Econ 3229 Midterm 2 SP2015 Name MULTIPLE CHOICE Choose the one alternative that best completes the statement or answers the question 1 One suggested method of dealing with the too big to fail problem is to reimpose the restrictions 1 that were in place under A the Federal Reserve Act B Glass Steagall C the Edge Act D McFadden 2 The Volcker Rule addresses the off balance sheet problem involving A loan guarantees B interest rate risks C trading risks D selling loans 2 3 The share of checkable deposits in total bank liabilities has A remained virtually unchanged since 1960 B expanded dramatically over time C shrunk over time D expanded moderately over time 3 4 An inverted yield curve predicts that short term interest rates A are expected to rise in the future B will remain unchanged in the future C will rise and then fall in the future D will fall in the future 4 5 If the expected path of 1 year interest rates over the next four years is 5 percent 4 percent 2 percent and 1 percent then the expectations theory predicts that today s interest rate on the four year bond is A 1 percent B 2 percent C 3 percent D 4 percent 5 6 The research document given to the Federal Open Market Committee that contains information on the state of the economy in each Federal Reserve district is called the A green book B black book C blue book D beige book 6 7 By bundling share purchases of many investors together mutual funds can take advantage of economies of scale and thereby lower A transactions costs B diversification C moral hazard D adverse selection 7 8 The growth of the subprime mortgage market led to A decreased demand for houses as the less credit worthy borrowers could not obtain residential mortgages B increased demand for houses and helped fuel the boom in housing prices C a decrease in home ownership as investors chose other assets over housing D a decline in the housing industry because of higher default risk 8 9 When yield curves are downward sloping A short term interest rates are about the same as long term interest rates B long term interest rates are above short term interest rates C medium term interest rates are above both short term and long term interest rates D short term interest rates are above long term interest rates 9 10 When the yield curve is flat or downward sloping it suggest that the economy is more likely to enter A a period of increasing output B a boom time C an expansion D a recession 10 11 A one year bond currently pays 5 interest and a two year bond pays 5 5 The two year term premium is 0 2 while the three year term premium is 0 35 What is the expected interest rate on one year bond next year according to the liquidity premium theory A 4 75 B 5 6 C 5 5 D 5 25 11 12 In the United States the government agency requiring that firms that sell securities in public markets adhere to standard accounting principles and disclose information about their sales assets and earnings is the 12 A Federal Trade Commission C Securities and Exchange Commission B Federal Reserve System D Federal Communications Commission 13 The ratio of bank capital to bank assets is known as the bank s A leverage ratio B return on equity C return on capital D net interest margin 13 14 If a bank s ratio of assets to capital is 20 and it s return on assets is 2 what is its return on equity A 0 2 B 30 C 5 D 40 14 15 When a new depositor opens a checking account at the First National Bank the bank s assets and its liabilities A decrease decrease B decrease increase C increase increase D increase decrease 15 16 Managers may act in their own interest rather than in the interest of the stockholder owners because the managers have less incentive to maximize profits than the stockholder owners do A principals principals B agents principals C principals agents D agents agents 16 17 Each Federal Reserve bank has nine directors Of these are appointed by the member banks and are appointed by the Board of Governors A six three B three six C five four D four five 17 18 If 1 year interest rates for the next five years are expected to be 4 2 5 4 and 5 percent and the 5 year term premium is 1 percent than the 5 year bond rate will be A 2 percent B 3 percent C 4 percent D 5 percent 18 19 Banks have a maturity mismatch since A some of their loans are short term while others are long term B they borrow long term but lend short term C some of their borrowings are short term while others are long term D they borrow short term but lend long term 19 20 The problem faced by the lender that the borrower may take on additional risk after receiving the loan is called A transactions costs B adverse selection C diversification D moral hazard 20 21 The Federal Open Market Committee usually meets times a year A four B six C eight 21 D twelve 22 Which investment bank avoided bankruptcy by being purchased by Bank of America in September of 2008 A Bear Stearns B Morgan Stanley C Lehman Brothers D Merrill Lynch 22 23 The most important category of assets on a bank s balance sheet is A loans B other assets C cash items in the process of collection D securities 23 24 The political business cycle refers to the phenomenon that just before elections politicians enact policies After the elections the bad effects of these policies for example have to be counteracted with policies A expansionary higher unemployment contractionary B contractionary a higher inflation rate expansionary C expansionary a higher inflation rate contractionary D contractionary higher unemployment expansionary 24 25 The era of bank panics in the United States was effectively ended by A implementing the gold standard 25 B introducing deposit insurance C abandoning the gold standard D establishing the Fed as lender of last resort 26 A borrower who takes out a loan usually has better information about the potential returns and risk of the investment projects he plans to undertake than does the lender This inequality of information is called A asymmetric information B noncollateralized risk C adverse selection D moral hazard 26 27 Excess reserves equal A total reserves less required reserves B total reserves plus required reserves C required reserves divided by total reserves D required reserves less total reserves 27 28 Secondary reserves include A short term U S government securities C deposits at other large banks 28 B deposits at Federal Reserve Banks D state and local government securities 29 The Federal Reserve Bank of houses the open market desk A San Francisco B