Midterm 2 Key Version 1 1 The dual banking system in the U S today refers to A A bank s ability to issue checking and saving accounts B A bank s ability to own another financial institution C The ability of banks to be either federally or state chartered D A deposit institution s decision to be either a bank or a savings and loan AACSB Analytic BLOOMS Remember Cecchetti Chapter 13 8 Difficulty Easy Topic Banking Industry Structure 2 A lender usually knows less about the creditworthiness of a borrower than the borrower does This is an example of A Opportunistic behavior B Economies of scale C Diminishing marginal returns D Information asymmetry AACSB Analytic BLOOMS Remember Cecchetti Chapter 11 29 Difficulty Easy Topic Information Asymmetries and Information Costs 3 A bank run involves A Illegal activities on the part of the bank s officers B A bank being forced into bankruptcy C A large number of depositors withdrawing their funds during a short time span D A bank s return on assets being below the acceptable level AACSB Analytic BLOOMS Remember Cecchetti Chapter 14 6 Difficulty Easy Topic The Sources and Consequences of Runs Panics and Crises 4 A bank s reserves include A U S Treasury bills B Currency in the bank but not currency in the ATM machines C The bank s deposits at the Federal Reserve D U S Treasury bills and currency in the bank AACSB Analytic BLOOMS Remember Cecchetti Chapter 12 10 Difficulty Medium Topic The Balance Sheet of Commercial Banks 5 Whenever central bankers face more than one goal the policy framework requires A The central bank to always focus on inflation first B Central bankers to focus on all goals no matter what C Economic growth to be the top priority D Central bankers to make their priorities clear AACSB Analytic BLOOMS Remember Cecchetti Chapter 15 81 Difficulty Easy Topic Meeting the Challenge Creating a Successful Central Bank 6 Central banks often find A They can efficiently pursue all of their goals simultaneously B There are tradeoffs that make pursuing all of their goals simultaneously impossible C The goal s they pursue will be determined by stock market behavior D They must keep their goals secret or else they cannot be attained AACSB Analytic BLOOMS Remember Cecchetti Chapter 15 20 Difficulty Medium Topic Stability The Primary Objective of All Central Banks 7 An economic rationale for government protection of small investors is that A Large investors can better afford losses B Many small investors cannot adequately judge the soundness of their bank C There is inadequate competition to ensure a bank is operating efficiently D Banks are often run by unethical managers who will often exploit small investors AACSB Analytic BLOOMS Remember Cecchetti Chapter 14 16 Difficulty Easy Topic The Government Safety Net 8 The U S has many banks because A Small banks are more profitable than large banks B Many states outlawed bank branching C The Great Depression caused the failure of the large banks leaving many small banks D The Glass Steagall Act forced the splitting up of large banks AACSB Analytic BLOOMS Remember Cecchetti Chapter 13 15 Difficulty Medium Topic Banking Industry Structure 9 Moral hazard problems arise because A Lenders cannot distinguish good from bad risks B Borrowers have incentives to act in ways that do not reflect the lender s interest C Firms hire incompetent employees D Lenders charge interest rates that are too low AACSB Analytic BLOOMS Remember Cecchetti Chapter 11 83 Difficulty Medium Topic Financial Intermediaries and Information Costs 10 A B C D JPMorgan Chase is an example of An Edge Act corporation A foreign bank A financial holding company A unit bank AACSB Analytic BLOOMS Remember Cecchetti Chapter 13 36 Difficulty Easy Topic Banking Industry Structure 11 The Glass Steagall Act of 1933 A Required commercial banks to sell off their investment banking operations B Eliminated the FDIC C Required federally chartered banks to meet the branching restrictions of the states D Required all state banks to get federal charters AACSB Analytic BLOOMS Remember Cecchetti Chapter 13 14 Difficulty Medium Topic Banking Industry Structure 12 Net interest income for a bank is A The difference between gross income and net income after taxes B The interest banks earn from uses of funds C The difference between interest income and interest expense D The difference between interest income and total expenses AACSB Analytic BLOOMS Remember Cecchetti Chapter 12 59 Difficulty Medium Topic The Balance Sheet of Commercial Banks 13 The Federal Reserve s Fedwire system is used mainly to provide A A means for foreign banks to transfer funds to U S banks B An inexpensive and reliable way for financial institutions to transfer funds to one another C An inexpensive way for individuals to pay their bills on line D A means for the Treasury to collect tax payments AACSB Analytic BLOOMS Remember Cecchetti Chapter 15 13 Difficulty Medium Topic The Basics How Central Banks Originated and Their Role Today 14 The payoff method used by the FDIC to address the insolvency of a bank is when the FDIC A Pays the owners of the bank for the losses they would otherwise face B Pays off all depositors the balances in their accounts so no depositor suffers a loss though the owners of the bank may suffer losses C Pays off the depositors up to the current 250 000 limit so it is possible that some depositors will suffer losses D Takes all of the assets of the bank sells them pays off the liabilities of the bank in full and then replenishes their fund with any remaining balance AACSB Analytic BLOOMS Remember Cecchetti Chapter 14 40 Difficulty Medium Topic The Government Safety Net 15 In terms of economic growth the central bank would like to A Have the maximum growth rate possible B Keep the growth rate averaging zero C Keep the economy close to its potential or sustainable rate of growth D Balance every recession with a boom AACSB Analytic BLOOMS Remember Cecchetti Chapter 15 32 Difficulty Medium Topic Stability The Primary Objective of All Central Banks 16 The government s role of lender of last resort is directed to A Large manufacturing firms that employ thousands of people B Depositors this is role the government plays when they insure depositors balances in banks that fail C Developing countries that are trying to build their financial systems D Banks that experience sudden deposit outflows AACSB Analytic BLOOMS Remember Cecchetti Chapter 14 19 Difficulty Easy Topic The