Fin Exam4

A central bank sale of ________ to purchase ________ in the foreign exchange market results

in an equal rise in its international reserves and the monetary base.

domestic currency; foreign assets

A central bank sale of ________ to purchase ________ in the foreign exchange market results in an equal decline in its international reserves and the monetary base.

foreign assets; domestic currency

 A central bank ________ of domestic currency and corresponding ________ of foreign assets in the foreign exchange market leads to an equal ________ in its international reserves and themonetary base.

purchase; sale; decline

 A central bank ________ of domestic currency and corresponding ________ of foreign assets in the foreign exchange market leads to an equal ________ in its international reserves and the monetary base.

 sale; purchase; increase

 A foreign exchange intervention with an offsetting open market operation that leaves the monetary base unchanged is called

a sterilized foreign exchange intervention.

 An unsterilized intervention in which domestic currency is sold to purchase foreign assets leads to

a gain in international reserves.

an increase in the money supply.

only A and B of the above.

A Federal Reserve decision to sell dollars in order to buy foreign assets in the foreign exchange market has the same effect as an open market ________ of bonds to ________ the monetary base and the money supply.

purchase; increase

 Because sterilized interventions mean offsetting open market operations, there is no impact on the monetary base and the money supply, and therefore a sterilized intervention

has no effect on the exchange rate.

Because sterilized interventions mean offsetting open market operations,

A) there is no impact on the monetary base.

B) there is no impact on the money supply.

C) there is no effect on the exchange rate.

D) all of the above occur.

 Central banks regularly engage in international financial transactions to influence exchange rates. These transactions are called __________

 foreign exchange interventions

_________are central bank holdings of assets denominated in a foreign currency.

International reserves

The difference between merchandise exports and imports is called the

trade balance.

 A current account ________ indicates that the United States is ________ its claims on

foreign wealth.

surplus; increasing

In 2021, the United States exported more services than it imported, by $245 billion. Net exports had a deficit of $845 billion, versus a merchandise trade ________ of ________ billion.

deficit; $1,090

Holding other factors constant, which of the following would decrease the size of the U.S. current account deficit?

An increase in the amount of goods sold to foreigners

The U.S. typically runs a

trade deficit.

 A trade balance is more accurately referred to as a(n)

merchandise trade balance

The Bretton Woods system was one in which central banks

 bought and sold their own currencies to keep their exchange rates fixed.

The Bretton Woods agreement created the ________, which was given the task of promoting the growth of world trade by setting rules for the maintenance of fixed exchange rates and by making loans to countries that were experiencing balance of payments difficulties.

IMF

The Bretton Woods agreement set up the ________, which currently provides long-term loans to assist developing countries to build dams, roads, and other physical capital that contributes to economic development.

World Bank

 What kind of exchange rate system did the Bretton Woods agreement establish?

Fixed

In the Bretton Woods system, the anchor currency was the

U.S. dollar

 A dirty float is

when countries intervene in foreign exchange markets in an attempt to influence their exchange rates by buying and selling foreign assets.

Seigniorage is

when a country loses the revenue that it received by issuing money.

Under a fixed exchange rate regime, if the domestic currency is initially ________, that is ________ par, the central bank must intervene to sell the domestic currency by purchasing foreign assets.

undervalued; below

Under a fixed exchange rate regime, if the domestic currency is initially ________, that is

________ par, the central bank must intervene to buy the domestic currency by selling foreign

assets.

overvalued; above

 If a central bank does not want to see its currency fall in value, it may pursue ________ monetary policy to ________ the domestic interest rate, thereby strengthening its currency.

contractionary; raise

If a central bank does not want to see its currency rise in value, it may pursue ________ monetary policy to ________ the domestic interest rate, thereby weakening its currency.

expansionary; lower

In September 1992, the Bundesbank attempted to keep the mark from appreciating relative to the British pound, but it failed because participants in the foreign exchange market came to expect the

appreciation of the mark.

 Under dollarization, a country

abandons its own currency and adopts the money of another country.

 (I) Controls on capital outflows may increase capital flight by weakening confidence in the government.

(II) Controls on capital outflows are an inadequate substitute for financial reform to deal with currency crises.

Both are true

Capital controls are seldom effective during a crisis since

the private sector finds other ways to move funds out of the country

Which of the following statements is true?

A bank's assets are its uses of funds.

 Which of the following statements is false?

 Bank capital is an asset on the bank balance sheet.

Which of the following are reported as liabilities on a bank's balance sheet?

Discount loans

Checkable deposits and money market deposit accounts are

A) payable on demand.

B) liabilities of the banks.

only A and B of the above.

 Because checking accounts are ________ liquid for the depositor than passbook savings, they earn ________ interest rates.

more; lower

 Which of the following are not checkable deposits?

A) Savings accounts

B) Small-denomination time deposits

Only A and B of the above

Bank loans from the Federal Reserve are called ________ and represent a ________ of funds.

discount loans; source

Which of the following are reported as assets on a bank's balance sheet?

Loans

 Which of the following are reported as assets on a bank's balance sheet?

Only A and B of the above

A) Cash items in the process of collection

B) Deposits with other banks

Because of their ________ liquidity, ________ U.S. government securities are called secondary reserves.

high; short-term

 Secondary reserves

can be converted into cash with low transaction costs.

The most important category of assets on a bank's balance sheet is

loans

 Which of the following bank assets are the least liquid?

Mortgage loans

 Which of the following bank assets are the most liquid?

Reserves

Loans

A) are the largest category of bank assets.

B) provide most of the bank's revenues.

C) earn the highest return of all bank assets.

D) do all of the above.

 A bank's largest source of funds is its

 nontransaction deposits.

Discount loans are also known as ________.

advances

 Bank capital

A) is raised by selling new equity.

B) is a cushion against a drop in the value of its assets.

C) comes from retained earnings.

D) is all of the above.

A bank

obtains funds by borrowing and by issuing liabilities

 Banks earn profits by selling ________ with attractive combinations of liquidity, risk, and return, and using the proceeds to buy ________ with a different set of characteristics.

liabilities; assets

In general, banks make profits by selling ________ liabilities and buying ________ assets.

short-term; longer-term

When you deposit $50 in the First National Bank,

only B and C of the above occur

B) its assets increase by $50.

C) its reserves increase by $50.

In general, banks make profits by selling ________ liabilities and buying ________ assets.

 short-term; longer-term

 When a $10 check written on the First National Bank is deposited in an account at the Second National Bank, then

 the liabilities of the First National Bank decrease by $10.

 Holding all else constant, when a bank receives the funds for a deposited check,

 only A and B of the above occur.

cash items in process of collection fall by the amount of the check.

bank assets remain unchanged.

When $1 million is deposited at a bank, the required reserve ratio is 20 percent, and the bank chooses not to hold any excess reserves but instead makes loans, then in the bank's final balance sheet,

reserves increase by $200,000.

If a bank has $1 million of deposits, a required reserve ratio of 20 percent, and $300,000 in reserves, it need not rearrange its balance sheet if there is a deposit outflow of

either A or B of the above.

$50,000.

$75,000.

If a bank has $200,000 of deposits, a required reserve ratio of 20 percent, and $80,000 in reserves, then the maximum deposit outflow it can sustain without altering its balance sheet is

$50,000

A bank manager has which of the following concerns?

A) To acquire funds at low cost

B) To minimize risk by diversifying asset holdings

C) To have enough ready cash to meet deposit outflows

D) All of the above

In the absence of regulation, banks would probably hold

 too little capital, increasing the return on equity.

The existence of deposit insurance can increase the likelihood that depositors will need deposit protection, as banks with deposit insurance

are likely to take on greater risks than they otherwise would.

Research at the World Bank has found that, on average, the adoption of explicit government

deposit insurance is associated with ________ banking sector stability and a ________ incidence

less; higher

Just prior to the global financial crisis, mortgage loans known as NINJA loans were issued to borrowers. What is a NINJA loan?

A loan issued to borrowers with no income, employment, nor assets to speak of.

Deposit insurance

does all of the above.

One problem of the too-big-to-fail policy is that it ________ the incentives for ________ by

big banks.

increases; moral hazard by big banks

The primary difference between the "payoff" and the "purchase and assumption" methods of handling failed banks is that the FDIC

guarantees all deposits, not just those under the $250,000 limit, when it uses the "purchase and assumption" method.

 The primary difference between the "payoff" and the "purchase and assumption" methods of handling failed banks is that the FDIC

E) does both B and C of the above.

B) guarantees all deposits, not just those under the $250,000 limit, when it uses the "purchase

and assumption" method.

C) is less likely to use the "payoff" method when the bank is large, and it fears that depositor

Regulators attempt to reduce the riskiness of banks' asset portfolios by

A) limiting the amount of loans in particular categories or to individual borrowers.

B) prohibiting banks from holding risky assets such as common stocks. 

doing only A and B of the above

When regulators engage in microprudential regulation, they focus on

the safety and soundness of individual financial institutions.

When regulators engage in macroprudential regulation, they focus on

 the safety and soundness of the financial system in aggregate.

The increased integration of financial markets across countries and the need to make the playing field equal for banks from different countries led to the Basel Accord agreement to

standardize bank capital requirements internationally

 Under the Basel plan,

A) assets and off-balance sheet activities are assigned to various categories to reflect the degree

of credit risk.

B) a bank's total capital must equal or exceed 8 percent of total risk-weighted assets.

C) both of the above occur

What role did the credit-rating agencies play leading up to the start of the financial crisis in 2007?

 Inaccurate ratings provided by credit-rating agencies helped promote risk taking throughout the financial system.

Ways in which bank regulations reduce the adverse selection and moral hazard problems in banking include

A) a chartering process designed to prevent crooks from getting control of a bank.

B) restrictions that prevent banks from acquiring certain risky assets, such as common stocks.

C) high bank capital requirements to increase the cost of bank failure to the owners.

D) all of the above.

Regular bank examinations and restrictions on asset holdings indirectly help to ________ the adverse selection problem because, given fewer opportunities to take on risk, risk-prone entrepreneurs will be ________ from entering the banking industry.

educe; discouraged

The legislation that separated commercial banking from the securities industry is known as

the

Glass-Steagall Act.

Dodd-Frank designates some financial institutions as __________since they are so important

that their failure would threaten the entire financial system.

SIFIs

Which of the following solutions have been proposed to solve the too-big-to-fail problem?

A) Break up large, systemically important financial institutions.

B) Impose higher capital requirements on large, systemically important financial institutions.

C) Do nothing, since Dodd-Frank effectively eliminated the problem.

D) All of the above have been proposed.

Some view that Dodd-Frank eliminated the too-big-to-fail problem. How did it achieve this?

By making it harder for the Federal Reserve to bail out financial institutions

One suggestion for combatting the too-big-to-fail problem is to

increase capital requirements of SIFIs when the economy is booming.

The government institution that has responsibility for the amount of money and credit supplied in the economy as a whole is the

central bank.

 The Federal Reserve Act of 1913 required that

national banks join the Federal Reserve System.

Which bank regulatory agency has the sole regulatory authority over bank holding companies?

The Federal Reserve System

State banks that are not members of the Federal Reserve System are most likely to be examined by the

Federal Deposit Insurance Corporation.

Which regulatory body charters national banks?

 The Comptroller of the Currency

 Large fluctuations in interest rates lead to

A) substantial capital gains and losses to owners of securities.

B) greater uncertainty about returns on investments.

C) greater interest-rate risk.

D) all of the above.

 The most significant change in the economic environment that changed the demand for

financial products since 1970 has been

the dramatic increase in the volatility of interest rates.

Adjustable-rate mortgages

A) benefit homeowners when interest rates are falling.

B) reduce financial institutions' interest-rate risk.

D) do only A and B of the above.

Examples of financial services that became practical realities as the result of new computer

technology include

A) credit cards.

B) electronic banking facilities.

E) only A and B of the above.

 A firm issuing credit cards earns income from

A) loans it makes to credit card holders.

B) payments made to it by stores on credit card purchases.

A smart card is a form of

stored-value card.

Unlike traditional banking, where the process of asset transformation involves ________,

securitization is a process of asset transformation that involves ________.

one entity; a number of different financial institutions

The securitization process involves the following four steps, in the sequence listed:

Loan origination, servicing, bundling, distribution

"Stripping" a Treasury bond

 means selling each of its future payments as a separate zero-coupon bond.

The practice of creating marketable debt instruments that are backed by otherwise illiquid assets is known as

securitization

The bundling of mortgages into a saleable security (usually for large institutional investors) is

called ________.

securitization

Which of the following is not a reason for the disappointing revenue growth and profits of Internet-only banks?

 High cost per transaction