1.When you deposit $100 in your account at University Bank and a $80 check you have written on this account is cashed at College Bank, then

A.the reserves at University Bank rise by $20.

B.the assets of University Bank fall by $20.

C.the assets of College Bank rise by $20.

D.the liabilities at College Bank fall by $20.

2.Suppose there is an excess demand of reserves in the federal funds market. If the Federal Reserve wishes to keep the federal funds rate at its target level, then the appropriate action for the Federal Reserve to take is a ________ open market ________, everything else held constant.

A.defensive; purchase

B.dynamic; purchase

C.defensive; sale

D.dynamic; sale

3.Which of the following is NOT a component of microprudential supervision?

A.Assessing the riskiness of an individual bank's activities.

B.Focusing on financial system liquidity.

C.Checking a bank's compliance with disclosure requirements.

D.Checking capital ratios of a bank.

4.According to the efficient markets hypothesis, stock prices follow a "random walk." Therefore, the optimal strategy for investing in the stock market is ________.

A.a "churning strategy" of buying and selling often to catch market swings.

B.a "buy and hold strategy" of holding stocks to avoid brokerage commissions.

C.following the advice of technical analysts.

D.turning over your stock portfolio each month, selecting stocks that have performed well within the previous months.

5.How would the lending role of financial institutions such as commercial banks change as technology improves?

A.It should increase somewhat.

B.It should increase significantly.

C.It should decrease.

D.There is no change.

6.How does high net worth diminish the moral hazard problem?

A.By making the debt contract incentive compatible.

B.By giving the debt contract characteristics of equity contracts.

C.By requiring the state to verify the debt contract.

D.By collateralizing the debt contract.

7.According to the Taylor Rule, when the inflation rate ________, the nominal interest rate should be ________ by ________ than the change in inflation rate.

A.decreases; increased; less

B.increases; decreased; more

C.increases; increased; more

D.decreases; decreased; less

8.In Argentina, firms' debts tend to be denominated in foreign currency such as U.S. dollars. A depreciation of the Argentine peso

A.means that Argentine firms do not owe as much on their foreign debt.

B.strengthens their balance sheet in terms of the peso.

C.results in an increase in the value of the firm's assets, making them more able to secure more loans for investment.

D.results in increases in the firm's indebtedness in peso, even though the value of their assets remains unchanged.

9.If there is an expected rise in interest rates, banks prefer to

A.make long-term rather than short-term loans.

B.buy long-term rather than short-term bonds.

C.buy short-term rather than long-term bonds.

D.make either short or long-term loans; expectations of future interest rates are irrelevant.

10.Assuming a mild value of the liquidity premium, if the yield curve slope is flat for short maturities and then slopes steeply upward for longer maturities, from the liquidity premium theory, the market is predicting short-term interest rates to be ________ in the near future and ________ further out in the future.

A.rising; declining

B.constant; declining

C.constant; constant

D.declining; rising

11.Factors that led to worsening financial market conditions in East Asia in 1997-1998 include

A.increased uncertainty from political shocks.

B.weak supervision by bank regulators.

C.a rise in interest rates abroad.

D.unanticipated increases in the price level.

12.Both the dual or hierarchical mandates can be used as long as in the ________, the primary goal of ________ can be achieved.

A.long run; price stability

B.short run; price stability

C.short run; reducing business-cycle fluctuations

D.long run; reducing business-cycle fluctuations

13.Regular bank examinations help reduce the ________ problem, while chartering helps reduce the ________ problem.

A.moral hazard; moral hazard

B.adverse selection; adverse selection

C.moral hazard; adverse selection

D.adverse selection; moral hazard

14.Inflation targeting has the following advantages EXCEPT FOR ________.

A.reduction of the time-inconsistency problem

B.immediate signal on the achievement of the target

C.consistency with democratic principles

D.increased monetary policy transparency

15.Why does holding a large amount of bank capital reduce the likelihood of bank failure?

A.It increases banks' income, making it safer as banks become larger.

B.It makes it easier to sell loans when it needs liquidity.

C.It makes it easier to call in loans.

D.It can be used to absorb the losses from bad loans.