Q&A Hero

Q: Stable inflation implies: A. that the rate of inflation averaged over many years is zero.B. that inflation is predictable.C. that the rate of inflation conceals relative price changes.D. low rates of unemployment.

Q: Which of the following statements is most accurate? A. As the inflation rate increases, inflation becomes less stable.B. As the inflation rate decreases inflation becomes less stable.C. As the inflation rate decreases inflation becomes more volatile.D. As the inflation rate increases, inflation becomes more stable.

Q: The efficient allocation of resources requires: A. that prices reflect the relative value of goods and services.B. that inflation not exceed three percent a year.C. deflation.D. prices to remain constant.

Q: Which of the following is the best analogy? Inflation is like: A. a pound having more ounces.B. a day having more hours.C. a minute having fewer seconds.D. a mile having more feet.

Q: If prices are not stable: A. money becomes less useful as a store of value.B. money performs better as a unit of account.C. it may be an inconvenience, but resources are still allocated efficiently.D. prices become highly useful for conveying information.

Q: The primary objective of most central banks in industrialized economies is: A. high securities prices.B. low unemployment.C. price stability.D. a strong domestic currency.

Q: Central banks often find: A. they can efficiently pursue all of their goals simultaneously.B. there are tradeoffs that make pursuing all of their goals simultaneously impossible.C. the goal(s) they pursue will be determined by their profitability.D. they must keep their goals secret or else they cannot be attained.

Q: A primary goal of central banks is to: A. reduce the idiosyncratic risk that impacts specific investments.B. reduce systematic risk.C. keep stock and bond prices high.D. keep inflation rates high.

Q: The specific goals of central banks include each of the following, except: A. high and stable real growth.B. low and stable inflation.C. high levels of exports.D. low and stable unemployment.

Q: The specific goals of central banks include all of the following except: A. high stock prices.B. low and stable inflation.C. high and stable real growth.D. a stable exchange rate.

Q: The rationale for the existence of central banks is mainly that: A. financial markets lack transparency.B. they are needed for the supervision of banks.C. financial intermediation cannot occur without a central bank.D. financial systems are prone to periods of extreme volatility.

Q: Which is a function of modern central banks? A. To control securities marketsB. To control the government's budgetC. To control the availability of money and creditD. To manage fiscal policy

Q: The Federal Reserve's Fedwire system is used mainly to provide: A. a means for foreign banks to transfer funds to U.S. banks.B. an inexpensive and reliable way for financial institutions to transfer funds to one another.C. an inexpensive way for individuals to pay their bills on-line.D. a means for the Treasury to collect tax payments.

Q: In 2012, the average daily volume on the Federal Reserve's Fedwire system was: A. $24 billion.B. $240 billion.C. $2.4 trillion.D. $240 million.

Q: The stability of the financial system is enhanced by the ability of central banks to: A. be a lender of last resort.B. provide loans to insolvent banks.C. provide deposit insurance.D. convert poorly run banks into branches of the central bank.

Q: The central bank has the ability to create money; this means it: A. can control the availability of money but not the availability of credit in the economy.B. can make loans only when other institutions can.C. can impact the rate of inflation.D. has an objective to maximize its profit.

Q: In its role as the bankers' bank, a central bank performs each of the following, except: A. providing loans during times of financial distress.B. providing deposit insurance.C. overseeing commercial banks and the financial system.D. managing the payments system.

Q: Many governments give their central bank control over issuing currency because: A. printing currency can be profitable for a government so government officials may have a strong incentive to print too much.B. having large amounts of currency can lead to lower rates of inflation.C. central banks use the profits from issuing currency to finance their operations.D. the only way to distribute currency to banks is through the central bank.

Q: Which of the following statement is true? A. Printing currency can be a profitable venture for a government.B. Printing currency, while necessary, is a losing venture for a government.C. Too much money printed usually leads to lower prices.D. In the modern economy the amount of money created has no effect on prices.

Q: The ability to create money means the central bank can control: A. the availability of money and credit in a country's economy.B. tax revenue.C. the unemployment rate.D. government expenditures.

Q: Monetary policy in the United States is under the control of: A. the U.S. Treasury.B. the President.C. the Federal Reserve.D. the U.S. Senate.

Q: In the U.S. the authority to issue currency is held by: A. the Federal Reserve.B. the U.S. Treasury.C. the Office of the Comptroller of the Currency.D. the U.S. Mint.

Q: One monopoly that modern central banks have is in: A. regulating other banks.B. making loans to banks.C. issuing U.S. Treasury securities.D. issuing currency.

Q: The number of central banks that exist in the world today is: A. less than 10.B. about 250.C. over 170.D. over 50 but less than 100.

Q: The central bank in the United States is: A. the Bank of America.B. the Federal Reserve.C. the U.S. Treasury.D. the Bank of the United States.

Q: Banking regulations prevent banks from: A. holding more than 10 percent of their assets in common stock of companies.B. owning corporate jets.C. owning common stocks of corporations.D. building big office buildings.

Q: Which of the following statements is most correct? A. Financial regulators do everything possible to encourage competition in banking.B. Financial regulators work to prevent monopolies but also work to prevent strong competition in banking.C. Financial regulators discourage competition in banking.D. Financial regulators prefer banks to have monopoly power in their geographic markets.

Q: Bank mergers require government approval because banking officials want to make sure that: A. the merger will create a larger bank.B. the merger will not create a monopoly.C. the merged bank will be more profitable.D. the merger will not result in regulatory competition.

Q: Following the consolidation that resulted from the 2007-2009 financial crisis in the U.S., the 4 largest commercial banks share of total deposits was: A. 75%.B. 50%.C. 40%.D. 25%.

Q: A long-standing goal of financial regulators has been to: A. prevent banks from growing too big and powerful.B. minimize the competition that banks face.C. encourage banks to grow as large as possible.D. discourage small rural banks.

Q: You have savings accounts at two separately FDIC insured banks. At one of the banks your account has a balance of $200,000. At the other bank the account balance is $60,000. You find out the banks are going to merge. If you are concerned about the possibility of the new bank failing, you should: A. do nothing; you are still insured up $250,000 per account.B. consider moving $10,000 to another account at the same bank.C. consider moving $10,000 to another account at a different bank.D. do nothing; as an individual you are only insured up $250,000 no matter where the accounts are.

Q: You have savings accounts at two separately FDIC insured banks. At one of the banks your account has a balance of $200,000. At the other bank the account balance is $60,000. If both banks fail, you will receive: A. $250,000.B. $60,000.C. $260,000.D. $200,000.

Q: You have two savings accounts at an FDIC insured bank. You have $225,000 in one account and $40,000 in the other. If the bank fails, you will receive: A. $225,000.B. $40,000.C. $115,000.D. $250,000.

Q: You hold an FDIC insured savings account at your neighborhood bank. Your current balance is $275,000. If the bank fails you will receive: A. $275,000.B. $250,000.C. $100,000.D. $125,000.

Q: One negative consequence of regulatory competition is: A. it is expensive.B. financial institutions are over regulated at a cost to customers.C. financial institutions often seek out the most lenient regulator.D. it minimizes competition.

Q: The fact that banks can be either nationally or state chartered creates: A. situations where some banks go unregulated.B. situations where banks operating in more than one state can escape regulation.C. regulatory competition.D. banks being simultaneously regulated by more than one agency.

Q: Banks can effectively choose their regulators by deciding whether to: A. be a private or public corporation.B. be a member of the Federal Reserve or not.C. purchase FDIC insurance or to forego the coverage.D. be chartered at the national or state level.

Q: Credit Unions are regulated by a combination of agencies which includes: A. state authorities.B. The Federal Reserve.C. The Federal Deposit Insurance Corporation.D. The Office of the Comptroller of the Currency.

Q: Which of the following regulates commercial banks as well as savings banks and savings and loans? A. The Federal Reserve SystemB. Securities and Exchange CommissionC. The Office of the Comptroller of the CurrencyD. The Internal Revenue Service

Q: Savings banks and savings and loans are regulated by a combination of agencies which includes the: A. Federal Reserve System.B. Office of the Comptroller of the Currency.C. Securities and Exchange Commission.D. Internal Revenue Service.

Q: Savings banks and savings and loans are regulated by a combination of agencies which includes all of the following except: A. The Federal Reserve System.B. The Comptroller of the Currency.C. The Federal Deposit Insurance Corporation.D. state authorities.

Q: Governments supervise banks mainly to do each of the following, except: A. reduce the potential cost to taxpayers of bank failures.B. be sure the banks are following the regulations set out by banking laws.C. reduce the moral hazard risk.D. eliminate all risk faced by investors.

Q: The purpose of the government's safety net for banks is to do each of the following, except: A. protect the integrity of the financial system.B. eliminate all risk that investors face.C. stop bank panics.D. improve the efficiency of the economy.

Q: Governments employ three strategies to contain the risks created by government safety nets. These include each of the following, except: A. government supervision.B. an excise tax on bank profits.C. government regulation.D. formal bank examination.

Q: If the government did not offer the too-big-to-fail safety net: A. large banks would be more disciplined by the potential loss of large corporate accounts.B. the moral hazard problem of insuring large banks would increase.C. the moral hazard problem of insuring large banks would not be affected.D. the FDIC deposit insurance limits would have to be raised.

Q: Implicit government support for "too big to fail" banks: A. increases the scrutiny of the bank's risk by large corporate depositors.B. reduces the risk faced by depositors with accounts less than $250,000.C. reduces the risk faced by depositors with accounts exceeding $250,000.D. reduces the moral hazard problem of insuring large banks.

Q: The government's too-big-to-fail policy applies to: A. certain highly populated states where a bank run impacts a large percent of the total population.B. large banks whose failure would start a widespread panic in the financial system.C. large corporate payroll accounts held by some banks where many people would lose their income.D. banks that have branches in more than two states.

Q: The moral hazard problem caused by government safety nets: A. is greater for larger banks.B. is greater for smaller banks.C. is pretty constant across banks of all sizes.D. only exists for banks with high leverage ratios.

Q: Since the 1920's, the ratio of assets to capital has almost tripled for commercial banks. Many economists believe this is the direct result of: A. lower quality management in banks.B. the increase in branch banking.C. allowing banks to offer non-bank services.D. government provided deposit insurance.

Q: As a result of government provided deposit insurance, the ratio of assets to capital for commercial banks since the 1920s has: A. just about doubled.B. almost tripled.C. not changed.D. decreased.

Q: Which of the following statements is most correct? A. the higher the deposit insurance limit the lower the risk of moral hazard.B. the higher the deposit insurance limit the greater the risk of moral hazard.C. deposit insurance limits do not impact moral hazard, they impact adverse selection.D. increasing the deposit insurance limits above $100,000 would increase coverage for over 50 percent of all depositors.

Q: In the ten years after the FDIC limit was increased to $100,000: A. more than four times the number of banks and savings and loans failed than did during the first 46 years of FDIC's existence.B. less than one-fourth the number of banks and savings and loans failed than during the first 46 years of FDIC's existence.C. the cost to taxpayers of failed institutions in that period was negligible because FDIC was in place.D. increasing the deposit insurance limit to $250,000 provided complete coverage for all deposits except those of large corporations.

Q: Deposit insurance only seems to be viable at the federal level. This is likely due to the fact that: A. state funds are less informed about the solvency of national banks.B. a run on the banks within a state will always spread countrywide.C. the U.S. Treasury backs the FDIC and can therefore withstand virtually any crisis.D. the cost of state insurance is prohibitively high.

Q: Many states had their own insurance fund to protect depositors. The critical problem with these state funds is: A. they are monopolies in their own state and extract extremely high prices for the insurance they provide.B. they are highly inefficient they cannot achieve the economies of scale a federal fund can achieve.C. they do not have regulators as knowledgeable as the regulators at FDIC.D. no state fund is large enough to withstand a run on all of the banks it insures.

Q: Under the purchase-and-assumption method, the FDIC usually finds it: A. can sell the failed bank for more than the bank is actually worth.B. can sell the bank at a price equaling the value of the failed banks assets.C. has to sell the bank at a negative price since the bank is insolvent.D. cannot sell the bank and almost always has to revert to the payoff method for dealing with a failed bank.

Q: Considering the methods available to the FDIC for dealing with a failed bank, the depositors of the failed bank should: A. be indifferent between the two since it really does not matter to them which method is used.B. prefer the purchase and assumption method since the deposits over $250,000 will also be protected.C. prefer the payoff method because they will have access to their funds earlier.D. prefer the payoff method since a lot less paperwork is involved for the depositor.

Q: Under the purchase-and-assumption method of dealing with a failed bank, the FDIC: A. finds another bank to take over the insolvent bank.B. takes over the day to day management of the bank.C. sells the failed bank to the Federal Reserve.D. sells off the profitable loans of the failed bank in an open auction.

Q: The payoff method used by the FDIC to address the insolvency of a bank is when the FDIC: A. pays the owners of the bank for the losses they would otherwise face.B. pays off all depositors the balances in their accounts so no depositor suffers a loss, though the owners of the bank may suffer losses.C. pays off the depositors up to the current $250,000 limit, so it is possible that some depositors will suffer losses.D. takes all of the assets of the bank, sells them, pays off the liabilities of the bank, in full and then replenishes their fund with any remaining balance.

Q: On November 20, 1985, the Bank of New York needed to use the lender of last resort function due to: A. a run on the bank started by a rumor that the president of the bank embezzled tens of millions of dollars from the bank.B. a computer error caused the bank's records to wipe out the balances of all of its customers.C. a rumor that the bank was about to be taken over by FDIC due to insolvency.D. a computer error that made it impossible for the bank to keep track of its Treasury bond trades.

Q: When the Federal Reserve was unable to stem the bank panics of the 1930s, Congress responded by: A. taking over the lender of last resort function and assigning this function to the U.S. Treasury.B. ordering the printing of tens of billions of dollars of additional currency.C. creating the FDIC and offering deposit insurance.D. declaring a bank holiday and closing banks for 30 days.

Q: One reason customers do not care about the quality of their bank's assets is: A. most people cannot distinguish an asset from a liability.B. the quality of a bank's assets changes almost daily.C. they assume the bank only has high quality assets.D. with deposit insurance, there isn't any real reason to care; their deposits are protected even if the bank fails.

Q: During the financial crisis of 2007-2009 in the United States it was revealed that the function of a lender of last resort had not kept pace with the evolving financial system because: A. financial intermediaries had grown sufficiently large so as not to need a lender of last resort.B. shadow banks lacked access to the financial resources available through the lender of last resort.C. banks were sufficiently linked to one another that the need for a lender of last resort had diminished.D. banks had become sufficiently diversified so as to be able to provide for their own liquidity.

Q: The existence of a lender of last resort creates moral hazard for bank managers because: A. they have an incentive to take too much risk in their operations.B. officials are likely to undervalue the bank's portfolio of assets.C. they are less likely to apply for a direct loan from the central bank.D. banks seek loans from the central bank only after exploring other options.

Q: If your stockbroker gives you bad advice and you lose your investment: A. the government will reimburse you similar to reimbursing depositors if a bank fails.B. the government will not reimburse you for the loss; you are not protected from bad advice by your stockbroker.C. these losses would be covered under FDIC insurance.D. your investment would only be covered if the stockbroker was employed by a bank.

Q: A moral hazard situation arises in the lender of last resort function because: A. a central bank finds it difficult to distinguish illiquid from insolvent banks.B. a central bank usually will only make a loan to a bank after it becomes insolvent.C. a central bank usually undervalues the assets of a bank in a crisis.D. the central bank is the first place a bank facing a crisis will turn.

Q: During a bank crisis: A. officials at the Federal Reserve find it easy to sort out solvent from insolvent banks.B. it is important for regulators to be able to distinguish insolvent from illiquid banks.C. it is easy to determine the market prices of bank's assets.D. a bank will go to the central bank for a loan before going to other banks.

Q: One lesson learned from the bank panics of the early 1930's is: A. the lender of last resort function almost guarantees that bank panics are a thing of the past.B. the mere existence of a lender of last resort will not keep the financial system from collapsing.C. only the U.S. Treasury can be a true lender of last resort.D. the financial system will collapse without a lender of last resort.

Q: The first test of the Federal Reserve as lender of last resort occurred with the: A. attack on Pearl Harbor by the Japanese.B. widespread failures of Savings and Loans in the 1980's.C. introduction of flexible exchange rates in the U.S. in 1971.D. stock market crash in 1929.

Q: If the lender of last resort function of the government is to be effective in working to minimize a crisis, it must be: A. reserved only for those banks that are most deserving.B. used on a limited basis.C. credible, with banks knowing they can get loans quickly.D. only available during economic downturns.

Q: The creation of the Federal Reserve in 1913: A. provided the opportunity for lender of last resort but not the guarantee that it would be used.B. guaranteed the Federal Reserve would always act as lender of last resort.C. eliminated bank panics in the U.S.D. was in response to the Great Depression in the U.S.

Q: The best way for a government to stop the failure of one bank from turning into a bank panic is to: A. make sure solvent institutions can meet the withdrawal demands of depositors.B. declare a bank holiday until solvent banks can acquire adequate liquidity.C. limit the withdrawals of depositors.D. provide zero-interest rate loans to all banks regardless of net worth.

Q: The need for a lender of last resort was identified as far back as: A. the start of the Great Depression in 1929.B. 1913, when the Federal Reserve was created.C. 1873, by British economist Walter Bagehot.D. 1776, by the first U.S. Secretary of the Treasury, Alexander Hamilton.

Q: The inter-bank loans that appear on banks' balance sheets represent what proportion of bank capital? A. Nearly ten percentB. Almost three-fourthsC. About one-thirdD. Less than one percent

Q: One of the unique problems that banks face is: A. they hold liquid assets to meet illiquid liabilities.B. they hold illiquid assets to meet liquid liabilities.C. they hold liquid assets to meet liquid liabilities.D. both their assets and their liabilities are illiquid.

Q: The government's providing of deposit insurance and functioning as the lender of last resort has significantly: A. decreased the incentive for bank managers to take on risk.B. increased the amount of regulation of banks required, but has had no effect on bank's incentive to take on risk.C. increased the incentive for banks to take on risk, but has had no effect on the amount of regulation of banks required.D. increased the amount of regulation of banks required and increased the incentive for banks to take on risk.

Q: The government provides deposit insurance; this insurance protects: A. large corporate deposit accounts, but only the amounts that exceed the $250,000 deductible.B. depositors for up to $250,000 should a bank fail.C. the deposits of banks in their Federal Reserve accounts.D. the deposits that people have, but only for federally chartered banks.

Q: The government's role of lender of last resort is directed to: A. large manufacturing firms that employ thousands of people.B. depositors; this is role the government plays when they insure depositors' balances in banks that fail.C. developing countries that are trying to build their financial systems.D. banks that experience sudden deposit outflows.

Q: The financial system is inherently more unstable than most other industries due to the fact that: A. while in most other industries customers disappear at a faster rate, in banking they disappear slowly so the damage is done before the real problem is identified.B. banks deal in paper profits, not in real profits.C. a single firm failing in banking can bring down the entire system; this isn't true in most other industries.D. there is less competition than in other industries.

Q: The government regulates bank mergers, sometimes denying the proposed merger. Often the reason given for the denial is to protect small investors. What are small investors being protected from? A. with a larger bank the bank is likely to take greater risk and may fail.B. in order to pay for the merger, the bank may seek higher returns putting the depositors' funds at greater risk.C. mergers can increase the monopoly power of banks and the bank may seek to exploit this power by raising prices and earning unwarranted profits.D. bank runs hurt larger banks more than smaller banks.

Q: An economic rationale for government protection of small investors is that: A. large investors can better afford losses.B. many small investors cannot adequately judge the soundness of their bank.C. there is inadequate competition to ensure a bank is operating efficiently.D. banks are often run by unethical managers who will often exploit small investors.