adverse selection and moral hazard problems in financial markets become more significant.
C) frequently lead to sharp contractions in economic activity.
D) are all of the above.
E) are only A and B of the above.
Q2) For both emerging market economies and advanced economies,Stage Two of a financial crisis is the same - a banking crisis.
A)True
B)False
Q3) In South Korea,the primary force leading to their financial crisis in 1997 was ________.
A) financial liberalization
B) fiscal mismanagement on the part of the government
C) fraud in financial markets
D) all of the above
E) only B and C of the above
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Chapter 26: Savings Associations and Credit Unions
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Sample Questions
Q1) Which of the following reasons explain why federal regulators adopted a policy of regulatory forbearance toward insolvent financial institutions in the early 1980s?
A) The FSLIC lacked sufficient funds to cover insured deposits in the insolvent S&Ls.
B) The regulators were reluctant to close the firms that justified their regulatory existence.
C) The Federal Home Loan Bank Board and the FSLIC were reluctant to admit that they were in over their heads with problems.
D) All of the above are reasons.
E) Only A and B of the above are reasons.
Q2) How has the thrift industry been transformed since FIRREA?
Q3) Examples of the huge risks that "zombie S&Ls" undertook include
A) building shopping centers in the desert.
B) buying manufacturing plants to convert manure to methane.
C) purchasing billions of dollars of junk bonds.
D) all of the above.
E) only A and B of the above.
Q4) Discuss the background of mutual savings banks and how this lead to the creation of S&Ls.
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Page 29
Chapter 27: Finance Companies
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Sample Questions
Q1) As presented in the Consolidated Finance Company Balance Sheet,the largest asset of finance companies is consumer loans,representing ________ of assets.
A) 10%
B) 22%
C) 25%
D) 33%
Q2) Commercial paper is an important source of funding for finance companies.As presented in the Consolidated Finance Company Balance Sheet,commercial paper represents about ________ of their liabilities.
A) 3.9%
B) 5.8%
C) 12.5%
D) 20.0%
Q3) What is default risk?
A) A problem that arises when a firm runs short of cash.
B) The risk of asset prices rising too high.
C) The chance that the borrower will fail to repay a loan.
D) The risk associated with longer-term contracts.
Q4) What are the various types of finance companies?
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