Money and Banking Test Preparation
Course Introduction
Money and Banking explores the fundamental roles played by money, financial institutions, and markets in the modern economy. This course examines the nature and functions of money, the mechanics of bank operations, the creation of money through lending, and the crucial role of central banks in regulating money supply and interest rates. Students will analyze how banks and other financial intermediaries facilitate economic activity, study monetary policy tools and objectives, and understand the impact of banking regulations on financial stability. The course also discusses contemporary issues such as digital currencies, financial crises, and the evolving landscape of the global financial system.
Recommended Textbook
Money Banking and the Financial System 2nd Edition by Glenn P. Hubbard
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18 Chapters
1827 Verified Questions
1827 Flashcards
Source URL: https://quizplus.com/study-set/2636
Page 2
Chapter 1: Introducing Money and the Financial System
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64 Verified Questions
64 Flashcards
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Sample Questions
Q1) The Troubled Asset Relief Program (TARP)allowed
A)the Treasury to inject funds into commercial banks in return for stock in the banks.
B)the Fed to provide funds to commercial banks in return for stock.
C)the Treasury to insure bank deposits at major U.S. banks.
D)the Fed to make loans to banks as the lender of last resort.
Answer: A
Q2) In the United States, monetary policy is carried out by
A)the Federal Reserve System.
B)Congress.
C)the President.
D)Congress and the President acting together.
Answer: A
Q3) The financial system performs the role of communicating information by
A)constantly increasing the liquidity of most assets.
B)constantly reducing the riskiness of most assets.
C)incorporating all available information into the prices of financial assets.
D)providing to investors for a nominal charge all government reports available about a particular company.
Answer: C
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Page 3
Chapter 2: Money and the Payments System
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113 Verified Questions
113 Flashcards
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Sample Questions
Q1) Under a system of barter
A)each individual trades output directly with another.
B)only agricultural goods may be traded.
C)goods may be traded for money, but money may not be traded for goods.
D)currency is accepted for purchases, but personal checks are not.
Answer: A
Q2) Which function of money allows for specialization to take place?
A)medium of exchange
B)unit of account
C)store of value
D)standard of deferred payment
Answer: A
Q3) Suppose $100 buys less in the year 2013 than in 2000. Then we can say that
A)money's store of value has decreased.
B)money's store of value has increased.
C)the economy must have been growing rapidly between 2000 and 2013.
D)the economy must have been growing slowly between 2000 and 2013.
Answer: A
Q4) In what way are other assets less liquid than money?
Answer: You incur transactions costs when you exchange other assets for money.
Page 4
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Chapter 3: Interest Rates and Rates of Return
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111 Verified Questions
111 Flashcards
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Sample Questions
Q1) The price of a financial asset equals the A)future value of all payments
B)sum of all payments
C)present value of all future payments
D)difference between the future value and present value of all payments
Answer: C
Q2) With respect to U.S. Treasury bills,
A)the bid price is always greater than the asked price.
B)the asked price is always greater than the bid price.
C)the bid price is only greater than the asked price if investors expect interest rates to decline in the future.
D)the asked price is only greater than the bid price if investors expect interest rates to decline in the future.
Answer: B
Q3) Suppose you purchase a bond with a coupon of $30 for $1025. You sell it one year later for $1050. What rate of return did you earn? Report a percentage with two decimal places.
Answer: The rate of return is $30/$1025 + ($1050 - $1025)/$1025 = 5.37%.
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5
Chapter 4: Determining Interest Rates
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124 Verified Questions
124 Flashcards
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Sample Questions
Q1) Diversification is most effective in reducing:
A)market risk
B)systemic risk
C)idiosyncratic risk
D)all forms of risk
Q2) If the federal government decreases its spending and doesn't decrease taxes, the bond supply shifts to the
A)left and the equilibrium interest rate rises.
B)left and the equilibrium interest rate falls.
C)right and the equilibrium interest rate rises.
D)right and the equilibrium interest rate falls.
Q3) An investor who bases the decision to buy an asset solely on the expected return of an asset is considered to be:
A)risk loving
B)risk averse
C)risk neutral
D)risk avoiding
Q4) Assess the impact on the bond market of the rise in Internet trading of stocks.
Q5) What is a black swan event?
Q6) How can diversification reduce idiosyncratic risk but not systematic risk?
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Chapter 5: The Risk Structure and Term Structure of Interest
Rates
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105 Verified Questions
105 Flashcards
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Sample Questions
Q1) Which interest rate is typically the lowest?
A)3-month Treasury bills
B)2-year Treasury notes
C)10-year Treasury bonds
D)30-year Treasury bonds
Q2) Describe the facts found in the bond market about the relationship between interest rates on bonds of different maturities.
Q3) Discuss what happened to the market prices on corporate securities relative to government securities during the Great Recession.
Q4) Default risk arises from the fact that
A)borrowers differ in their ability to repay in full the principal and interest required by a loan agreement.
B)the bond price drops when interest rates rise.
C)it is inherently riskier to wait for a capital gain than to receive an immediate interest payment.
D)interest rates are far more likely to go up than to go down.
Q5) Suppose the private bond rating agencies ceased to exist. What would be the impact on the bond market?
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Chapter 6: The Stock Market, Information, and Financial
Market Efficiency
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111 Verified Questions
111 Flashcards
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Sample Questions
Q1) Which of the following is NOT a popular stock market index?
A)Dow Jones Industrial Average
B)NASDAQ
C)S&P 500
D)Moody's Market Index
Q2) Explain how a bubble can develop in the market for an asset.
Q3) What should affect the fundamental value of a stock according to the efficient markets hypothesis?
Q4) The small-firm effect
A)shows that investments in the stocks of small firms would have earned a below-normal return during the period beginning in the mid-1920s.
B)may be the result of the low liquidity and high information costs of small-firm stock.
C)was stronger during the 1980s than in previous decades.
D)is the tendency for stocks of large firms to outperform those of small firms.
Q5) Suppose 3M pays a dividend of $2 per share which the investor is expected to receive immediately. The dividend is expected to grow by 5% per year and the investor has a required rate of return of 8%. What should be the current price of the stock according to the Gordon-Growth model?
Page 8
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Chapter 7: Derivatives and Derivative Markets
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115 Verified Questions
115 Flashcards
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Sample Questions
Q1) Spot transactions
A)involve immediate settlement.
B)may only take place in face-to-face trading.
C)take place on-the-spot, rather than on an organized exchange.
D)are relatively unimportant in financial markets.
Q2) The seller of a futures contract
A)assumes the long position.
B)has the obligation to deliver the underlying financial instrument at the specified date.
C)has the obligation to receive the underlying financial instrument at the specified future date.
D)may, at his or her option, deliver or receive the underlying financial instrument at the specified date.
Q3) Futures trading practices in the United States are regulated by
A)the Chicago Board of Trade.
B)the Chicago Mercantile Exchange.
C)the Commodities Futures Trading Commission.
D)the Board of Futures Trading.
Q4) Why do futures have lower information costs and higher liquidity than forward contracts?
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Chapter 8: The Market for Foreign Exchange
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99 Verified Questions
99 Flashcards
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Sample Questions
Q1) When a country's nominal exchange rate appreciates, the price of
A)that country's goods abroad increases.
B)that country's goods abroad decreases.
C)foreign goods sold in the country increases.
D)that country's goods produced and sold at home increases.
Q2) If the nominal interest rate parity condition is not met,
A)imports will exceed exports.
B)the return from holding domestic assets must exceed the expected return from holding foreign assets.
C)the return from holding domestic assets must be less than the expected return from holding foreign assets.
D)the return from holding domestic assets must be greater or less than the expected return from holding foreign assets.
Q3) An exporter can hedge against the possible decline in a foreign currency by purchasing
A)put options on the currency.
B)call options on the currency.
C)the currency on the spot market.
D)currency on forward contracts.
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Page 10
Chapter 9: Transactions Costs, Asymmetric Information, and the Structure of the Financial System
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107 Verified Questions
107 Flashcards
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Sample Questions
Q1) All of the following are consequences of adverse selection on good firms EXCEPT
A)the cost of external financing increases.
B)firms need to rely more on internal funds.
C)firms need to rely more on accumulated profits.
D)firms will only be able to attain financing from the government.
Q2) Government regulations requiring firms that desire to sell securities in financial markets to disclose all available information
A)eliminate the adverse selection problem (when rigorously enforced).
B)increase the difficulty that young firms may have in raising funds.
C)eliminate the moral hazard problem in securities markets.
D)fail to eliminate the adverse selection problem, in part because they do not greatly reduce the difficulty that young firms have in raising funds.
Q3) How does adverse selection in financial markets affect the method by which firms raise funds?
Q4) How do car dealers help reduce adverse selection?
Q5) How does the principal-agent problem increase the possibility of moral hazard?
Q6) What are the reasons why disclosure by the SEC do not eliminate the information costs of adverse selection?
11
Q7) What are the information costs faced by savers?
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Chapter 10: The Economics of Banking
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139 Verified Questions
139 Flashcards
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Sample Questions
Q1) Which of the following is a hybrid of a checking and savings account?
A)CD
B)negotiable CD
C)passbook accounts
D)money market deposit account
Q2) Compare the characteristics of loans and marketable securities in terms of liquidity, risk, and information costs.
Q3) What steps can a bank take to deal with a significant outflow of deposits?
Q4) The interest rate on unsecured loans between banks is called the
A)discount rate.
B)repurchase rate.
C)T-bill rate.
D)federal funds rate.
Q5) Using statistical models to estimate the maximum losses a portfolio's value is likely to sustain over a particular time period is called:
A)gap analysis
B)duration analysis
C)value-at-risk approach
D)credit-risk analysis
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Chapter 11: Investment Banks, Mutual Funds, Hedge Funds, and the Shadow Banking System
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85 Verified Questions
85 Flashcards
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Sample Questions
Q1) Which of the following rules affected hedge funds as a result of the Dodd-Frank Act of 2010?
A)Hedge funds have to make detailed disclosure of their asset holdings.
B)Large hedge funds must register with the SEC.
C)Investors are allowed to make withdrawals after the first week.
D)Carried interest is taxed as ordinary income.
Q2) Compare and contrast hedge funds and mutual funds in terms of the benefits and drawbacks of each.
Q3) Hedge funds have been criticized for
A)their heavy use of short selling.
B)their inability to mobilize a large amount of funds.
C)forcing quick price changes that reduce market inefficiencies.
D)excessive use of hedging strategies.
Q4) To deal with difficulties in administering pension funds, Congress in 1974 passed the
A)Corrupt Pension Fund Reform Act.
B)Securities and Exchange Act.
C)Employee Retirement Income Security Act.
D)Social Security Act.
Q5) How do defined-contribution plans differ from defined-benefit plans?
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Chapter 12: Financial Crises and Financial Regulation
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75 Verified Questions
75 Flashcards
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Sample Questions
Q1) In 1971 money market mutual funds were introduced as an alternative to A)commercial paper.
B)Treasury bills.
C)repurchase agreements.
D)bank deposits.
Q2) What was the purpose of the stress test administered by the Treasury in 2009?
A)Evaluate potential losses of Fannie Mae and Freddie Mac.
B)Assess the viability of AIG.
C)Gauge how well the largest financial firms would fare if the recession deepened.
D)Evaluate the solvency of the major investment banks.
Q3) An ATS account
A)converts a corporation's checking account balance at the end of the day into an overnight repurchase agreement.
B)is the name given to NOW accounts outside of New England.
C)are negotiable certificates of deposit of less than $100,000.
D)were used during the Great Depression by depositors who had lost faith in conventional checking accounts.
Q4) What are the two most common reasons for a sovereign debt crisis?
Q5) What are the primary reasons for and against a policy of "too big to fail."
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Chapter 13: The Federal Reserve and Central Banking
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102 Verified Questions
102 Flashcards
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Sample Questions
Q1) The movement to set up a central bank in the United States was spurred by the financial panic that occurred in A)1816.
B)1907.
C)1929.
D)1987.
Q2) The political business cycle theory predicts that
A)the Fed acts to promote the interests of the general public.
B)the Fed acts to stimulate economic activity before an election.
C)the President's appointments to the Board of Governors will usually be politicians.
D)political factors over which the Fed has no control are most important in explaining the business cycle.
Q3) The Federal Reserve district banks
A)do not engage in monetary policy.
B)engage in monetary policy directly through discount lending.
C)engage in monetary policy directly through open market operations.
D)engage in monetary policy directly through their membership on Federal Reserve committees.
Q4) What was the original intent of the Federal Reserve Act of 1913?
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Chapter 14: The Federal Reserves Balance Sheet and the
Money Supply Process
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77 Verified Questions
77 Flashcards
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Sample Questions
Q1) If the Fed makes a discount loan of $2 million to a commercial bank, the Fed's balance sheet will show
A)an increase in discount loans of $2 million and an increase in bank reserves of $2 million.
B)an increase in discount loans of $2 million and a decrease in bank reserves of $2 million.
C)a decrease in discount loans of $2 million and an increase in bank reserves of $2 million.
D)a decrease in discount loans of $2 million and a decrease in bank reserves of $2 million.
Q2) If banks hold no excess reserves, checkable deposits total $1.5 billion, currency totals $400 million, and the required reserve ratio is 10%, then the monetary base equals A)$550 million.
B)$1.54 billion.
C)$1.9 billion
D)$15 billion.
Q3) What unusual policy actions did the Fed take during the Financial Crisis of 2007-2009 that affected its balance sheet?
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Chapter 15: Monetary Policy
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121 Verified Questions
121 Flashcards
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Sample Questions
Q1) The third round of quantitative easing, announced in September 2012, was focused on purchases of:
A)short-term Treasury bills
B)long-term Treasury notes
C)long-term Treasury notes and sales of short-term Treasury bills
D)mortgage-backed securities
Q2) Which of the following statements accurately describes the Fed's control of discount policy?
A)It controls discount policy more completely than it controls open market operations.
B)It must abide by discount rates set by Congress.
C)It controls discount policy less completely than it controls open market operations.
D)It controls discount policy completely, just as it controls open market operations.
Q3) In practice, the ECB has committed to what type of strategy for monetary policy?
A)inflation targeting
B)monetary targeting
C)unclear as to inflation or monetary targeting
D)exchange rate targeting
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Chapter 16: The International Financial System and Monetary Policy
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103 Verified Questions
103 Flashcards
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Sample Questions
Q1) The speculative attack on the British pound in 1967 succeeded because
A)the pound was seriously undervalued relative to the dollar.
B)Britain decided to drop out of the Bretton Woods system.
C)British exports greatly exceeded British imports, causing a large inflow of gold.
D)the Bank of England lacked the international reserves to defend the existing exchange rate indefinitely.
Q2) The official settlement balance
A)is an amount that the IMF requires each member country to pay annually.
B)must by definition always be zero.
C)equals the current account balance divided by the capital account balance.
D)equals the net increase in a country's official reserve assets.
Q3) In what sense does the IMF act as a lender of last resort? How might the IMF's actions during the Mexican crisis of the mid-1990s have contributed to the Asian currency crisis a few years later?
Q4) In the balance-of-payments accounts, the statistical discrepancy
A)equals the capital account balance minus the current account balance.
B)equals the current account balance minus the capital account balance.
C)probably reflects hidden capital flows.
D)must equal zero.
Page 18
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Chapter 17: Monetary Theory I: The Aggregate Demand and Aggregate Supply Model
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98 Verified Questions
98 Flashcards
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Sample Questions
Q1) An increase in the price level reduces net exports because
A)it leads indirectly to a higher exchange rate.
B)it leads indirectly to a lower exchange rate.
C)it leads indirectly to a lower real interest rate.
D)it leads directly to higher real money balances.
Q2) If there is a decrease in the expected future profitability of capital,
A)the aggregate demand curve will shift right.
B)the aggregate demand curve will shift left.
C)the aggregate demand curve will become steeper.
D)the aggregate demand curve will be unaffected.
Q3) During the years from 1964 to 1969, inflation increased in the United States
A)when the AD curve shifted up and to the right, even though the SRAS curve remained stable.
B)when the SRAS curve shifted up and to the left, even though the AD curve remained stable.
C)when the AD curve shifted up and to the right and the SRAS curve shifted up and to the left.
D)despite the AD and SRAS curves remaining stable.
Q4) How does an increase in interest rates affect net exports?
Q5) What are the principal sources of change in productivity growth?
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Chapter 18: Monetary Theory II: The IS-MP Model
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78 Verified Questions
78 Flashcards
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Sample Questions
Q1) In the bank lending channel, an important reason for output increases in the short run after an expansionary monetary policy is that
A)the funds directly available for households and firms to spend will increase.
B)prices will increase, making increased production more profitable for firms.
C)the increase in government spending from an expansionary monetary policy increases output through the multiplier effect.
D)the ability of banks to make loans will increase.
Q2) Monetary policy can have substantial effects on the economy even when nominal interest rates are very low
A)since real rates are what affects borrowing and spending decisions.
B)by improving borrower and bank balance sheets.
C)by reducing transactions costs.
D)only when the policy is substantial.
Q3) An increase in the output gap causes the demand for real balances
A)to rise and the interest rate to fall.
B)to fall and the interest rate to rise.
C)and the interest rate to fall.
D)and the interest rate to rise.
Q4) How does the goods market return to equilibrium if AE is less than production?
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