Midterm 2 Version 1 Student 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 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 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 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 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 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 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 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 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 10 JPMorgan Chase is an example of A An Edge Act corporation B A foreign bank C A financial holding company D A unit bank 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 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 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 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 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 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 17 One reason lenders usually require a lot of information from loan applicants is to avoid A The problems of moral hazard B The problem of adverse selection C Being harmed by symmetric information D Charges of discrimination in lending 18 Economies of scale associated with financial intermediaries means A The total cost of handling transactions falls as more transactions are handled B The cost per transaction falls as a larger volume of similar transactions are handled C The cost per transaction increases as more transactions are handled D The cost per transaction decreases regardless of the size of the transaction 19 Considering the balance sheet for all commercial banks in the U S the largest category of liabilities is A Borrowing from other banks in the U S B Savings deposits and time deposits C Checkable deposits D Borrowings from non banks in the U S 20 Over the last twenty years in the U S the number of banks has A Steadily increased B Stayed about the same C Steadily decreased D More than doubled 21 If financial intermediaries did not have the ability to pool the resources of small savers A Borrowers needing large amounts of money would find it more costly to obtain the funds B The economy would grow faster C People would likely save more D The risk associated with lending would decrease 22 Financial intermediation exists in part because A Financial markets work so well B Direct finance through stocks and bonds is the dominant form of financing C Transaction costs of financial intermediation is always higher than direct finance D The transaction and informational costs associated with direct finance can at times be prohibitive 23 The primary objective of most central banks in industrialized economies is A High securities prices B Low unemployment C Price stability D A strong domestic currency 24 The moral hazard