Q&A Hero

Q: A thrift institution that obtains a federal charter obtains its charter from which government agency?a. The Federal Savings and Loan Insurance Corporation b. Federal Reservec. The Office of Thrift Supervisiond. The Office of Comptroller of Currency

Q: Credit Unions get slight competitive advantage over commercial banks and thrifts because they a. get their charter from the Comptroller of the Currency.b. get tax exemptions as they are often run as non-profit organizations. c. are insured by the Federal Deposit Insurance Corporation.d. can rely on the funds from the Federal Reserve at times of emergency.

Q: Federal funds are A) the tax revenues of the Federal government. B) loans by the Federal Reserve to banks. C) loans by banks to the Federal Reserve. D) short-term loans between banks.

Q: Rank the components of aggregate demand by their sensitivity to changes in the real interest rate. Start with the most sensitive to the least sensitive.

Q: Which component of aggregate expenditures is the least sensitive to changes in the real interest rate? A. InvestmentB. ConsumptionC. Net exportsD. Government purchases

Q: Which of the following illustrates a difference between the Federal Reserve and the Federal Deposit InsuranceCorporation?a. The Fed supervises most of the largest banks; whereas the Federal Deposit Insurance Corporation has mostlyvery small banks under its supervision.b. The Fed supervises state banks that do are not the members of the Federal Reserve System; whereas theFederal Deposit Insurance Corporation supervises all financial holding companies.c. The Fed supervises national banks that are not in Financial Holding Companies or bank holding companies;whereas the Federal Deposit Insurance Corporation supervises bank holding companies.d. The Fed supervises credit unions; whereas the Federal Deposit Insurance Corporation supervises thriftinstitutions.

Q: Loans by the Federal Reserve to banks are known as A) repurchase agreements. B) Federal funds. C) discount loans. D) cash items in the process of collection.

Q: The free-rider problem faced by private information-collection firms results in their A) usually going out of business within a few years. B) collecting less than all the available information about the firms they investigate. C) being plagued by lawsuits. D) charging fees higher than can be justified by market conditions.

Q: If changes in the nominal federal funds rate result in equal changes to the expected rate of inflation, how effective would it be for the FOMC to target the nominal federal funds rate?

Q: The Federal Deposit Insurance Corporation is the main supervisor fora. national banks that are part of a financial holding company or a bank holding company. b. national banks that are not in a financial holding company or a bank holding company. c. state banks that are not members of the Federal Reserve System.d. state banks that do not have Federal Deposit Insurance Corporation insurance.

Q: Private information-collection firms fail to eliminate the adverse selection problem because A) the law does not allow them to disclose private information about the creditworthiness of firms. B) they do not monitor borrowers after loans have been made. C) some investors who do not pay for their services will still profit from them. D) most companies refuse to provide them with any information.

Q: On a bank's balance sheet, "borrowings" are A) loans to households. B) loans to businesses. C) nondeposit liabilities. D) U.S. Treasury securities.

Q: Temporary changes in inflation lead to adjustments in the price level. What causes permanent increases in inflation and why?

Q: The Office of the Comptroller of the Currency is the main supervisor fora. national banks that are part of a financial holding company or a bank holding company. b. national banks that are not in a financial holding company or a bank holding company.c. state banks that are not members of the Federal Reserve and are not in a financial holding company or a bank holding company.d. state banks that are members of the Federal Reserve System.

Q: Which of the following is NOT a company that collects information on individual borrowers and sells it to savers? A) Moody's Investor Service B) Value Line C) NASDAQ D) Dun and Bradstreet

Q: What is the current limit on balances that are covered by federal deposit insurance? A) $100,000 B) $250,000 C) $500,000 D) $1,000,000

Q: In the face of constant velocity, explain what happens to aggregate demand if the growth rate of money is less than the rate of inflation.

Q: A financial holding company (FHC) is the a financial structure that can a. own a bank and an insurance underwriting firm.b. own either an insurance underwriting firm or an insurance agency. c. own either an insurance agency or a securities agency.d. own either a securities agency or a securities underwriting firm.

Q: A state bank that is a member of the Federal Reserve System and is not in a financial holding company or a bank holding company is mainly supervised by thea. Federal Deposit Insurance Corporation. b. Federal Reserve.c. Office of the Comptroller of the Currency. d. National Credit Union Administration.

Q: Moody's Investors Service is able to make a profit because A) most investors are irrational. B) of the existence of adverse selection problems. C) fluctuations in interest rates make default risk on corporate bonds difficult to gauge. D) small investors like the mutual funds they sell.

Q: A key difference between small-denomination and large-denomination time deposits is that A) small-denomination time deposits pay no interest. B) large-denomination time deposits may be bought and sold on secondary markets. C) large-denomination time deposits carry a significant penalty for early withdrawal. D) small-denomination time deposits carry a significant penalty for early withdrawal.

Q: Use the equation of exchange to show how the level of money in the economy impacts the level of aggregate demand.

Q: Irving Fisher derived the quantity theory of money from the equation of exchange. What two assumptions did he make to derive the theory and what is the basic assertion of the theory?

Q: The Gramm-Leach Bliley Act was passed in the year a. 1930.b. 1999. c. 1956. d. 1977.

Q: A national bank that is part of a financial holding company or a bank holding company is mainly supervised by the a. Federal Deposit Insurance Corporation.b. Federal Reserve.c. Office of the Comptroller of the Currency. d. National Credit Union Administration.

Q: Requirements for information disclosure for firms that desire to sell securities in financial markets A) are very common in industrialized countries, including the United States. B) are common in other industrialized countries, but have not yet been adopted in the United States. C) have been adopted in the United States, but have not yet been adopted in other industrialized countries. D) have yet to be adopted in the United States or other industrialized countries.

Q: Assuming a constant nominal GDP, would the velocity of M1 equal the velocity of M2? Explain.

Q: Use the equation of exchange to show that in the long run, inflation must equal money growth less the growth of potential output.

Q: The law that allowed banks to engage in investment banking was the a. Gramm-Leach-Bliley Act.b. Glass-Steagall Act. c. McFadden Act.d. Garn-St. Germain Act.

Q: A national bank that is not in a financial holding company or a bank holding company is mainly supervised by the a. Federal Deposit Insurance Corporation.b. Federal Reserve.c. Office of the Comptroller of the Currency. d. National Credit Union Administration.

Q: 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.

Q: If the price of money is determined by supply and demand, what impact should a decrease in the supply of money (given steady money demand) have on the price of money and the rate of inflation?

Q: What would you expect to happen to the price level (inflation) from a prolonged expansionary gap and why?

Q: The proponents of repeal of the Glass-Steagall Act argued that repeal will a. lead to an increase in operational and information costs of banks.b. increase externalities because of banking problems.c. reduce the international competitiveness of the commercial banks.d. lead to the generation of a higher capital level.

Q: A national bank is supervised by all of the following agencies EXCEPTa. the Federal Deposit Insurance Corporation. b. the Federal Reserve.c. the Office of the Comptroller of the Currency. d. the National Credit Union Administration.

Q: When there's asymmetric information, who tends to have the better information? A) lender B) borrower C) intermediary D) equally likely to be the borrower or the lender

Q: The CPI is a commonly used and closely watched measure of inflation. However, it has limitations. What are they?

Q: What are the determinants of the potential output for an economy?

Q: Which of the following is true of the Glass-Steagall Act?a. The act provides authority to the Federal Reserve to regulate bank holding companies and prevent them from branching out.b. The act enables banks to engage in more non-banking activities by operating subsidiaries.c. The act prohibits banks to own subsidiary firms that sold products other than banking services.d. The act encourages banks to meet the credit needs of their communities.

Q: Symmetric information A) is the same as perfect information. B) holds under the assumption of rational expectations. C) is true only in efficient markets. D) means that savers and borrowers have the same information.

Q: One method that lenders use to mitigate the adverse selection problem is to A) charge higher interest rates to less creditworthy borrowers. B) monitor closely the behavior of borrowers after a loan is made. C) ration credit. D) provide default insurance.

Q: If the Fed wanted to target price stability, meaning zero inflation, why should it set a target rate of inflation of around one percent?

Q: During the time that the Glass-Steagall Act was in effect, which banking authority wanted to allow banks to be able to engage in more nonbanking activities through operating subsidiaries?a. The Federal Reserveb. The Office of Comptroller of the Currency c. The U.S. Treasury Departmentd. The Federal Deposit Insurance Corporation

Q: 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.

Q: Why do higher interest rates increase adverse selection problems in the loan market? A) Higher interest rates reduce the gains from economies of scale. B) As interest rates rise, the creditworthiness of the average loan applicant declines. C) Higher interest rates reduce information problems in the loan market. D) At higher interest rates fewer investment projects are profitable.

Q: The equation of exchange which is MV = PY is an identity, which means it is true by definition. If you think carefully, what variable in the equation by the way it is defined really makes the equation of exchange an identity?

Q: An enterprise that either take deposits or make loans but do not perform both the activities together, and therefore is not subject to the same restrictions as banks is known asa. non­governmental organizations.b. corporations.c. nonbanks.d. business firms.

Q: One reaction of firms to the adverse selection problem is to A) rely on internal funds to finance investment. B) use the stock market rather than the bond market to raise funds. C) use the bond market rather than the stock market to raise funds. D) borrow long-term rather than short-term.

Q: To help offset the costs from loan defaults, the First National Bank of Gotham decides to increase the interest rate it charges on its business loans. As a result of this increase in the interest rate, the creditworthiness of Gotham's loan applicants is likely to A) improve. B) deteriorate. C) be unchanged. D) be unchanged, unless the economy enters a recession at the same time as the interest rate is increased.

Q: If velocity of money is constant; real growth in the output of the economy is +2.5%; and inflation is 2.0%; what is the growth rate of money?

Q: To oppose the Glass-Steagall Act, banks argued that theya. would be forced to extend deposit insurance coverage to firms that were not banks.b. would have a conflict of interest between their needs to underwrite stocks and to serve their customers. c. could gain greater monopoly power by lending only to big businesses.d. could take advantage of economies of scope if they were able to underwrite securities and sell them directly to their customers.

Q: Credit rationing refers to A) the increase in the interest rate that occurs when the demand for credit increases. B) the increase in the interest rate that occurs when the supply of credit increases. C) the increase in the interest rate that occurs when the supply of credit decreases. D) a restriction in the availability of credit.

Q: Which of the following is NOT included in the call report filed by a commercial bank?a. A report on a bank's assetsb. A report on a bank's liabilitiesc. A report on a bank's compliance with the Fair Lending Act d. A report on a bank's profits

Q: Why is adverse selection more likely in financial markets when interest rates rise? A) The remaining borrowers are more likely to be risky. B) Higher interest rates are likely to hurt the economy. C) If firms have to pay higher interest rates, they may choose to use the funds differently than they first intended. D) Banks eliminate risky borrowers by raising interest rates.

Q: When the former Soviet Union collapsed in 1990, most of the countries that made up the union experienced extremely high rate of inflation? What was the source of the high inflation and why did it happen?

Q: The law that prohibited banks from engaging in investment banking was the a. Gramm-Leach-Bliley Act.b. Glass-Steagall Act. c. McFadden Act.d. Garn-St. Germain Act.

Q: If the nominal interest rate decreases: A. the cost of holding money decreases.B. the cost of holding money increases.C. the velocity of money should increase.D. the cost of holding money increases and the velocity of money should decrease.

Q: When interest rates in the bond market rise, A) adverse selection problems increase. B) adverse selection problems are mitigated. C) moral hazard problems increase. D) moral hazard problems are mitigated.

Q: The document that a bank must fill out quarterly, reporting its assets, liabilities, and profits to the government, is called aa. balance-sheet analysis. b. P&L statement.c. white paper. d. call report.

Q: Why does the Fed have to be concerned with money growth even though their main focus seems to be on interest rates?

Q: The Glass-Steagall Act was passed into law in the year a. 1999.b. 1913. c. 1933. d. 1980.

Q: In the late 1970s into the early 1980s, interest rates were high and very volatile. During this period: A. the velocity of money should have been stable.B. money demand as well as velocity should have also been shifting and volatile.C. it should have been easy for the Fed to predict the velocity of money.D. the Fed was actually targeting the short-term interest rate.

Q: If there were no adverse selection problems in the stock market, A) some well-run firms would pay more to raise funds. B) some poorly-run firms would pay less to raise funds. C) the willingness of savers to invest in the market would be increased. D) the volume of new stock issues would be lower.

Q: Which of the following is a government regulation that enables the government to achieve its goals for the bankingsystem?a. A government regulation that allows for mergers in order to help increase the size of a bank.b. A government regulation that provides complete discretion to banks to manage the supply of money.c. Banks are required to hold reserves in order to control the money supply.d. Banks are penalized in case of inefficient functioning.

Q: All other factors equal, as nominal interest rates increase, checking account balances should: A. increase.B. decrease.C. remain constant.D. be converted to cash.

Q: Which of the following is an error made by commercial banks in 1920s that caused depositors to lose money andforced regulators to impose restrictions?a. Banks sold securities in the primary market.b. Smaller banks merged to form larger banks.c. Banks issued loans to a number of firms that went bankrupt during the Great depression.d. Banks did not diversify their activities and were engaged only in banking activities.

Q: During the period of October 1979 to October 1982; the FOMC's primary operating target resulted in: A. the most stable period for the federal funds rate in history.B. reserves being highly volatile.C. the federal funds rate experiencing high volatility.D. the federal funds rate dropping to 2 percent (an all-time low to that date) and not rising above 3 percent.

Q: The mechanisms by which cash, checks, and electronic payments flow from buyers to sellers are called a. the transactions system.b. float.c. the payments system. d. ACH.

Q: You own a 2007 Ford Explorer. Although it has high mileage, you have maintained it very well. You want to sell it, but after checking the prices other owners of 2007 Ford Explorers are able to get for their cars in the used car market, you decide the prices are too low and you decide not to sell. This is an example of A) the "lemons problem." B) moral hazard. C) economies of scale. D) low information costs.

Q: All other factors equal, if the costs of converting bonds and other financial securities to a means of payment decrease: A. the transactions demand for money should increase.B. the transactions demand for money should decrease.C. it shouldn't impact the transactions demand for money.D. nominal interest rates should decrease.

Q: For a three-year period from October 1979 to October 1982; the FOMC: A. primarily targeted reserves.B. primarily targeted the real federal funds interest rate.C. primarily targeted M2.D. gave up targeting reserves entirely.

Q: Which of the following is a possible drawback of a bank run?a. It leaves the banks with excess reserves.b. It leads to a fall in investment activities because of lack of loans available to business firms.c. It leads to a fall in the demand for loans by the business firms.d. It leads to an excessive increase in the supply of money by the banks.

Q: The "lemons problem" is overcome in the used car market by A) strict government regulation of private deals between individual buyers and sellers of used cars. B) most used cars selling for well below their true values. C) "lemon insurance" policies being offered by insurance companies. D) the existence of used car dealers who are concerned about maintaining their reputations.

Q: It is generally agreed that A) the financial system would be more efficient if intermediaries were eliminated. B) small- and medium-sized firms benefit by the actions of intermediaries. C) the addition of intermediaries adds to transactions costs. D) intermediaries should not seek to profit from reducing transactions costs.

Q: One cost that potentially could result from central banks targeting money growth is: A. high inflation.B. a slowdown in financial innovation.C. volatile interest rates.D. decreased independence.

Q: The fact that the Fed is willing to pay interest on reserves gives the Fed another mechanism for affecting the money supply and the amount of reserves that banks hold. How might a very low interest rate paid on reserves increase the money supply? (Hint: Consider the possible uses of excess reserves.)

Q: Which economist is credited with having been the first to discuss the "lemons problem"? A) George Akerlof B) Milton Friedman C) Robert Shiller D) James Tobin

Q: Small investors face A) high transactions costs in financial markets. B) low transactions costs in financial markets. C) high transactions costs in financial intermediaries. D) high information costs in financial intermediaries.

Q: Which of the following statements is true? A. While the Fed emphasizes money growth more than the ECB, both central banks have chosen interest rates as their operating target.B. While the Fed emphasizes money growth less than the ECB, both central banks have chosen interest rates as their operating target.C. Because the Fed emphasizes money growth less than the ECB, the Fed uses interest rates as their operating target while the ECB looks at growth in money aggregates.D. Both the Fed and the ECB use growth in money aggregates as their operating target.

Q: In a recent year, a bank earned $36 million in interest on its assets of $523 million, it paid out $9 million in interest on its liabilities (excluding capital) of $470 million, and it paid its workers $21.5 million in total compensation. Calculate the bank's spread and its return on equity.