1. ___ and ___ allow a financial intermediary to offer safe, liquid liabilities such as deposits while investing the depositors' money in riskier, illiquid assets.

A. Free riders; regulations

B. Diversification; high equity returns

C. Monitoring; diversification

D. Price risk; collateral

2. A decrease in reserve requirements could lead to an:

A. Increase in the money supply

B. Increase in bank lending

C. A & B

D. Increase in bank lending and an increase in the discount rate

3. If the supply curve shifts to the right, without any change in demand, it will cause the interest rates to go up according to the loanable funds theory.

A. True

B. False

4. According to the unbiased expectations theory current long term rates are geometric averages of:

A. Current and expected future long term rates

B. Treasury yields plus future short term rates

C. Current and expected future short term rates

D. Two of the other three

5. Duration is inversely related to the coupon payment of a bond

A. True

B. False