Q&A Hero

Q: The "lemons problem" exists in the market for goods because A) sellers tend to try to take advantage of buyers. B) buyers tend to try to take advantage of sellers. C) differences in the quality of the goods being exchanged. D) of moral hazard.

Q: Which of the following is NOT an example of transactions costs? A) high interest rates B) lawyers' fees C) brokerage commissions D) minimum investment requirements

Q: Statistical analysis reveals that the long-run money velocity (for euro-area M3, which is equivalent to U.S. M2): A. is unstable in the euro similar to the instability that exists in the U.S.B. is much more stable in the U.S. than in the euro area.C. has increased in the euro area since 1980.D. is more stable in the euro area than in the U.S.

Q: Reserve requirements for banks are currently:Amount of Bank's Requirement Transaction Deposits ReserveThe first $6.6 million 0 percentAmounts from $6.6 to $45.4 million 3 percentAmounts over $45.4 million 10 percentCalculate the reserve requirements for three banks with the following amounts of transaction deposits.a. $38.8 millionb. $95.6 millionc. $3,400 million

Q: The "lemons problem" in the used car market arises from A) the difficulty U.S. producers have in making reliable cars. B) the difficulty buyers have in distinguishing good cars from lemons. C) the tendency of buyers of used cars to pay for them with bad checks. D) the reluctance of many car dealers to handle used cars.

Q: The presence of transactions costs and information costs A) lowers the cost of funds to borrowers. B) raises the expected return to lenders. C) lowers the expected return to lenders. D) increases the efficiency of the financial system.

Q: In order to manipulate the money supply, the Fed can change the interest rate that it pays on reserves in comparison to the ____ rate.a. federal funds b. primec. 30-year fixed mortgage d. credit card interest

Q: Between 1970 and 2000, if the Fed had tried to hit the money growth targets: A. the economy would have likely experienced very high inflation.B. the federal funds rate would have changed often and by large amounts.C. the interest rates would have likely been more stable.D. the economy would have likely experienced very high inflation but the interest rates would have likely been more stable.

Q: The reserve requirement is 0 percent on the first $6.0 million in transaction deposits, 3 percent on amounts between $6.0 million and $42.1 million, and 10 percent on amounts above $42.1 million.The First Bank of Boston has the following assets and liabilities (all amounts in millions of dollars): AssetsReserves $5.0Loans $345.0Securities $70.0 Liabilities + CapitalTransaction deposits $75.0Nontransaction deposits $315.0Equity capital $30.0a. Calculate the bank's excess reserves.Show your work.b.Suppose First Bank makes a loan to a customer equal to the amount of the excess reserves you found in part a. Calculate the bank's excess reserves before the customer spends the proceeds of the loan.Show your work.c. Now suppose the customer spends the proceeds of the loan. Calculate the bank's excess reserves. Show your work.

Q: The relationship between the velocity of money and interest rates is: A. positive but not stable.B. negative but not stable.C. positive and stable.D. negative and stable.

Q: In addition to paying interest on reserves starting in October 2008, the Fed also provideda. lending against a variety of collateral, such as commercial paper and mortgage-backed securities. b. advice on how to conduct contemporaneous reserve accounting.c. the power for banks to print and distribute their own currency.d. staff people to help banks make real-estate decisions regarding the locations of their branch offices.

Q: Between 1970 and 2000, the Fed: A. published their targets for money growth and often hit these targets.B. never published targets or actual amounts for money growth.C. published targets for money growth and rarely hit them.D. published actual money growth but not targets.

Q: Information costs A) are the costs of buying and selling financial claims. B) include the costs that savers incur to determine the credit worthiness of borrowers. C) include the costs borrowers incur to discover the best investments to make with the money they have borrowed. D) are zero in financial markets, but high for transactions carried out through financial intermediaries.

Q: A bank offers credit cards with a 24 percent interest rate, when its competitors' cards have just a 18 percent interest rate. What do you predict will happen? Will the bank profit from its offer?

Q: To say that the relationship between the velocity of money and the opportunity cost of holding money is not stable is the same as saying: A. the supply of money is not stable.B. the money market is always in disequilibrium.C. money demand is stable.D. money demand is not stable.

Q: When the Fed began paying interest on reserves, reserve balances a. increased dramatically.b. decreased dramatically. c. decreased only slightly. d. increased only slightly.

Q: Transactions costs are A) zero in financial markets. B) zero in financial intermediaries. C) the costs of direct financial transactions. D) equal to the taxes imposed on financial transactions.

Q: The Lucas critique focuses specifically on: A. the relationship between Fed policy and the money supply.B. the role that economic policymaking has on people's economic behavior.C. the inability to measure economic performance accurately.D. the moving away from fixed exchange rates to flexible exchange rates.

Q: Which of the following measures by the Federal Reserve led to an increase in bank reserves between 2009 and 2013?a. Moral Suasionb. Open market operationsc. Haircutd. Quantitative easing

Q: A cause of the decline in the velocity of money during the 2007-2009 financial crisis was a result of: A. the fiscal stimulus provided by the U.S. government.B. the lowering of the discount rate by the Fed.C. the use of unconventional policy tools by the Fed.D. an increase in uncertainty.

Q: Before October 2008, banks earned interest on reserve balances that they held at the Federal Reserve at a rate ofa. 0.00%.b. 0.05%. c. 0.60%.d. 1.00%.

Q: A major contributing factor to the instability of money demand over the past 25 years is the: A. introduction of financial instruments that pay higher returns than money but can be used as a means of payment.B. Fed has changed the way the money aggregates are defined.C. failure of many savings and loans.D. introduction of credit cards.

Q: What are the three key features of the financial system that result from the existence of transactions and information costs?

Q: Empirical research has shown that: A. in the 1990s and 2000s, velocity was more sensitive to an increase in the opportunity cost of holding money than in the 1980s.B. in the 1990s and 2000s, velocity was less sensitive to an increase in the opportunity cost of holding money than in the 1980s.C. during the 1980s and 1990s, the velocity of money was not sensitive to changes in the opportunity cost of holding money.D. during the 1980s and 1990s, the velocity of money actually decreased as the opportunity cost of holding money increased.

Q: Which of the following is a way in which banks can equalize the time to maturity of their assets and liabilities?a. Securitizationb. Quantitative easingc. Privatizationd. Credit easing

Q: Which of the following concerns were raised as a result of record low interest rates in 2012? A) high perceived risk of default B) high interest rate risk C) corporations facing a lack of demand for bonds D) high risk premiums on investment-grade corporate bonds

Q: Which of the following is the most important source of external financing for corporations? A) stock market B) bond market C) retained earnings D) mortgages

Q: To use money growth as a short-term monetary policy instrument, a central bank must: A. believe there is a stable link between the monetary base and the rate of inflation.B. believe that only money matters.C. believe that there is an unpredictable relationship between money aggregates and inflation.D. believe the deposit expansion multiplier is volatile and unpredictable.

Q: Securitization is the process by which a bank sells a loan (which it made previously) toa. investors.b. the government.c. other banks.d. depositors.

Q: Due in part to record low interest rates on U.S. Treasury Bonds, A) investors searching for higher yields bought corporate bonds B) interest rates on corporate bonds rose C) corporations faced higher borrowing costs D) many corporations were at greater risk of defaulting

Q: Why are corporations more likely to raise funds externally by debt instead of equity? A) moral hazard is less of a problem with debt contracts B) transactions costs tend to be higher in the stock market than bond market C) to avoid paying dividends D) interest rates tend to be lower than dividend rates

Q: For the Fed to use money growth as a direct monetary policy target, which of the following needs to exist? A. A highly variable deposit expansion multiplierB. A stable link between the monetary base and the quantity of moneyC. A predictable link between the quantity of money and the deposit expansion multiplierD. A stable link between the monetary base and the quantity of money and a predictable relationship between the quantity of money and the rate of inflation

Q: If a bank has assets with the same time to maturity as its liabilities, thena. the interest rate on assets changes faster than the interest rate on liabilities. b. the interest rate on liabilities changes faster than the interest rate on assets. c. changes in interest rates will not affect the bank's overall portfolio.d. changes in interest rates puts the bank at a high risk of default.

Q: By reducing transactions and information costs, financial intermediaries can A) offer savers higher interest rates. B) offer borrowers lower interest rates. C) earn a profit. D) all of the above.

Q: Smaller firms tend to rely on financial intermediaries instead of financial markets for external financing due to A) transactions costs. B) adverse selection. C) moral hazard. D) all of the above.

Q: Stable velocity as a contributing factor to successfully using money growth as a stabilizing monetary policy tool, is more important in an environment where: A. inflation is extremely high (e.g., over 100 percent).B. inflation is low (e.g., less than 10 percent).C. inflation occurs, the problems caused by a variable velocity are just as severe at low levels of inflation as at high levels of inflation.D. there is deflation.

Q: Credit risk means the same thing as a. withdrawal risk.b. default risk.c. interest-rate risk.d. foreign-exchange risk.

Q: Suppose a bank earned $173 million in interest on its assets of $2,153 million, it paid out $81 million in interest on its liabilities (excluding capital) of $2,007 million, and it paid its workers $71 million in total compensation. The bank's return on equity is approximatelya. 12 percent. b. 14 percent. c. 16 percent. d. 18 percent.

Q: The purpose of collateral and restrictive covenants is to reduce ________ in debt contracts. A) adverse selection B) transactions costs C) moral hazard D) loan amounts

Q: In the late 2000s, which source of funds for corporations grew the most? A) net new stock issues B) net new bond issues C) net new loans D) net new commercial paper

Q: The only solution available to a country experiencing extremely high rates of inflation is to: A. raise interest rates.B. peg your currency to another country's currency.C. reduce money growth.D. revert to a gold standard.

Q: If an investor thinks interest rates are likely to rise, she would: A. sell her bonds and hold more money.B. buy more bonds now and hold less money.C. not alter her bond portfolio until interest rates actually rise.D. not change her money holdings at all.

Q: The risk that market interest rates may change, affecting the value of a bank's assets and liabilities, is known as a. withdrawal risk.b. default risk.c. interest-rate risk.d. foreign-exchange risk.

Q: Suppose a bank earned $173 million in interest on its assets of $2,153 million, it paid out $81 million in interest on its liabilities (excluding capital) of $2,007 million, and it paid its workers $71 million in total compensation. The bank's spread is approximatelya. 2 percent. b. 3 percent. c. 4 percent. d. 5 percent.

Q: In the late 2000s, the primary source of external funds for corporations was A) commercial paper. B) loans. C) bonds. D) stocks.

Q: You graduate from law school and can now begin charging clients fees for your time. What impact will this have on your demand for money? A. Your increased income will likely cause your demand for money to decreaseB. Your opportunity cost of making trips to the bank will decreaseC. Your increased income will likely cause your demand for money to increaseD. Your demand for money will not be affected

Q: A decline in the yields earned by bonds should: A. not impact the demand for money since money doesn't earn any interest.B. also decrease the demand for money.C. increase the demand for money.D. increase the velocity of money.

Q: Suppose a bank earned $12 million in interest on its assets of $157 million, it paid out $8 million in interest on its liabilities (excluding capital) of $172 million, and it paid its workers $3 million in total compensation. The bank's profit equalsa. $12 million. b. $8 million. c. $3 million. d. $1 million.

Q: A bank can reduce the impact of a default risk by a. having assets with the same time to maturity.b. making risky loans at low interest rates. c. making safe loans at high interest rates. d. diversifying its portfolio.

Q: In the late 2000s, which of the following was the primary source of external financing for small to medium-size firms? A) mortgages B) bank loans other than mortgages C) trade credit D) other loans

Q: The demand for money varies: A. directly with the liquidity of other financial assets.B. inversely with the liquidity of other financial assets.C. not all with the liquidity of other assets since money is liquid.D. inversely with wealth.

Q: As a person's wealth increases we would expect the demand for money to: A. decrease.B. increase dollar for dollar with wealth.C. increase but at a rate less than dollar for dollar.D. not change; money demand does not vary with wealth, only with income.

Q: A bank borrows funds from its depositors by paying them 2% interest on the funds. It lends those funds to borrowers by charging an interest of 5% on the loans. The bank's spread isa. 2 percent.b. 3 percent. c. 4 percent. d. 5 percent.

Q: The possibility that a bank's loan customers might not repay their loans is known as a. withdrawal risk.b. default risk.c. interest-rate risk.d. foreign-exchange risk.

Q: How can restrictive covenants help to reduce moral hazard in bond markets?

Q: Crises that occasionally hit financial markets will increase the demand for money since: A. the return on money increases.B. the return on financial assets increases.C. there is no risk with holding money.D. the risk of holding money relative to other financial assets decreases.

Q: People have a portfolio demand for money in part because: A. money is part of a well-diversified financial portfolio.B. the return on money is often higher than other financial assets.C. money is needed to pay brokerage commissions.D. there is no cost to holding money which gives it a relatively high return.

Q: Which of the following statements is true of banks?a. Small banks do not face the same competitive pressure as large banks do. b. Location of banks does not determine the level of competition among them. c. Bank spreads are large for large banks.d. Returns on equity are large for small banks.

Q: Compared to CDs and money market funds, crowd funding A) provides higher expected returns with increased safety B) provides lower expected returns in exchange for increased safety C) is likely to result in lower returns due to higher volatility D) provides opportunities for higher returns but also significant losses

Q: How does the principal-agent problem increase the possibility of moral hazard?

Q: If your bank offers you free checking if your average balance is at least $1000 and you would normally carry an average balance of $500, what is the annual cost to you of free checking if bonds are paying a 5.0% return? A. $50.00B. $0.00C. $20.00D. $25.00

Q: Which size category of banks generally has the smallest spread?a. The 10 smallest banks b. The 100 smallest banks c. Medium-sized banksd. Large banks

Q: How does the use of collateral and net worth help reduce the problem of adverse selection?

Q: Many economists and policymakers have raised concerns about crowd funding due to the existence of: A) information costs facing small investors B) information costs facing business start ups C) transaction costs facing business start ups D) increased competition for banks in funding business start ups

Q: The portfolio demand for money reflects: A. the money we hold for our everyday transactions.B. the portion of wealth people desire to hold in the form of money.C. the money we hold to purchase stocks and bonds and other financial securities.D. the money we hold for our everyday transactions and the money we hold to purchase stocks and bonds and other financial securities.

Q: Which size category of banks generally has the largest spread?a. Small banksb. Medium-sized banksc. The 100 largest banks d. The 10 largest banks

Q: What are the reasons why disclosure by the SEC do not eliminate the information costs of adverse selection?

Q: A part of the Jumpstart Our Business Startups (JOBS) Act: A) banks were required to provide special financing for start ups B) differences between qualified and unaccredited investors were removed C) the SEC is no longer is allowed to regulate funding of business start ups D) Congress removed some of the restrictions on using crowd-funding to allow small investors to buy equity in start-ups

Q: Money held for precautionary reasons is included in the demand for money: A. as a third, separate category called the precautionary demand for money.B. as part of transactions demand.C. as part of portfolio demand.D. partly as transactions demand and partly as portfolio demand.

Q: Which of the following is true of bank spread?a. The more vigorous the competition among banks, the smaller will be spread between the interest rates on loans and deposits.b. The larger the banks that are competing with each other, the larger will be spread between the interest rates on loans and deposits.c. The spread between the interest rates on loans and deposits will be much narrower in banks in rural areas than the banks in big cities.d. The lower the number of banks in a city, the smaller will be the spread between the banks' interest rates on loans and deposits.

Q: How does adverse selection in financial markets affect the method by which firms raise funds?

Q: In which of the following ways can a bank increase its reserves?a. Give out more loans b. Sell securitiesc. Reduce interest rate on time depositsd. Increase service charges for safety vault facility

Q: Crowd funding can best be described as: A) raising funds in a very large market B) raising small amounts of money from large numbers of people C) many firms competing for the same source of funds D) making funds available for a large number of business start ups

Q: Which of the following would be classified as precautionary demand for money? A. You keep a $1000 in a money market account because the return is better than a savings account at your bankB. You apply for and receive a credit card with a $1000 limitC. You put $1000 in a savings account at your bank for emergenciesD. You put $1000 in your checking account each month to cover your regular expenses

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

Q: A bank's spread equalsa. the bank's average profit per dollar of assets. b. the bank's return on equity.c. the average interest rate on all the bank's investments minus the inflation rate.d. the average interest rate on the bank's assets minus the average interest rate on its liabilities.

Q: The discount rate is the interest rate on a. loans of reserves between banks.b. discount loans from the Federal Reserve. c. discount bonds.d. federal agency securities.

Q: The existence of adverse selection results in: A) reduced market efficiency B) an increase in the likelihood of moral hazard C) increase market transactions D) higher transaction costs

Q: In high inflation countries, inflation rates can exceed the rate of growth of money because: A. high inflation increases the velocity of money.B. high rates of inflation increase the opportunity cost of holding money.C. money loses value quickly with inflation.D. all of the answers given are correct.

Q: A bank is said to have________ when its average costs decline when it offers a wider variety of products.a. economies of scope.b. economies of scale.c. cost diminution.d. decreasing returns to scale.