Money & Banking Exam 1

The National Credit Union Administration insures the share draft accounts (deposits) of credit union members up to a maximum of $250,000 per account holder in all federal credit unions and the overwhelming majority of state-chartered credit unions.

True

False

True

U.S. Treasury bills

a.provide interest income to the buyer

b.provide dividends to the buyer

c.are purchased and sold on the capital market

d.are the least liquid financial instrument of the money market

e.are not backed by the full faith and credit of the U.S. government

a.provide interest income to the buyer

The dual mandate of the Federal Reserve means that the Federal Reserve is responsible for promoting

a.stable exchange rates and a sound money supply.

b.high interest rates and strong investment spending.

c.an equitable distribution of income and low inflation.

d.zero unemployment and modest inflation.

e.maximum employment and stable prices.

e.maximum employment and stable prices.

Treasury bills are typically sold at a discount from the face value. When a bill matures, you are paid its face value. If the face value is greater than the purchase price, the difference is your implied interest.

True

False

True

A rising rate of interest might cause businesses to _____, but households to ______

a.borrow less; save more

b.borrow more; save less

c.borrow the same amount; spend more on consumption

d.borrow less; save less

e. borrow more; save more

a.borrow less; save more

Due to their longer-term maturities, securities of the capital market tend to have greater price fluctuations and are riskier than instruments of the money market.

True

False

True

Founded in 1913, the Federal Reserve System is currently owned and operated by the U.S. government to serve the public interest of the American economy.

True

False

False

Financial institutions that make loans and accept deposits are known as:

a.trading exchanges

b.investment banks

c.commercial banks

d.foreign exchanges

e.mutual funds

c.commercial banks

Borrowers usually have superior information than lenders about the likely returns and risks of an investment undertaking. This difference in information is known as:

a.moral hazard

b.symmetric information

c. asymmetric information

d. adverse selection

e. disinformation

c. asymmetric information

The Office of the Comptroller of the Currency strives to ensure that national banks and federal savings associations operate in a safe and sound manner, provide fair access to financial services, treat customers fairly, and comply with applicable laws and regulations.

True

False

True

In 2022, Bitcoin replaced the U.S. dollar as the key currency in the global trading and financial system.

True

False

False

Regarding Bitcoin, which of the following statements is false?

a.Bitcoin is a centralized currency; it is regulated by a single government and central bank.

b.Bitcoin transactions don't have legal protection, which makes them susceptible to scams.

c.Although there's a growing number of firms that accept Bitcoin, it's still not widely accepted.

d.Bitcoin transactions are anonymous, so transactions can't be traced back to the user.

e.Transactions done through Bitcoin are irreversible and final

a.Bitcoin is a centralized currency; it is regulated by a single government and central bank.

The dollar value of the M1 money supply is larger than the value of the M2 money supply. This is because the assets included in M1 are more liquid than the assets included in M2.

True

False

False

During the 1970s, the price level approximately doubled in the United States. During this era, money served quite unsuccessfully as a:

a.means of payment

b.store of value

c.medium of exchange

d.standard of value

e.unit of account

b.store of value

Under historic barter economies, commodities such as wheat, oxen, or milk served as money. Disadvantages of commodity money included all of the following except:

a.a lack of divisibility into small units

b.a lack of portability

c.a lack of durability

d.lack of general acceptability

e.All of the above are true.

d.lack of general acceptability

Federal Reserve Notes account for all of the paper currency currently issued in the United States. The notes are issued by the twelve regional Federal Reserve Banks.

True

False

True

Before the mid-1900s, most countries used gold or silver as the basis for their monetary systems.

True

False

False

The monetary system of the United States is currently a fiat money system. This means that

a.money has value because the material from which it is made is relatively scarce and costly.

b.money is not backed by gold or silver, and it is declared by the government to be legal tender.

c.the money supply includes coins, paper currency, but not checkable deposits issued by banks

d.money is backed by commodities including gold and silver.

e.there are government-mandated restrictions on the amount of money that can be created

b.money is not backed by gold or silver, and it is declared by the government to be legal tender.

When you look at the front side of a dollar bill, you see the statement, “This note is legal tender. . . .” Legal tender is currency that cannot legally be refused in payment of debt.

 

True

False

True

For the United States, the official measurement of the money supply includes all of the following except: 

a.credit cards

b.checks written by businesses

c.personal checks

d.paper currency

e.coin

a.credit cards

 A positive total return on a bond is a function of

a.only the capital gain or loss earned by the bond.

b.neither the interest paid by the bond nor any capital appreciation (depreciation) on the bond.

c.interest paid by the bond and any capital appreciation, the rise in the bond’s market price.

d.interest paid by the bond and any capital depreciation, the fall in the bond’s market price.

e.only the interest paid by the bond.

c.interest paid by the bond and any capital appreciation, the rise in the bond’s market price.

In 1997, the U.S. Treasury started issuing indexed securities whose returns are adjusted for changes in the consumer price index. These securities are called:

a.U.S. treasury bonds

b.U.S. government agency securities

c.municipal adjusted securities

d.TIPS

e.U.S. government-agency securities

d.TIPS

Regarding interest yields, the _____ refers to the annual interest payment of the bond divided by its face value; the _____ refers to the annual interest payment of a bond divided by the bond’s current market price.

a.coupon rate; current yield

b.yield to maturity; current yield

c.yield to maturity; coupon rate

d.real rate; nominal rate

e.current yield; coupon rate

a.coupon rate; current yield

With an adjustable-rate mortgage, the interest rate is initially fixed for a period, usually for the first three, five, or seven years, depending on the type of mortgage. After that, the interest rate on the outstanding balance fluctuates over the period of the loan, based on changing market rates of interest.

True

False

True

 The prime rate of interest for the banking system is set by Bank of America. All other banks base their interest rates on Bank of America’s prime rate.

True

False

False

Concerning the time value of money, the higher the interest rate, the lower the present value and the higher the future value.

True

False

True

 Bondholders will be happy when interest rates rise because prices will increase on the bonds they currently hold.

True

False

False

 Total return is the amount of value an investor earns from a security over a specific period, typically one year, when all distributions are reinvested. Total return is expressed as a percentage of the amount invested, and it includes interest, dividends, and capital gains.

True

False

True

During eras of increasing interest rates, which type of bond will be subject to the least interest rate risk?

a.a six-year bond

b.a three-year bond

c.a one-year bond

d.a five-year bond

e.a two-year bond

c.a one-year bond

Assume that you have a savings account at U.S Bank. You would hope that the bank would compound the interest on your account:

a.twice a year

b.on a daily basis

c.once a month

d.once a quarter

e.once a year

b.on a daily basis

In the bond market, if the price of bonds is above the equilibrium price, there will be a surplus of bonds. To eliminate the surplus, bond issuers will reduce the asking price and decrease the quantity of bonds offered for sale, while the lower price encourages investors to purchase more bonds.  

True

False

True

The loanable funds model explains the interest rate on a loan in terms of the supply and demand for funds offered for lending. A loanable funds market exists for virtually every type of loan in the economy. 

True

False

True

An investment portfolio is a collection of assets such as stock, bonds, mutual funds, and money. These assets represent values of ownership that can be converted into cash, which means that they serve as a store of value.  

True

False

True

In the market for government or corporate bonds,

a.bond suppliers are lenders of funds, and bond demanders are borrowers of funds.

b.if the price of bonds is at equilibrium, there is a shortage of bonds.

c.if the price of bonds is below equilibrium, there is a surplus of bonds.

d.if the price of bonds is above equilibrium, there is a shortage of bonds. 

e.bond suppliers are borrowers of funds, and bond demanders are lenders of funds.

e.bond suppliers are borrowers of funds, and bond demanders are lenders of funds.

If the demand for U.S. Treasury bonds decreases, the price of the bonds will

a.decrease and the interest rate will increase.

b.increase and the interest rate will decrease.

c.increase and the interest rate remains constant.

d.increase and the interest rate will increase.

e.decrease and the interest rate will decrease.

a.decrease and the interest rate will increase.

Although the empirical evidence on the Fisher effect is mixed, most economists maintain that if we want nominal interest rates to be low, inflation must be relatively high.

True

False

False

If the federal government stops running budget deficits and commits to balancing its budget annually, the government’s 

a.supply curve of bonds will shift rightward.

b.demand curve for bonds will shift rightward.

c.demand curve for bonds will shift leftward.

d.supply curve of bonds will fall to zero

e.supply curve of bonds will shift leftward.

e.supply curve of bonds will shift leftward.

Economist Irving Fischer (1867–1947) was famous for his research in capital and monetary theory. According to Fischer, the primary factor underlying the long-run behavior of interest rates is (are):

a.the business cycle

b.expected inflation

c.anticipated changes in exchange rates

d.anticipated changes in taxes

e.budget surpluses and deficits

b.expected inflation

An increase in the savings rate of households will result in a rightward shift in the demand curve for loanable funds, which leads to a rise in the interest rate. 

Question 9Answer

True

False

False

American economist Harry Markowitz was a main developer of portfolio theory, which considers the selection of investments. He maintained that most investments

a.have zero thresholds of inflation risk and zero thresholds of interest-rate risk

b.are either high risk and high return, or low risk and low return.

c.have high thresholds of inflation risk and thus high thresholds of interest-rate risk.

d.have low thresholds of inflation risk and thus low thresholds of interest-rate risk.

e.are either high risk and low return, or low risk and high return.

b.are either high risk and high return, or low risk and low return.