Suppose you deposit $100 of currency into your commercial bank savings account. This action does what to the monetary base?

*a. leaves it unchanged

b. increases it $100

c. decreases it $100

d. does none of the above

The monetary base is comprised of

a. currency in circulation and Federal Reserve notes.

b. currency in circulation and government securities.

*c. currency in circulation and reserves.

d. reserves and government securities.

The sum of vault cash and bank deposits with the Fed minus required reserves is called

a. the monetary base.

b. the money supply.

*c. excess reserves.

d. total reserves.

When the Fed simultaneously purchases government bonds and extends discount loans to banks,

a. the money supply unambiguously falls.

*b. the money supply unambiguously rises.

c. the net effect on the money supply cannot be determined because the two Fed actions counteract each other.

d. the Fed action has no effect on the money supply.

When the Fed simultaneously extends discount loans and sells government bonds,

a. the money supply unambiguously increases.

b. the money supply unambiguously falls.

*c. the net effect on the money supply cannot be determined without further information because the two Fed actions counteract each other.

d. the Fed action has no effect on the money supply.

When the Fed wants to reduce reserves in the banking system, it will

a. purchase government bonds.

b. extend discount loans to banks.

c. print more currency.

*d. sell government bonds.

The simple deposit multiplier is equal to 4 when the required reserve ratio is equal to

*a. 0.25.

b. 0.40.

c. 0.05.

d. 0.15.

The First National Bank of Galata has $150 in excess reserves. If the required reserve ratio is 10%, how much extra can the First national Bank lend?

a. $1500

b. $750

*c. $150

d. $0

If excess reserves in the banking system amount to $75 and the required reserve ratio is 0.20, checkable deposits could potentially expand by

a. $75.

b. $750.

c. $37.5

*d. $375.

If a member of the nonbank public purchases a government bond from the Federal Reserve with currency, then

a. both the monetary base and reserves will fall.

b. both the monetary base and reserves will rise.

*c. the monetary base will fall, but reserves will remain unchanged.

d. the monetary base will fall, but currency in circulation will remain unchanged.

e. none of the above will occur.

Which of the following are found on the asset side of the Federal Reserve’s balance sheet?

a. Treasury securities

b. Treasury deposits

c. Discount loans

d. Both (a) and (b) of the above

*e. Only (a) and (c) of the above.

Which of the following are found on the liability side of the Federal Reserve’s balance sheet?

a. Cash items in the process of collection.

*b. Deferred availability cash items.

c. Gold.

d. All of the above.

e. Only (b) and (c) of the above.

When float increases,

a. currency in circulation falls.

b. the monetary base falls.

*c. the monetary base rises.

d. the monetary supply falls.

e. none of the above.

A reduction in which of the following leads to an increase in the monetary base?

*a. U.S. Treasury deposits at the Fed when it makes tax refunds

b. Float

c. Discount loans

d. All of the above

When comparing the simple model of multiple deposit creation with the money supply model that accounts for depositors’ currency drains and bank’s precautionary balances of excess reserves, the more complicated model indicates that

a. an increase in the monetary base that goes into loans is not multiplied to arrive at the change in the money supply.

*b. the money multiplier is negatively related to the currency drain ratio.

c. the money multiplier is positively related to the precautionary excess reserves ratio.

d. the money multiplier is positively related to the required reserve ratio.

e. Only (a) and (b) of the above.

The money multiplier increases in value as the

a. currency ratio increases.

b. excess reserves ratio increases.

*c. required reserve ratio decreases.

d. required reserve ratio increases.

Depositors often withdraw more currency from their bank accounts during the Christmas season. Therefore, one would predict that

*a. the money multiplier will tend to fall during Christmas season.

b. the money multiplier will tend to rise during Christmas season.

c. discount borrowing will tend to fall during Christmas season.

d. none of the above will occur.

The Fed lacks complete control over the monetary base because

a. it cannot set the required reserve ratio on checkable deposits.

b. it cannot perfectly predict the amount of discount borrowing by banks.

c. it cannot perfectly predict shifts from deposits to currency.

d. all of the above are true.

* e. only (b) and (c) are true.

The more complex money multiplier is smaller than the simple deposit multiplier when

a. the currency drain ratio is greater than zero.

b. the precautionary excess reserves ratio is greater than zero.

c. the required reserve ratio on checkable deposits is greater than zero.

*d. both (a) and (b) of the above occur.

The money multiplier is negatively related to

a. the excess reserves ratio.

b. the currency ratio.

c. the required reserve ratio on checkable deposits.

*d. all of the above.

e. only (a) and (b) of the above.

For a given level of the monetary base, a drop in the excess reserve ratio means

*a. an increase in the money supply.

b. an increase in the monetary base.

c. an increase in the nonborrowed base.

d. all of the above.

e. only (b) and (c) of the above.

If a bank reduce its holdings of excess reserves by making loans,

a. the monetary base will decrease.

*b. the money supply will increase.

c. both (a) and (b) of the above will occur.

d. neither (a) nor (b) of the above will occur.

The banking system’s precautionary excess reserves ratio is

a. negatively related to both the market interest rate and expected deposit outflows.

b. positively related to both the market interest rate and expected deposit outflows.

c. positively related to the market interest rate and negatively related to expected deposit outflows.

*d. negatively related to the market interest rate and positively related to expected deposit outflows.

If the required reserve ratio is one-fourth, excess reserves are not held, and checkable deposits are $1200 billion, then the money multiplier is

a. 2.5.

b. 3.0.

c. 3.5.

*d. 4.0.

An important routine function of a Federal Reserve Bank is to

a. supervise the liquidation of the assets of bankrupt commercial banks

b. help large banks develop financial relationships with smaller banks

c. advise banks as to the most profitable ways of buying securities

d. * provide facilities by which banks may clear and collect checks

Open market operations are of two types:

a. defensive and offensive.

b. dynamic and reactionary.

c. actionary and passive.

*d. dynamic and defensive.

If the Federal Reserve wants to inject reserves into the banking system, it will usually

*a. purchase government securities.

b. raise the discount rate.

c. sell government securities.

d. lower reserve requirements.

e. do either (a) or (b) of the above.

To temporarily increase reserves in the banking system, the Fed engages in

*a. a repurchase agreement.

b. a reverse repo.

c. a matched sale-purchase transaction.

d. none of the above.

When float increases, causing a temporary increase in reserves in the banking system, the Fed can offset the effects of float by engaging in

a. a repurchase agreement.

b. an interest rate swap.

*c. a matched sale-purchase transaction.

d. none of the above.

The type of discount loan extended by the Fed to banks that experience financial difficulties and do not qualify as fulfilling “generally sound financial condition” is called

a. primary credit.

b. seasonal credit.

*c. secondary credit.

d. installment credit.

Changes in the reserve requirements (required reserve ratio) are infrequently used for changing the money supply because

*a. reserve requirements changes tend to be too powerful and costly for banks to adjust to.

b. reserve requirement changes tend to be ineffective.

c. reserve requirement changes must be approved by the president.

d. of only (a) and (c) of the above.

A reduction in reserve requirements causes the money supply to rise, since the change causes

a. the money multiplier to fall.

*b. the money multiplier to rise.

c. total reserves to fall.

d. total reserves to rise.

Because the discount rate is kept above the federal funds interest rate,

a. the Fed must ration discount loans on a first-come, first-serve basis.

*b. banks have the incentive to borrow from other banks before borrowing from the Fed.

c. the Fed refuses to extend discount credit to banks that are not members of the Federal Reserve System.

d. none of the above occurs.

Under 100% reserve banking, the money multiplier will be

a. 0.

*b. 1.

c. 10.

d. 100.

Advantages of tying the discount rate to the federal funds rate would include

a. increasing the confusion concerning the Fed’s intentions about future monetary policy because of the uncertainty about what a change in the discount rate is intended to signal.

b. reducing the large fluctuations in the money multiplier from even small changes in the discount rate.

*c. simplifying the Fed’s administration of the discount window.

d. only (a) and (c) of the above.

When the Fed engages in a matched sale-purchase with a bank, it first ______ securities which the bank agrees to______ back to the Fed within a few days.

a. buys; buy

b. buys; sell

c. sells; buy

*d. sells; sell

When the Fed wants to decrease bank reserves on a temporary basis, it engages in a _______.

a. outright purchase of securities from banks

b. outright sale of securities from banks

*c. reverse repurchase agreement with banks

d. repurchase agreement with banks

The Fed extends______ to financially sound banks that experience unexpected withdrawals of funds by depositors.

*a. primary credit loans

b. seasonal credit loans

c. secondary credit loans

d. emergency loans

If either Treasury deposits or foreign deposits at the Fed are predicted to_______, a ______ open market ______ would be needed to offset the expected decrease in the monetary base.

a. rise; dynamic; purchase

b. fall; dynamic; sale

*c. rise; defensive; purchase

d. fall; defensive; purchase

When the Fed raises the discount rate, as it did on May 16, 2000, the_____ curve in the market for reserves shifts to the______, thereby causing the federal funds interest rate to________.

a. supply; right; fall

b. supply; right; rise

*c. supply; left; rise

d. demand; right; fall

e. demand; left; rise

Even if the Fed could completely control the money supply, not everyone would be happy with monetary policy, since

*a. the Fed is asked to achieve many goals, some of which are incompatible with one another.

b. the goals that are stressed by the Fed do not include high employment, making labor unions a vocal critic of Fed policies.

c. the Fed places primary emphasis on exchange rate stability, often to the detriment of domestic conditions.

d. its mandate requires it to keep Treasury security prices high.

Because timely information on the price level and economic growth is generally unavailable, the Fed has adopted a strategy of

a. targeting the exchange rate, since the Fed has the ability to control this variable.

b. targeting the price of gold, since it is closely related to economic activity.

*c. using an intermediate target such as an interest rate.

d. stabilizing the consumer price index, since the Fed has a high degree of control over the CPI.

Which of the following is true about the Federal Reserve System?

*a. There are 12 regional Federal Reserve Banks

b. The head of the U.S. Treasury also chairs the Federal Reserve Board

c. There are 14 members of the Federal Reserve Board

d. The Federal Reserve receives its operating funds from the federal government

Many economists questions the desirability of targeting real interest rates by pointing out that

a. the Fed does not have direct control over real interest rates.

b. changes in real interest rates have little effect on economic activity.

c. real interest rates are extremely difficult to measure.

d. all of the above are correct.

*e. only (a) and (c) of the above are correct.

The Federal Reserve regulates the money supply mainly by

a. controlling the production of coins and paper money issued by the U.S. mint

b. altering the reserve requirements of commercial banks

c. issuing discount loans to financially troubled commercial banks

d. *altering the reserve of banks through purchases/sales of government securities

Open market operation change

a. The size of the monetary multiplier, but not commercial bank reserves

b. *Commercial bank reserves, but not the size of the monetary multiplier

c. Neither commercial bank reserves nor the size of the monetary multiplier

d. Both commercial bank reserves and the size of the monetary multiplier

A decrease in the required reserve ratio increases

a. The total reserves of commercial banks

b. The required reserves of commercial banks

c. *The excess reserves of commercial banks

d. The actual reserves of commercial banks

The interest rate that banks charge one another on overnight loans is called the

a. *Federal funds rate

b. Prime lending rate

c. Subprime lending rate

d. Discount rate

To decrease the federal funds rate, the Fed can

a. *Buy securities from banks or the public

b. Sell securities to banks or the public

c. Increase the discount rate

d. Increase the prime interest rate

If the Fed was attempting to decrease demand-pull inflation, the proper policies would be to

a. Sell government securities, raise reserve requirements, and lower the discount rate

b. Sell government securities, lower reserve requirements, and lower the discount rate

c. Buy government securities, raise reserve requirements, and raise the discount rate

d. *Sell government securities, raise reserve requirements, and raise the discount rate

Which of the following best describes the cause-effect chain of a restrictive (tight) monetary policy?

a. A decrease in the money supply will lower the interest rate, increase investment spending, and increase aggregate demand and GDP

b. *A decrease in the money supply will raise the interest rate, decrease investment spending, and decrease aggregate demand and GDP

c. An increase in the money supply will raise the interest rate, decrease investment spending, and decrease aggregate demand and GDP

d. An increase in the money supply will lower the interest rate, decrease investment spending, and increase aggregate demand and GDP

Opponents of the Federal Reserve’s adoption of an inflation targeting strategy argue that it would

a. Result in the federal government “crowding out” private investment spending

b. Expand the Federal Reserve’s monetary powers beyond reasonable limits

c. Reduce the size of the banking system’s money multiplier

d. *limit the Fed’s ability to engage in countercyclical monetary policy

If the Federal Reserve is targeting interest rates, during an economic downturn it will

a. Use open market purchases to lower interest rates

b. * Use open market sales to increase interest rates

c. Avoid open market operations so as not to interfere with the adjustment of interest rates

d. Impose limits on the interest rates banks may charge on credit cards

Which of the following is not considered to be a goal of monetary policy?

a. *Fair wages

b. High employment

c. Price stability

d. Economic growth

A decrease in Federal Reserve float will

a. Increase excess reserves of commercial banks

b. Increase required reserves of commercial banks

c. *Increase the federal funds rate

d. Decrease the federal funds rate

In the federal funds market diagram, an open market sale by the Fed

a. Shifts the supply curve of reserves to the right

b. *Shifts the supply curve of reserves to the left

c. Shifts the demand curve for reserves to the right

d. Shifts the demand curve for reserves to the left

Temporary, short-term discount loans to banks in areas in which agriculture and tourism are important are known as

a. Primary credit

b. Secondary credit

c. *Seasonal credit

d. Extended credit

The Federal Reserve’s Open Market Trading Desk is another name for security traders at the Federal Reserve Bank of

a. San Francisco

b. Chicago

c. Atlanta

d. *New York

The margin requirement set by the Federal Reserve is the

a. *Proportion of the purchase price of a security that an investor must pay in cash

b. Difference between the interest rate banks may charge on loans and the interest rate they pay to depositors

c. Same thing as the required reserve ratio on checking deposits

d. Difference banks must maintain between the value of their assets and the value of their liabilities

Under the Federal Reserve Act, which banks must be members of the Federal Reserve System?

a. All commercial banks

b. *National banks

c. State banks

d. All banks with capital in excess of $100 million

Money and Banking MCQs

1- A lender is promised a $100 payment (including interest) one year from today. If the

lender has an 8% opportunity cost of money, he should be willing to accept what amount

today?

A. $100.00

B. $108.20

C. $92.59 100/(1+0.8)^1 page= 23

D. $96.40

Money and Banking (MGT411) Quiz 01

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2- The higher the Future Value (FV) of the payment, the higher will be the:

A. Discount rate

B. Present value p=25

C. Liquidity

D. Cost of borrowing

3- The procedure of finding out the Present Value (PV) is known as:

A. Discounting

B. Compounding

C. Time value of money

D. Bond pricing

4 ---------------- tells us after how much time period the amount of money will become

double.

A. Real interest rate

B. Nominal interest rate

C. Rule of 72 p=25

D. Time value of money

5- The interest rate used in the present value calculation is often referred to as:

A. Discount rate p=27

B. Inflation rate

C. Nominal rate

D. None of the given option

6- The procedure of finding out the Future Value (FV) is known as:

A. Discounting

B. Compounding

C. Time value of money

D. Bond pricing

7- The price of a bond is the ---------------- of its payments.

A. Present Value p=29

B. Future Value

C. Coupon rate

D. Principal amount

Money and Banking (MGT411) Quiz 01

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8- The ---------------is defined as the probability weighted average of the squared

deviations of the possible outcomes from their expected value.

A. Standard deviation

B. Variance p=34

C. Mean

D. Median

9- The difference between real and nominal interest rate is

A. The cost of borrowing

B. The effect of inflation p=30

C. The price of bonds

D. None of the given option

10- The Future Value (FV) of $1000 in 5 years at 5% interest rate will be:

A. $1000.00

B. $1276.28 fv=1000*(1+.5)^5 p=23

C. $999.99

D. $1500.52

11- Stock exchange is an example of:

A. Financial instrument

B. Financial institution

C. Financial market

D. Bank

12- Which of the following is NOT an example of financial institutions?

A. Banks

B. Securities firms

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C. Stock exchanges

D. Insurance companies

13. Which of the following are used to monitor and stabilize the economy?

A. Governments

B. Commercial Banks

C. Central Banks

D. Financial institutions

Money and Banking (MGT411) Quiz 01

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14. Financial instruments are evolved just as much as _____________.

A. Currency

B. Stocks

C. Bonds

D. Commodity

15. Previously financial markets are located in which of the following?

A. Coffee houses or Taverns

B. Stock exchanges

C. Bazaar

D. Coffee houses and Stock exchanges

16. We need __________ to carry out day to day transactions

A. Money

B. Bonds

C. Stocks

D. Loans

17- Among the following which one is less liquid asset?

A. Checking account

B. Car

C. Share

D. Debit card

18- Which of the following is the final mode of payment?

A. Money

B. ATM

C. Cheque

D. Yet to discover

19- Debit card works in the same way as which one of the following?

A. Cheque p=9

B. Credit card

C. Store value card

D. Pay order

Money and Banking (MGT411) Quiz 01

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20- Banks use to handle transactions among themselves, through which one of the

following?

A. Debit card

B. Electronic transfers p=9

C. Credit card

D. Store value card

1- The present value of an asset can be found by __________________ the future value.

A. Stripping

B. Discounting

C. Compounding

D. Annualizing

2 The interest rate used in the present value calculation is often referred to as the

A. Internal rate of return

B. Inflation rate

C. Discount rate

D. Nominal rate

3 When the yearly coupon payments rises then

A. The value of the coupon bond falls

B. The value of the coupon bond rises

C. The price of the coupon bond rises

D. The price of the coupon bond falls

4 Bond prices are

B. Equal to the face value of the bond

C. Equal to the real interest rate

D. Equal to the nominal interest rate

E. Inversely related to the interest rate

5 If the inflation rate is expected to be 5 % and nominal interest rate is 9%, then the real interest rate will be

A. 14%

B. 9%

C. 5%

D. 4%

6 Riskier investment must have

A. Lower expected returns

B. Higher expected returns

C. No expected return

D. None of the above

7 If market interest rate is higher than the individual’s personal discount rate then people will

made

A. Higher savings

B. Lower savings

C. Dissavings

D. None of the above option

8 The internal rate of return is the interest rate that equates

A. The present value of an investment with its future value

B. The present value of an investment with its cost

C. The future value of an investment with its cost

D. None of the given options

9- The central bank of Pakistan is the

A. Federal Reserve

B. Securities and Exchange Commission

C. State Bank

D. Department of the Treasury

10- Studying money, banking, and financial markets will help you to

B. Answer basic questions about financial relationships from family members

C. Better understand financial newspapers

D. Get a job after your graduate

E. All of the above

1. “Don’t put all your eggs in one basket” is the famous statement of:

A. Moral hazard

B. Indirect finance

C. Asymmetric information

D. Diversification

2. According to which principle, people and companies concentrate on such activities for which their opportunity cost is lower?

E. Principle of absolute advantage

F. Principle of comparative advantage

G. Principle of management

H. None of the given options

3. The problem of “asymmetric information” arises because:

I. Lender knows more than the borrower

J. Borrower knows more than the lender

K. Borrower and lender have different goals

L. Borrower and lender know the future much less than they do the present

4. Nonprofit depository institutions that are owned by people with a common bond are known as:

M. Commercial banks

N. Central banks

O. Credit unions

P. Insurance companies

5. Which of the following is true?

Q. Total bank assets = Total bank liabilities + Bank capital

R. Bank capital = Total bank assets – Total bank liabilities

S. Total bank liabilities = Total bank assets – Bank capital

T. All of the above are true

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6. Securities are highly liquid and can be sold quickly if the bank needs cash, that’s why these are also called:

U. Primary reserves

V. Secondary reserves

W. Excess reserves

X. None of the given options

7. Cash has a high opportunity cost because:

Y. It earns no interest

Z. It earns less interest

AA. It earns more interest

BB. Both B & C

8. The net worth of banks is known as the:

CC. Bank capital

DD. Bank liability

EE. Bank assets

FF. Bank profit

9. ____________ is a measure of how efficiently a particular bank uses its assets:

GG. Return on assets

HH. Return on equity

II. Return on bonds

JJ. None of the given options

10. If return on equity is higher for larger banks then it shows the existence of:

KK. Economies of scope

LL. Economies of scale

MM. Diseconomies of scale

NN. All of the given options

1) Instruments that are not directly under the control of the Central Bank are referred to as:

OO. Operating instruments

PP. Intermediate targets

QQ. Economic instruments

RR. Social instruments

2) Every country with high inflation has ____________ money growth:

A. High

B. Low

C. Medium

D. Zero

3) Which of the following statement is true?

A. Nominal GDP = PY

B. Nominal GDP > PY

C. Nominal GDP <>

D. Nominal GDP ≠ PY

4) According to Milton Friedman, Central Banks should set money

growth at a __________ rate:

A. Increasing rate

B. Decreasing rate

C. Constant rate

D. Zero rate

5) ____________ is one of the financial instruments that we can hold in our investment portfolios:

A. Bonds

B. Shares

C. Money

D. Term finance certificates (TFC)

6) Increases in price level will ____________ the purchasing power of money:

A. Increase

B. Decrease

C. No change

D. Balance

7) At long run real interest rate:

A. AD = Potential Output

B. AD > Potential Output

C. AD <>

D. None of the given options

8) __________ curve is downward sloping because higher inflation reduces real money balances:

A. Aggregate Demand Curve

B. Aggregate Supply Curve

C. IS Curve

D. LM Curve

9) Increases in government purchases will ________ the aggregate demand:

A. Increase

B. Decrease

C. No change

D. Balance

10) A change in cost of producing output causes the ________ curve to shift:

A. Aggregate Demand Curve

B. Aggregate Supply Curve

C. IS Curve

D. LM Curve

1. Future value is equal to:

a. PV/ i

b. PV + PV +i

c. PV + i

d. None of the given options.

2. In compounding we calculate the future value for:

a. Less than 1 year.

b. Equal to 1 year.

c. More than 1 year.

d. All of the given options.

3. ___________ is used in the calculation of present value:

a. Compounding

b. Discounting.

c. Yield to maturity.

d. None of the given options.

4. You receive a check for $100 two years from today. The discounted present value of this $100 is:

a. $100*(1+i)2

b. $100/ (1+i)

c. $100/(1+i)2

d. $100*(1+i)

5. As bond prices increase:

a. Yields to maturity increase.

b. Yields to maturity do not change.

c. Yields to maturity decrease.

d. All of the given options.

6. For a $1000 one year discount bond with a price of $975, the yield to maturity is:

$1000/$975

($1000 – $975)/$975

($1000 – $975)/ ($1000)

$975/$1000

7. For a coupon bond, the current yield is calculated as:

a. Coupon Payment/Price

b. The current yield is the same as the coupon rate.

c. Coupon Payment/Face Value

d. Coupon Payment/((Price + Face Value)/2)

8. For a coupon bond, the yield to maturity is the:

a. Difference between the bond's price and its face value.

b. Annual interest payment divided by the bond's face value.

c. Interest rate that equates the bond's present value with its face value.

d. Interest rate that equates the bond's present value with its price.

9. The real interest rate is:

a. The nominal rate plus the expected inflation rate.

b. The nominal interest rate/the CPI.

c. The product of the nominal rate and the CPI.

d. The nominal rate minus the expected inflation rate.

10. Other things remaining equal, which of the following will increase the demand (shift the demand curve to the right) for bond J?

a. An increase in the risk level of bond J.

b. An increase in the interest rate on bond K.

c. An increase in the level of wealth in the economy.

d. An increase in the interest rate on bond J.

11. At a bond price above the equilibrium,

a. There is an excess supply and the price will tend to rise.

b. There is an excess supply and the price will tend to fall.

c. There is an excess demand and the price will tend to rise.

d. There is an excess demand and the price will tend to fall.

12. Using money demand and money supply:

a. An increase in prices will increase money demand and decrease the interest rate.

b. An increase in expected inflation will decrease money demand and decrease interest rates.

c. An increase in income will increase money demand and increase the interest rate.

d. An increase in the money supply will increase the interest rate.

13. According to the ________ effect, an increase in the money supply lowers the interest rate.

a. Price-level

b. Liquidity

c. Income

d. Expected-inflation

14. Riskier investment must have:

a. Lower expected returns

b. Zero expected returns

c. Higher expected returns.

d. None of the given options.

15. _____________ risks affect everyone.

a. Idiosyncratic

b. Systematic

c. Hedging

d. None of the given options.

16. Zero- Coupon bonds are sold at a price:

a. Equal t their face value

b. Below their face value.

c. Above their face value.

d. None of the given options.

17. If the bond is selling above the face value than it is called:

a. Discount

b. Compound

c. Premium

d. None of the given options.

18. Municipal bonds generally have lower interest rates than U.S. Government bonds because:

a. They have less risk.

b. They are more liquid.

c. They never mature.

d. They are exempt from Federal taxes.

19. Yield curves show:

a. The relationship between liquidity and bond interest rates (yields).

b. The relationship between risk and bond interest rates (yields).

c. The relationship between bond interest rates (yields) and bond prices.

d. The relationship between time to maturity and bond interest rates (yields).

20. The expectations theory of the term structure assumes:

a. Buyers of bonds prefer bonds with longer maturities.

b. Buyers of bonds consider bonds of different maturities to be perfect substitutes.

c. Buyers of bonds prefer bonds with shorter maturities.

d. Markets for different maturity bonds are completely separate.

1. According to the liquidity premium theory of the term structure, when the yield curve has its usual slope, the market expects:

a. Short-term interest rates to rise sharply.

b. Short-term interest rates to stay near their current levels.

c. Short-term interest rates to drop sharply.

d. None of the above.

2. When the yield curve slopes down,

a. The expectations theory suggests that short-term interest rates are expected to fall.

b. The segmented markets theory suggests that short-term interest rates are expected to rise.

c. The expectations theory suggests that short-term interest rates are expected to rise.

d. The liquidity premium theory suggests that short-term interest rates are expected to rise.

3. Which of the following patterns of term structure occur most frequently?

a. Ascending yield curve

b. Descending yield curve

c. Flat yield curve

d. Humped yield curve

4. Common stocks (or corporate stocks):

a. Represent an IOU on the part of the issuing firm

b. Entitle the holder to contractual payments

c. Were a poor investment over the period 1982‑1996

d. Allows the holder to share in the earnings of the firm

5. Financial intermediaries:

a. Channel funds from savers to borrowers

b. Greatly enhance economic efficiency

c. Have been an source of many financial innovations

d. Have done all of the above

6. Which of the following cannot be described as indirect finance?

a. You take out a mortgage from your bank.

b. An insurance company lends money to General Motors Corporation.

c. You borrow $1000 from your best friend.

d. You buy shares in a mutual fund.

7. Which of the following is a depository institution?

a. Life insurance Company

b. Credit union

c. Pension fund

d. Finance company

8. Which of the following is traded in a money market?

a. U.S. Treasury bonds

b. Mortgages

c. Common stocks

d. Federal funds

9. The primary liabilities of a savings and loan association are:

a. Bonds.

b. Mortgages.

c. Deposits.

d. Commercial paper.

10. Financial intermediaries promote efficiency and thereby increase people’s wealth:

a. By reducing the transaction cost of linking together lender and borrowers.

b. To the extent that they help solve problems created by adverse selection and moral hazard.

c. By providing additional jobs.

d. Because of only (a) and (b) of the above.

11. When an investment bank purchases a new issue of securities in the hopes of making a profits, it is said to ________ the issue.

a. Pawn

b. Back stock

c. Syndicate

d. Underwrite

12. Which of the following is a use for commercial bank funds?

a. Loans

b. Securities

c. Reserves

d. All of the above

13. On the commercial bank balance sheet, which of the following is an asset

a. Capital accounts

b. Deposits with Federal Reserve

c. transactions deposits

d. All of the above

14. If a bank has total assets of $100 million and capital accounts of $8 million, then:

a. Its total liabilities are $92 million

b. Its total liabilities are $108 million

c. It has an equity multiplier of 10

d. None of the above are true

15. A bank can increase its leverage by increasing its ratio of:

a. Earnings/total assets

b. Total assets/equity capital

c. Earnings/equity capital

d. Equity capital/total assets

16. When you deposit a $100 check in your bank account at the First National Bank of Chicago and you withdraw $50 in cash, then:

a. The liabilities of First National Bank rise by $100.

b. The reserves of First National Bank rise by $100.

c. The assets of the First National Bank rise by $100.

d. The liabilities of the First National Bank rise by $50.

17. Commercial banks obtain funds by:

a. Issuing demand deposits

b. Borrowing from other banks

c. Issuing ownership claims (equity)

d. All of the above

18. A bank failure is more likely to occur when:

a. A bank holds more U.S. government securities

b. A bank suffers large deposit outflows.

c. A bank holds more excess reserves.

d. A bank has more bank capital.

19. ---------------measures how efficiently a bank uses its assets:

a. Return on assets

b. Return on equity

c. Bank capital

d. Bank Profitability

20. -----------refers to the risk assessment and loss reimbursement guarantee by the individual risk experts of the relevant field:

a. Underwriting process

b. Research process

c. Insurance process

d. None of the given options

21. The euro is the name for:

a. A currency deposited outside its country of origin.

b. A bond sold internationally outside of the country in whose currency the bond is denominated.

c. A common European currency.

d. A type of sandwich.

22. Banks can operate in other countries by:

a. Offering same services as in home country

b. Opening a foreign branch

c. Creating an international Banking Facility

d. All of the given options.

23. The theory of efficient markets:

a. Allows for higher than average returns if the investor takes higher than average risk

b. Says insider information makes markets less efficient

c. Rules out high returns due to chance

d. Assumes people have equal luck

24. If information in a financial market is asymmetric, this means:

a. Borrowers and lenders have perfect information

b. Borrowers would have more information than lenders

c. Borrowers and lenders have the same information

d. Lenders lack any information

25. Khushali Bank is:

a. A Finance company

b. A Securities firm

c. A Government sponsored enterprise

d. An insurance company

1. Currency includes the following forms of assets:

a. Paper money and coins.

b. Paper money, coins, and checks.

c. Paper money and checks.

d. Paper money and savings deposits.

2. The conversion of a barter economy to one that uses money increases efficiency by reducing:

a. The need to exchange goods.

b. The need to specialize.

c. The need to employ team production.

d. Transaction costs.

3. Of money's three functions, the one that distinguishes money (as measured by M1) from other assets is its function as a:

a. Store of value.

b. Unit of account.

c. Standard of deferred payment.

d. Medium of exchange.

4. The narrowest definition of money that the Federal Reserve System reports is:

a. M0.

b. M1.

c. M2.

d. M3.

5. Higher the risk,

a. Higher will be the compensation,

b. Lower the compensation,

c. There will be no compensation,

d. All of the given options.

6. the financial system makes it easier to trade,

a. Facilitate payments,

b. Channel funds from savers to borrowers,

c. Enable risk sharing,

d. All of the given options.

7. Given the price level Pt, the inflation rate is calculated as:

a. (Pt – Pt-1)/Pt

b. Pt – Pt-1

c. (Pt – Pt-1)/Pt-1

d. Pt/Pt-1

8. The GDP deflator is calculated as:

a. Real GDP – Nominal GDP

b. Nominal GDP/Real GDP

c. Nominal GDP – Real GDP

d. Real GDP/Nominal GDP

9. Present value is equal to:

a. 1/FV

b. FV/ i

^c. FV/ (1+i) ⁿ

d. None of the given options.

10. Financial institutions play an important role to,

a. Reduce transaction,

b. Reduce information,

c. Curb information,

d. All of the given options.

1. Which of the following correctly states the relationship regarding banks' balance sheets?

a. Total Bank Liabilities = Total Bank capital + Total Bank Assets.

b. Total Bank Assets = Total Bank Liabilities + Total Bank Capital.

c. Total Bank Assets = Total Bank Liabilities – Total Bank Capital.

d. Total Bank Assets = Total Bank Capital – Total Bank Liabilities.

2. A bank's reserves do not include:

a. U.S. Treasury bills.

b. Currency in the bank.

c. The bank's deposits at the Federal Reserve.

d. Currency in ATM machines.

3. Eurodollars are:

a. Dollar-denominated deposits in foreign banks.

b. Euro denominated deposits in U.S. Banks

c. The currency of the European Economic Union.

d. Dollars that are specially printed for use in the European Union countries to minimize counterfeiting.

4. One of the unique problems that banks face is:

a. They hold illiquid assets to meet liquid liabilities.

b. They hold liquid assets to meet illiquid liabilities.

c. They hold liquid assets to meet liquid liabilities.

d. Both banks' assets and liabilities are illiquid.

5. Central banks perform each of the following EXCEPT:

a. Issue currency.

b. Operate a payments system.

c. Controls the availability of money and credit.

d. Manages fiscal policy.

6. 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 imports.

d. Low and stable unemployment rates.

7. Small and medium enterprise (SME) Bank is:

a. A Finance company

b. A Securities firm

c. A Government sponsored enterprise

d. An insurance company

8. ---------------is classified as a liability for a commercial bank

a. Reserves

b. Commercial loans

c. Demand deposits

d. Deposits with the Federal Reserve

http://vustudents.ning.com/

9. ------------------is a primary policy tool of the Central Bank:

a. Inflation rate

b. Open market operations

c. interest rate

d. money supply

10. -----------is a component of the liability side of the commercial bank’s balance sheet:

a. Deposits

b. Loans

c. Securities

d. All of the given options

1- A lender is promised a $100 payment (including interest) one year from today. If the lender has an 8% opportunity cost of money, he should be willing to accept what amount today?

A. $100.00

B. $108.20

C. $92.59

D. $96.40

2- The higher the Future Value (FV) of the payment, the higher will be the:

A. Discount rate

B. Present value

C. Liquidity

D. Cost of borrowing

3- The procedure of finding out the Present Value (PV) is known as:

A. Discounting

B. Compounding

C. Time value of money

D. Bond pricing

4 ---------------- tells us after how much time period the amount of money will become double.

A. Real interest rate

B. Nominal interest rate

C. Rule of 72

D. Time value of money

5- The interest rate used in the present value calculation is often referred to as:

A. Discount rate

B. Inflation rate

C. Nominal rate

D. None of the given option

6- The procedure of finding out the Future Value (FV) is known as:

A. Discounting

B. Compounding

C. Time value of money

D. Bond pricing

7- The price of a bond is the ---------------- of its payments.

A. Present Value

B. Future Value

C. Coupon rate

D. Principal amount

8- The ---------------is defined as the probability weighted average of the squared deviations of the possible outcomes from their expected value.

A. Standard deviation

B. Variance

C. Mean

D. Median

9- The difference between real and nominal interest rate is

A. The cost of borrowing

B. The effect of inflation

C. The price of bonds

D. None of the given option

10- The Future Value (FV) of $1000 in 5 years at 5% interest rate will be:

A. $1000.00

B. $1276.28

C. $999.99

D. $1500.52

1- Which of the following appears as a liability in the balance sheet of the central bank?

A. Currency

B. The government’s deposit account

C. The deposit accounts of the commercial banks

D. All of the given options

2- The transaction in which central bank buys or sells foreign currency reserves is known as:

A. Foreign exchange intervention

B. Open market operation

C. Discount loans

D. Reserve requirement

3- Which of the following equations depicts equation of exchange?

A. MV= VY

B. MV=PY

C. MP=VY

D. V=PY

4- ---------------is determined by the central bank and the behavior of the banking system:

A. Money demand

B. Money supply

C. Aggregate demand

D. Aggregate supply

5- If the alternative assets become more risky then the demand for money:

A. Goes up

B. Goes down

C. Remains unchanged

D. None of the given options

6- The interest rate at which aggregate demand equals potential output is known as:

A. Discount rate

B. Short run real interest rate

C. Long run real interest rate

D. Inflation rate

7- An increase in the long run real interest rate shifts the monetary policy reaction curve to the:

A. Right

B. Left

C. No change

D. None of the given options

8- An increase in oil prices causes the short run aggregate supply curve to shift:

A. Upward

B. Downward

C. No change

D. All of the given options

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9- An increase in potential output shifts the long run aggregate supply curve to the:

A. Left

B. Right

C. No change

D. None of the given options

10- --------------policy works slowly and almost impossible to implement effectively:

A. Monetary policy

B. Fiscal policy

C. Trade policy

Foreign exchange policy

6. If there is a decrease in the expected future interest rate, what will be its affect on bond?

a) Bond will Less attractive

b) Bond will More attractive

c) Bond will Less expensive

d) Bond will More expensive

7. There is no guarantee that a bond issuer will make the promised payments is known as:

a) Default risk

b) Inflation risk

c) Interest rate risk

d) Systematic risk

8. A plot of the term structure with YTM on Y-axis and time to maturity on

X-axis is called:

a) Demand curve

b) Supply curve

c) Yield curve

d) Leffer curve

9. If bond’s rating is lower, what will be its price?

a) Higher

b) Lower

c) Equal to

d) No change

10. Bond A is for 1 Year and Bond B is for 5 years maturity period which one of the statements is true for Bond A and Bond B.

a) Yields on A is Less volatile than the yield on B

b) Yields on A is Higher than the yield on B

c) Yields on A is Lower than the yield on B

d) Yields on A is More volatile than the yield on B

Which of the following ratings denote the lowest expectations of credit risk?

1 A

2 AA

3 AAA

4 BBB

Which of the following patterns of term structure occur most frequently?

1 Ascending yield curve

2 Descending yield curve

3 Flat yield curve

4 Humped yield curve

Common stocks (or corporate stocks):

1 Represent an IOU on the part of the issuing firm

2 Entitle the holder to contractual payments

3 Were poor investments over the period 1982‑1996

4 Allows the holder to share in the earnings of the firm

Financial intermediaries:

1 Channel funds from savers to borrowers

2 Greatly enhance economic efficiency

3 Have been an source of many financial innovations

4 Have done all of the above

Which statement shows the major difference between stocks and bonds?

1 Bonds pay their owners dividends while stocks pay interest

2 Bonds pay their owners interest while stocks pay dividends

3 The interest on a bond depends on the earnings of the corporation and is not guaranteed while dividends on stock are legally required

4 Bonds represent ownership while stock represents debt

----------------------agencies assess the default risk of different issuers:

1 Insurance

2 Bond issuing

3 Credit rating

4 None of the given options

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The ---------------are an assessment of the creditworthiness of the corporate issuer.

1 Bond yield

2 Bond ratings

3 Bond risk

4 Bond rate

The KSE 100 Index contains a representative sample of common stock that trade on the

1 Lahore Stock Exchange

2 Karachi Stock Exchange

3 Islamabad Stock Exchange

4 New York Stock Exchange

According to the liquidity premium theory of the term structure, when the yield curve has its usual slope, the market expects:

1 Short-term interest rates to rise sharply.

2 Short-term interest rates to stay near their current levels.

3 Short-term interest rates to drop sharply.

4 None of the above

When the yield curve slopes down,

1 The expectations theory suggests that short-term interest rates are expected to fall.

2 The segmented markets theory suggests that short-term interest rates are expected to rise.

3 The expectations theory suggests that short-term interest rates are expected to rise.

4 The liquidity premium theory suggests that short-term interest rates are expected to rise.

1. Which of the following correctly states the relationship regarding banks' balance sheets?

A. Total Bank Liabilities = Total Bank capital + Total Bank Assets.

B. Total Bank Assets = Total Bank Liabilities + Total Bank Capital.

C. Total Bank Assets = Total Bank Liabilities – Total Bank Capital.

D. Total Bank Assets = Total Bank Capital – Total Bank Liabilities.

2. A bank's reserves do not include:

A. U.S. Treasury bills.

B. Currency in the bank.

C. The bank's deposits at the Federal Reserve.

D. Currency in ATM machines.

3. Eurodollars are:

A. Dollar-denominated deposits in foreign banks.

B. Euro denominated deposits in U.S. Banks

C. The currency of the European Economic Union.

D. Dollars that are specially printed for use in the European Union countries to minimize counterfeiting.

4. One of the unique problems that banks face is:

A. They hold illiquid assets to meet liquid liabilities.

B. They hold liquid assets to meet illiquid liabilities.

C. They hold liquid assets to meet liquid liabilities.

D. Both banks' assets and liabilities are illiquid.

5. Central banks perform each of the following EXCEPT:

A. Issue currency.

B. Operate a payments system.

C. Controls the availability of money and credit.

D. Manages fiscal policy.

6. 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 imports.

D. Low and stable unemployment rates.

7. Small and medium enterprise (SME) Bank is:

A. A Finance company

B. A Securities firm

C. A Government sponsored enterprise

D. An insurance company

8. ---------------is classified as a liability for a commercial bank:

A. Reserves

B. Commercial loans

C. Demand deposits

D. Deposits with the Federal Reserve

9. ------------------is a primary policy tool of the Central Bank:

A. Inflation rate

B. Open market operations

C. interest rate

D. money supply

10. -----------is a component of the liability side of the commercial bank’s balance sheet:

A. Deposits

B. Loans

C. Securities

D. All of the given options

MONEY & BANKING (MGT411)

SPRING SEMESTER 2009

1- A lender is promised a $100 payment (including interest) one year from today. If the

lender has an 8% opportunity cost of money, he should be willing to accept what amount

today?

A. $100.00

B. $108.20

C. $92.59

D. $96.40

Money and Banking (MGT411) Quiz 01

Virtual University of Pakistan Page 2 of 5

2- The higher the Future Value (FV) of the payment, the higher will be the:

A. Discount rate

B. Present value

C. Liquidity

D. Cost of borrowing

3- The procedure of finding out the Present Value (PV) is known as:

A. Discounting

B. Compounding

C. Time value of money

D. Bond pricing

4 ---------------- tells us after how much time period the amount of money will become

double.

A. Real interest rate

B. Nominal interest rate

C. Rule of 72

D. Time value of money

5- The interest rate used in the present value calculation is often referred to as:

A. Discount rate

B. Inflation rate

C. Nominal rate

D. None of the given option

6- The procedure of finding out the Future Value (FV) is known as:

A. Discounting

B. Compounding

C. Time value of money

D. Bond pricing

7- The price of a bond is the ---------------- of its payments.

A. Present Value

B. Future Value

C. Coupon rate

D. Principal amount

Money and Banking (MGT411) Quiz 01

Virtual University of Pakistan Page 3 of 5

8- The ---------------is defined as the probability weighted average of the squared

deviations of the possible outcomes from their expected value.

A. Standard deviation

B. Variance

C. Mean

D. Median

9- The difference between real and nominal interest rate is

A. The cost of borrowing

B. The effect of inflation

C. The price of bonds

D. None of the given option

10- The Future Value (FV) of $1000 in 5 years at 5% interest rate will be:

A. $1000.00

B. $1276.28

C. $999.99

D. $1500.52

11- Stock exchange is an example of:

A. Financial instrument

B. Financial institution

C. Financial market

D. Bank

12- Which of the following is NOT an example of financial institutions?

A. Banks

B. Securities firms

C. Stock exchanges

D. Insurance companies

13. Which of the following are used to monitor and stabilize the economy?

A. Governments

B. Commercial Banks

C. Central Banks

D. Financial institutions

Money and Banking (MGT411) Quiz 01

Virtual University of Pakistan Page 4 of 5

14. Financial instruments are evolved just as much as _____________.

A. Currency

B. Stocks

C. Bonds

D. Commodity

15. Previously financial markets are located in which of the following?

A. Coffee houses or Taverns

B. Stock exchanges

C. Bazaar

D. Coffee houses and Stock exchanges

16. We need __________ to carry out day to day transactions

A. Money

B. Bonds

C. Stocks

D. Loans

17- Among the following which one is less liquid asset?

A. Checking account

B. Car

C. Share

D. Debit card

18- Which of the following is the final mode of payment?

A. Money

B. ATM

C. Cheque

D. Yet to discover

19- Debit card works in the same way as which one of the following?

A. Cheque

B. Credit card

C. Store value card

D. Pay order

Money and Banking (MGT411) Quiz 01

Virtual University of Pakistan Page 5 of 5

20- Banks use to handle transactions among themselves, through which one of the

following?

A. Debit card

B. Electronic transfers

C. Credit card

D. Store value card