I could use some help with this exam review. Please show work for the math problems.

Part ONE: Multiple Choice, 15 questions, each worth 3 points [45 points total] 1. The FED would expect if investors shift funds from stocks into bank deposits, this would ____the supply of loanable funds, and place ____pressure on interest rates. a. increase; upward b. increase; downward c. decrease; downward d. decrease; upward 2. The FED expects if the aggregate demand for loanable funds increases without a corresponding _____ in aggregate supply, there will be a _____ of loanable funds. a. increase; surplus b. increase; shortage c. decrease; surplus d. decrease; shortage 3. Which of the following is not a major component of the Federal Reserve System? a. member banks b. Federal Open Market Committee c. Board of Governors d. Securities and Exchange Commission 4. Which of the following is not an activity of Fed District banks? a. clearing checks b. providing loans to member banks c. replacing old currency d. matching lenders & borrowers for commercial loans 5. Which of the following is not a tool directly under the control of the FED? a. open market operations b. setting the discount rate c. setting the federal funds rate d. adjusting the reserve requirement ratio 6. Total funds of commercial banks will initially _____ by the dollar amount of the securities _____ by the FED. a. increase; purchased b. increase; sold c. decrease; purchased d. remain unchanged; purchased 7. A loose money policy tends to ____ economic growth and ____ the inflation rate. a. stimulate; place downward pressure on b. stimulate; place upward pressure on c. dampen; place upward pressure on d. dampen; place downward pressure on 8. Subordinate notes and debentures are used as ___________ at ________: a. secondary capital; pension funds b. primary capital; insurance companies c. secondary capital; banks d. depository sources; mutual funds. 9. Which of the following best describes the relationship between the FED and the Administration? a. The FED must receive approval by the Administration before conducting monetary policy. b. The FED must implement a monetary policy specifically to support the Administration's policy. c. The Administration must receive approval from the FED before implementing fiscal policy. d. None of these is an accurate description. 10. Banks sometimes need funds and sometimes have excess funds available. Which of the following is commonly both a source and a use of bank funds: a. MMDAs b. Federal Funds c. discount window d. checking deposits. 11. During a period of rising interest rates, a bank's net interest margin (GAP) will likely _______ if its liabilities are _________ rate-sensitive than its assets. a. increase; more b. decrease; more c. increase; equally d. decrease; equally 12. A gap ratio of less than one suggests that: a. rate-sensitive assets exceed rate-sensitive liabilities; b. an increase in interest rates would increase the bank's net interest margin; c. rate-sensitive liabilities exceed rate-sensitive assets; d. an increase in interest rates would increase the bank's net profitability. 13. Banks could decrease their liquid position by restructuring their asset portfolio to contain fewer _________ and more ____________ . a. treasury securities; excess reserves b. loans; treasury securities c. corporate bonds; treasury securities d. treasury securities; loans. 14. Insufficient capital to offset a sudden decline in the value of assets versus liabilities is referred to as ____________ risk. a. sovereign b. liquidity c. insolvency d. credit 15. Without any changes in the flow of funds or the level of funds at the banks, a decrease in the reserve requirement will: a. increase required reserves b. decrease excess reserves c. increase excess reserves d. decrease total reserves. Part Two: These questions refer to general information discussed in class, read in various sources, or perhaps heard or read in the media; 10 questions, 3 points each. [30 points total] 1. The $600 billion plan offered through the Federal Reserve to aid in the great recession by bailing out failing institutions and stimulating the economy is referred to as the: a. QE2, Quiditch Experiment c. TARP, Troubled Asset Relief Program b. QE2, Quantitative Easing d. Stimulus, American Recovery and Reinvestment 2. Any reference in any article or media that the central bank will directly finance the government's deficit is referred to as: a. familiarizing the debt c. universe expansion b. monetarizing the debt d. Keynesian contractionism 3. In the news, the FED's intention to \"buy the equivalent of most of the new Treasury debt issued\" is referred to as ______________ monetary policy: a. defensive (action to maintain achievement of current goals) b. offensive (action to change the direction of monetary policy) c. reactionary (action taken without clear policy intentions stated) d. precautionary (action in response to market action to prevent inflation) 4. IF one were to read that \"the [FED's] portfolio of federal bonds amassed during 2009 will swell...about doubling.\" This is in contrast to the FED's action to the 2007 crisis when there is a different change on the FED's balance sheet. We looked at these differences in class using the FED balance sheet postings to Blackboard. Which of the following reflects the contrasting actions best between 2007 crisis & 2009 crisis: a. the FED expanded the money supply without expanding either the Loan or Security Portfolio on its balance sheet. b. the FED forced gold prices to record prices to provide the collateral to print additional money. c. the FED increased its security holdings associated with repos, acceptances, foreign securities, and foreign currencies. b. the FED sold Treasuries from its portfolio and expanded loans to record high amounts. 5. The statement that \"Mr. Friedman argued that the FED could have prevented the [Great] Depression, and he rejected the Keynesian doctrine of using government spending to stimulate demand,\" implies that Mr Friedman is: a. in favor of the use of monetary policy to resolve economic challenges, but not fiscal policy. b. in favor of the use of fiscal policy to resolve economic challenges, but not monetary policy. c. in favor of using both fiscal policy and monetary policy simultaneously and in coordination with each other to resolve economic challenges. d. in favor of no government or agency (FED) interference with the operation of the free market. 6. Mr. Friedman often \"called for limiting the growth of the money supply\" since he believed the primary goal of the FED is to: a. stimulate the economy b. provide an environment of stable prices c. provide a plentiful money supply d. provide an environment of full employment 7. People who fear the FED is \"stoking inflation to stimulate the economy\" fear: a. rapid employment growth will shrink the wealth gap reported over the past 20 years; b. increased funds available in the US will be used to purchase overseas products harming our global competitiveness; c. that the FED will not be able to time, recognize and/or control the removal of overexpansionary funds in the system; d. their wealth will disappear in the lowering of the tax structure to repay the debt. 8. Even if the FED is \"stoking inflation to stimulate the economy,\" it must be because the decision makers are relying on the : a. Phillips Curve Theory b. the Expectations Theory c. Yield Curve Analysis d. all three of these 9. As expressed in class, the leading factor to the morass in the system during this election year (even though profits and the stock market have done well this year) is due to: a. insufficient liquidity b. severe limitations on the growth of money c. unclear goals stated by the FED d. uncertainty with the regulatory/tax environment 10. According to the dual mandate of the FED, what is the FED to do?: a. fight inflation and stimulate employment c. lend to banks and block trade b. fight inflation and lend to banks d. stimulate employment and lend to banks. Part 3: The following is based upon the Integrative Problem in the text, posted to blackboard, and discussed in class. The completed INCOME STATEMENT on the worksheet provides for 10 entries (answers), each worth 3 points. [30 points total] Use the information provided to forecast the earnings and expenses associated with the Sources and Uses of the bank funds for each category in the order listed and then answer the questions asked. See worksheet provided on separate sheet. Current Treasury Bill rate is 1.5%. Be sure to consider that bad debt would not be expected to earn interest. Correctly completed worksheet is worth 20 points. DATA: Source of Funds Demand Deposits Time Deposits 1-year NCD 5-year NCD Money Market Total Liabilities Dollar Amount (in millions) $5,000 $2,000 $3,000 $2,500 $2,500 $15,000 Use of Funds Cash Small Bus. Loans Lg Bus. Loans Consumer Loans Treasury Bills Treasury Bonds Corporate Bonds Fixed Assets Total Assets $1,800 $4,000 $3,000 $3,000 $1,000 $1,500 $1,000 $ 700 $16,000 Non-Interest Revenue Non-Interest Expense Tax rate $ 300 $ 400 34% Rate 0% 2% T-bill + 1.5% 1-year NCD + 1% T-bill - 1% Loan Loss T-bill + 3% T-bill + 1.5% T-bill + 4% T-bill rate T-bill rate + 2% T-bond rate + 2% 1.5% 1.0% 2.5% 0% 0% 0% Difference between Assets and Liabilities must be Equity (Capital). Current T-bill Rate 1.5% Source of Funds Dollar Relevant Amount Interest (in millions) Rate Demand deposits $5,000 Time deposits $2,000 1-year NCDs $3,000 5-year NCDs $2,500 Expected Expenses Money Market Borrowings Total Liabilities Use of Funds Cash Small business loans Large business loans Consumer loans Treasury bills Treasury bonds Corporate bonds Total investments $2,500 $15,000 LL% Loan Loss $ Amt Funds Earning Interest Relevant Interest Rate Expected Earnings (corrected for LL) $1,800 $4,000 $3,000 $3,000 $1,000 $1,500 $1,000 $15,300 Income Statement *DPR: dividend payout ratio (portion of earnings available to common stockholders paid out as dividends), thus 1-DPR = Retention Ratio. Entry #1 Entry #2 Entry #3 Entry #4 Entry #5 Entry #6 Entry #7 Entry #8 Entry #9 Entry #10 Interest Revenues Interest Expenses Non Interest Revenues Non Interest Expenses Loan Loss Provision Income Before Tax Income tax liability (34%) Net Income Cash Dividends (60% DPR) Retained Earnings (40% RR) Part 4: interpretive statements related to bank performance as indicated with forecasted balance sheet and income statement. [30 points total] These four questions are worth 3 points each. 1. Calculate the Expected ROA and ROE for the bank. [Capital (or Equity) is implied in the data provided.] (worksheet provided to add in creating balance sheet and income statement so as to determine ROE and ROA.) 2. Calculate the Primary Liquidity Ratio Position to contrast with an industry average of 10% (Primary is the Vault Cash plus Reserves at the Fed). 3. Calculate the total Liquidity Position to contrast with an industry average of 15%. (Total Liquidity Position is the cash position plus the holding of short term US Treasuries. {T-bonds are held as collateral when the bank is designated by the FED as a Tax & Loan Facility for the Treasury, and are not held for liquidity.}) 4. Calculate the Current Capital Ratio Position (Capital Ratio is the Equity or Capital divided by Total Assets) to contrast with a Basil Expectation of 8% for a risk-ranked institution similar to this one. Each of these six segments of question #5 is worth 3 points. These questions do not require the completion of the Income Statement for determination of answers, but rather asks you to consider the general impact on earnings of various shifts in the funds, similar to the example done in class in our most recent meeting. Argue conceptually whether you agree or disagree, using reference to the relationships expressed in the numbers/data provided concerning the bank's financial statements, with each of the next statements. Assume all else stays the same for each statement. Answers may take the form of a sentence or two, but no larger than a simple paragraph. Do you agree or disagree with the statement, and most importantly, why? 5. If market interest rates rise next year, the GAP will rise causing ROA and ROE to rise. 6. If Required Reserves were to add an additional 3% to the Uses for Funds causing a movement of funds from other accounts, then the GAP, the ROA & ROE would all rise. 7. Replacing $1 billion in five-year NCDs with $1 billion of 1-year NCDs will increase ROA & ROE. 8. Provide a brief explanation as to why the bank would be cautious (concerned) with the longer-term impact of the decision to use fewer 5-year NCDs and more 1-year NCDs in part c. 9. Shifting $1 billion from T-bills to make small business loans will raise ROA and would increase (improve) its liquidity position. 10. The bank will replace $200 million in five-year NCDs with a variable rate preferred stock issue based on the 1-year NCD rate + 2%. This change in Capital will reduce ROA but increase ROE