Solved Quiz 11 - Financial Markets and Economic Fluctuations | ECON 423, Quizzes of Financial Market

Download Solved Quiz 11 - Financial Markets and Economic Fluctuations | ECON 423 and more Quizzes Financial Market in PDF only on Docsity! 1 Econ 423: Questions from Previous Versions of Quiz 11 [Fall 2000-present] 1. The declining relative importance of such traditional financial intermediaries as banks, savings and loans, credit unions, and stock brokers across the last four decades is probably most attributable to: (a) improvements in information technology. (b) new government regulations intended to ensure the accuracy of corporate income statements and balance sheets. (c) deregulation that encourages private production and sale of information. (d) increased speculation in financial markets by private individuals. (b) a wave of mergers and acquisitions in the financial services industry. 2. One major reason why financial markets are among the most heavily regulated sectors of the economy is that: (a) financial assets are difficult to identify if stolen. (b) borrowers are prone to the problems of moral hazard after securing loans. (c) adverse selection by decisionmakers who work in financial institutions can affect net savers in very negatively ways. (d) the financial sector of the economy is especially vulnerable to swings in the aggregate level of economic activity. 3. The potential for economic inefficiency associated with legally allowing a single financial institution to offer multiple financial services through a single location would most plausibly include problems posed by predictable increases in: (a) loophole mining. (b) the rate of creative response in financial technologies. (c) transaction costs. (d) the average “spread” in financial intermediation. (e) concentrations of market power in the financial sector. 4. The cost savings a financial institution achieves by engaging in multiple activities derive from economies of: (a) aggregation. (b) scope. (c) complexity. (d) information. (e) scale. 5. Property pledged to the lender by a lien if a borrower fails to make debt payments is: (a) bondage. (b) an asset on the lender’s balance sheet. (c) collateral. (d) garnishment. (e) interest securitization. 6. Changes in financial laws and regulations that stimulate creative responses often involve the process called: (a) loophole mining. (b) price gouging. (c) branching. (c) usury. (e) financial evolution. 7. The existence of such organizations as loan sharks, “rent-to-own” stores, and “payday” lenders reflect creative responses to: (a) legal ceilings on the interest rates that banks can pay depositors. (b) usury laws. (c) prohibitions against branch banking. (d) credit rationing. (e) the “Commerce Clause” of the US Constitution, which forbids regulation of interstate commerce by the federal government. 8. John Kenneth Galbraith’s model predicts an increase in “bezzle” following the financial deregulation that tends to emerge during a period of relative prosperity. This increase in financial fraud can be viewed as an example of: (a) credit rationing. (b) immoral hazard. (c) adaptive expectations. (d) creative response. (e) moral suasion. 9. The structure of demand for financial products changed dramatically over the past thirty years or so primarily as a consequence of: (a) huge decreases in financial uncertainty. (b) huge decreases in rates of personal saving by Americans. (c) dramatic increases in the volality of interest rates. (d) unexpected increases in transactions costs. 2 10. Although perfect hedging against specific risk is theoretically possible, hedging would be least likely to be even close to perfect if an individual investor tried to eliminate: (a) market risk, also known as Knightian uncertainty. (b) interest rate risk. (c) inflation risk. (d) default risk. 11. An equation capable of specifying the location/value of a moving variable at every continuously calculable nanosecond in time would be most likely to entail the use of: (a) the Black-Scholes equation. (b) Ito calculus. (c) Newtonian thermodynamics. (d). Fermat’s theorem. (e) Leibniz differentials. 12. The idea that financial portfolios can be shielded against risk through fine-tuned trading in options “at all times, in markets all over the world,” is most consistent with the theories underpinning: (a) rational expectations models. (b) technical analysis. (c) Keynesian beauty contests. (d) the Black-Scholes-Merton concept of dynamic hedging. (e) adaptive expectations models. 13. The term “disintermediation” would apply least well to: (a) the planned obsolescence of computer software by some developers as Microsoft releases new generations of its Windows operating system. (b) attempts by students to sell their used textbooks by posting notes on bulletin boards in Gardner Hall. (c) internet purchases of clothing by college students. (d) the reduced importance of depository institutions during the 1970s and the rapid growth of mutual funds. (e) real estate that is offered “for sale by owner” over the internet. 14. Efficient pricing for an option depends least on the: (a) current price of the underlying asset. (b) risk averseness of potential purchasers of the option. (c) expected rate of return [interest rate] appropriate for alternative investments with comparable risk. (d) expected price volatility of the underlying asset. (e) strike price. 15. The process of hedging involves: (a) selling a put option if you expect the price of the asset rise, and selling a call option if you expect the price of the asset to fall. (b) buying a call option if you expect the price of an asset to rise, and a put option if you expect the price of the asset to fall. (c) offsetting the risk of potential losses from a possible future event by “betting” that the event will, in fact, occur. (d) trimming the shrubbery between your property and your neighbor’s property. 16. The U.S. government agency that requires firms that sell securities in public markets to adhere to standard accounting principles and disclose information about their sales, assets, and earnings is the (a) Federal Corporate Securities Commission. (b) Federal Trade Commission. (c) Securities and Exchange Commission. (d) U.S. Treasury Department. (e) Federal Reserve System. 17. Financial intermediaries, especially banks, can avoid free-riders problem as long as they primarily: (a) make private loans. (b) acquire a diversified portfolio of stocks. (c) buy junk bonds. (d) charge depositors fees that maximize the financial spread. (e) rely on insider information. 5 38. The process of reducing portfolio risk by engaging in two (or more) concurrent transactions, where values of the assets underlying such transactions are negatively correlated when “shocked” by an external event, is known as: (a) pointing-to-counterpoint. (b) arbitrage. (c) hedging. (d) speculation. (e) intermediation. 39. Private placement issues of new securities are most commonly purchased by: (a) insurance companies and pension funds. (b) mutual funds. (c) investment banks. (d) trustees of large inheritances. (e) non-profit corporations. 40. Promising the future delivery of an asset not currently owned is known as: (a) speculative gambling. (b) selling long. (c) buying long. (d) buying short. (e) betting the house. (f) selling short. 41. Probably the most significant factor explaining the drastic drop in the number of bank failures since the Great Depression has been: (a) the creation of the FDIC. (b) rapid economic growth since 1941. (c) the employment of new auditing procedures by the Federal Reserve. (d) better bank management. 42. Investment banking activities of the commercial banks were blamed for many bank failures. This led to the passage of: (a) the National Bank Charter Amendments of 1918. (b) the Glass/St. Germain Act of 1982. (c) the National Bank Act of 1863. (d) the Glass- Steagall Act of 1933. (e) the establishment of the FDIC in 1933. 43. The legislation that effectively prohibited banks from branching across state lines and forced all national banks to conform to the branching regulations in the state in which they reside is the: (a) McFadden Act. (b) National Banking Act. (c) Glass-Steagall Act. (d) Garn-St. Germain Act. 44. The prohibition against banks underwriting corporate securities and engaging in brokerage, real estate, and insurance activities was repealed by the: (a) Gramm-Leach-Bliley Financial Services Modernization Act. (b) Competitive Equality in Banking Act. (c) Depositary Institution Deregulation and Monetary Control Act. (d) Glass Steagall Act. (e) McFadden Act. 45. The process of creating more liquid marketable debt instruments backed by otherwise relatively less liquid assets is known as: (a) standardization. (b) homogenization. (c) securitization. (d) adverse selection. 46. Thrift institutions’ importance as a source of funds for borrowers has: (a) shrunk from around 40 percent of total credit advanced in the late 1970s to below 30 percent by 2003. (b) shrunk from over 20 percent of total credit advanced in the late 1970s to below 10 percent by 2003. (c) expanded dramatically, from around 15 percent of total credit advanced in the late 1970s to above 25 percent by 2003. (d) has expanded dramatically, from around 15 percent of total credit advanced in the late 1970s to above 30 percent by 2003. 47. The process in which people seeking higher interest rates take their funds out of financial institutions is called: (a) capital motility. (b) loophole mining. (c) disintermediation. (d) deposit jumping. (e) security skipping. 6 48. The policy of _____ exacerbated _____ problems as savings and loans took on increasingly huge levels of risk on the slim chance of returning to solvency. (a) regulatory forbearance; moral hazard (b) regulatory forbearance; adverse selection (c) regulatory agnosticism; moral hazard (d) regulatory agnosticism; adverse selection 49. “Bureaucratic gambling” refers to (a) the strategy of thrift managers that they would not be audited by thrift regulators in the 1980s due to the relatively weak bureaucratic power of thrift regulators. (b) the risk that thrift regulators took in publicizing the plight of the S&L industry in the early 1980s. (c) the strategy adopted by thrift regulators of lowering capital requirements and pursuing regulatory forbearance in the 1980s in the hope that conditions in the S&L industry would improve. (d) none of the above. 50. The “creative response” of the financial system refers to how profit seekers: (a) adjust institutions and practices in response to laws and regulations. (b) are prevented by adaptive laws and regulations from engaging in excessively risky activities. (c) instantaneously exploit new information to ensure that asset prices are always in long run equilibrium. (d) ensue that savings are efficiently channeled to the most profitable forms of investment. 51. One financial intermediary that helps to reduce the moral hazard arising from the principal- agent problem when a new firm is attempting to secure financing is the: (a) venture capital firm. (b) money market mutual fund. (c) pawn broker. (c) savings and loan association. (e) commercial bank. 52. If borrowers find it increasingly attractive to take on even bigger risks after obtaining a loan, then lenders face the problem of: (a) moral hazard. (b) free-riding. (c) adverse selection. (d) costly state verification. (e) inverted default ratios. 53. The bulk of household debt in the United States consists of: (a) credit card debt. (b) consumer installment debt. (c) collateralized loans. (d) unsecured loans, such as student loans. 54. One way for a corporate board of directors to somewhat alleviate potential principal-agent problems in dealing with professional managers is to: (a) reward managerial performance that exceeds industry averages. (b) reward “whistle-blowing” by workers who observe that corporate policies violate federal statutes. (c) use its profits to buy its own stock in the open market. (d) fire managers who don’t exceed profit expectations. 55. The driving force behind the securitization of mortgages and automobile loans has been the (a) rising regulatory constraints on substitute financial instruments. (b) desire of mortgage and auto lenders to exit this field of lending. (c) improvement in computer technology. (d) relaxation of regulatory restrictions on credit card operations. 56. The starting point for understanding how exchange rates are determined is a simple idea called _____, which states that if two countries produce an identical good, the price of the good should be the same throughout the world no matter which country produces it. (a) Gresham’s law. (b) the law of one price. (c) purchasing power parity. (d) arbitrage. (e) reciprocity. 7 57. The theory of purchasing power parity states that exchange rates between any two currencies will adjust to reflect changes in: (a) the trade balances of the two countries. (b) the current account balances of the two countries. (c) fiscal policies of the two countries. (d) the price levels of the two countries. 58. Higher tariffs and quotas cause a country’s currency to _____ in the _____ run. (a) equalize / intermediate (b) appreciate / short (c) depreciate / long (d) depreciate / short (e) appreciate / long 59. If the US inflation rate is higher than the average rate of inflation in Europe, and if productivity is growing more slowly in the US than in Europe, then, in the long run: (a) the euro should appreciate relative to the dollar. (b) the euro should depreciate relative to the dollar. (c) there should be no change in the euro price of dollars. (d) it is not clear what will happen to the euro price of dollars. 60. The government institution that has overall responsibility for the amount of money and credit supplied in the economy as a whole is the (a) central bank. (b) commercial bank. (c) bank of settlement. (d) monetary fund. 61. To reduce abuses from the state chartering of banks, the ____created a new banking system of federally chartered banks, supervised by the ____. (a) National Banking Act of 1863; Office of the Comptroller of the Currency. (b) Federal Reserve Act of 1863; Office of the Comptroller of the Currency. (c) National Banking Act of 1863; Office of Thrift Supervision. (d) Federal Reserve Act of 1863; Office of Thrift Supervision. 62. The regulatory system that has evolved in the United States whereby banks are regulated at the state level, the national level, or both, is known as a (a) bilateral regulatory system. (b) tiered regulatory system. (c) two-tiered regulatory system. (d) dual banking system. 63. With the creation of the Federal Deposit Insurance Corporation, member banks of the Federal Reserve System _____ to purchase FDIC insurance for their depositors, while non- member commercial banks ____ to buy deposit insurance. (a) could choose; were required. (b) could choose; were given the option. (c) were required; could choose. (d) were required; were required. 64. The bank regulatory agency possessing sole regulatory authority over bank holding companies is the: (a) FDIC. (b) Comptroller of the Currency. (c) FHLBS. (d) Federal Reserve System. 65. Deposits in European banks denominated in dollars for the purpose of international transactions are known as (a) Eurodollars. (b) European Currency Units. (c) European Monetary Units. (d) International Monetary Units. 66. The existence of deposit insurance can increase the likelihood that depositors will need deposit protection, as banks with deposit insurance are: (a) likely to take on greater risks than they otherwise would. (b) likely to be too conservative, reducing the probability of turning a profit. (c) likely to regard deposits as an unattractive source of funds due to depositors’ demands for safety. (d) placed at a competitive disadvantage in acquiring funds.