Econ 3229 1 Midterm 2 BLUE Name MULTIPLE CHOICE Choose the one alternative that best completes the statement or answers the question 1 The problem helps to explain why the private production and sale of information cannot eliminate A free rider moral hazard B principal agent moral hazard C free rider adverse selection D principal agent adverse selection 2 According to the liquidity premium theory a yield curve that is flat means that A the yield curve has nothing to do with expectations of bond purchasers B bond purchasers expect interest rates to rise in the future C bond purchasers expect interest rates to fall in the future D bond purchasers expect interest rates to stay the same 3 When 1 million is deposited at a bank the required reserve ratio is 20 percent and the bank chooses not to make any loans but to hold excess reserves instead then in the bank s final balance sheet A liabilities increase by 200 000 B the assets at the bank increase by 1 million C the liabilities of the bank decrease by 1 million D reserves increase by 200 000 4 A one year bond and two year bonds currently pay 5 and 5 5 interest 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 5 percent B 5 3 percent C 5 6 percent D 5 8 percent 5 The principal agent problem would not occur if of a firm had complete information about actions of the A owners managers B managers owners C owners customers D managers customers 6 The members of Federal Reserve district bank boards of directors who represent the public interest are known as A Class A directors B Class B directors C Class C directors D Class D directors 7 When yield curves are downward sloping A short term interest rates are above long term interest rates B medium term interest rates are above both short term and long term interest rates C long term interest rates are above short term interest rates D short term interest rates are about the same as long term interest rates 8 is a process of bundling together smaller loans like mortgages into standard debt securities C Distribution D Debt deflation A Origination B Securitization 9 A venture capital firm protects its equity investment from moral hazard through which of the following means A It writes contracts that prohibit the sale of an equity investment to the venture capital firm B It places people on the board of directors to better monitor the borrowing firm s activities C It requires a 50 stake in the company D It prohibits the borrowing firm from replacing its management 10 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 contractionary a higher inflation rate expansionary B contractionary higher unemployment expansionary C expansionary higher unemployment contractionary D expansionary a higher inflation rate contractionary 11 Although debt contracts require less monitoring than equity contracts debt contracts are still subject to since borrowers have an incentive to take on more risk than the lender would like A the lemons problem B moral hazard C agency theory D diversification 12 If interest rates for one year two year and three years bonds are 1 25 1 5 and 3 percent what is expected interest rate on one year bond 2 years from now according to Expectations Theory A 1 percent B 2 percent C 3 percent D 6 percent 13 Bank loans from the Federal Reserve are called and represent a of funds A discount loans use B fed funds use C fed funds source D discount loans source 14 The main argument against Fed independence is that A congressional control was tried during the 1960s and it worked well B the Fed has proven irresponsible on many occasions C monetary and fiscal policy would be easier to coordinate if the Fed were not independent D in a democracy elected officials should make public policy 15 The national economic forecast for the next two years prepared by the staff of the Board of Governors is published in the A blue book B green book C beige book D Fed book 16 What is the length of a term for the Chairman of the Board of Governors A 28 years B four years C 14 years D one year 17 Which of the following is NOT a form of a short term liability in the shadow banking system A money market mutual fund shares B repurchase agreements C bank deposits D commercial paper 18 A bank panic occurs when A a bank is worried that its loans will not be repaid B the situation in which many banks experience a bank run simultaneously C an individual bank cannot meet its reserve requirements D a bank lacks sufficient funds with which to make loans 19 The president of which Federal Reserve bank is always a voting member of the Federal Open Market Committee A Chicago B Philadelphia C New York D Boston 20 Professional athletes often have contract clauses prohibiting risky activities such as skiing and motorcycle riding These clauses are A risk insurance B illegal C limited liability clauses D restrictive covenants 21 The legislation that separated investment banking from commercial banking until its repeal in 1999 is known as the A Federal Reserve Act of 1913 B National Bank Act of 1863 C Glass Steagall Act D McFadden Act 22 The share of checkable deposits in total bank liabilities has A shrunk over time B expanded dramatically over time C remained virtually unchanged since 1960 D expanded moderately over time 23 Which investment bank avoided bankruptcy by being purchased by Bank of America in September 2008 A Morgan Stanley B Bear Stearns C Lehman Brothers D Merrill Lynch 24 The term structure of interest rates is A the structure of how interest rates move over time B the relationship among the term to maturity of different bonds C the relationship among interest rates on bonds with different maturities D the relationship among interest rates of different bonds with the same maturity 25 A bank is insolvent when A its assets exceed its liabilities C its liabilities exceed its assets B its capital exceeds its liabilities D its assets increase in value 26 Which of the following is NOT considered one of the four groups in the Federal Reserve System A Federal Open Market Committee B Federal Deposit Insurance Corporation C Federal Reserve banks D Board of Governors 27 An inverted yield curve A has a U shape B slopes up 28 Net worth can