Fin 326 Final Set #2

Front 1

Consider the character named ‘Will’ (from the “West Wing” video) who attempted to explain changes to the U.S. tax code. Which of following best potrays the basic error behind Will’s explanation?
a. There are too few “Uber Wealthy” to tax in order to finance programs for the millions of lower income earners.
b. Will confused marginal taxation with average taxation.
c. Will did not account for the fact that state income taxes are deductible on federal tax returns.
d. Will was using tax rates that were out of date.
e. Will failed to account for the fact that - as higher income workers pay higher tax rates - that they would take fewer business risks. This would increase unemployment for lower income earners.

Back 1

b. Will confused marginal taxation with average taxation.

Front 2

Which of the following statements is false?
a. Financial intermediaries specialize in the production of information.
b. A financial intermediary reduces its risk exposure by pooling its assets.
c. Financial intermediaries benefit society by providing a payments mechanism.
d. A financial intermediary acts as a broker to bring together funds deficit and funds surplus units.
e. Financial intermediaries act as a lender of last resort.

Back 2

e. Financial intermediaries act as a lender of last resort.

Front 3

Liabilities on the Fed’s balance sheet include:
a. government securities and currency in circulation
b. discount loans and member bank reserves.
c. government securities and discount loans.
d. currency in circulation and member bank reserves.

Back 3

d. currency in circulation and member bank reserves.

Front 4

Consider the actions of the Federal Reserve to create money by means of an open market purchase of Treasury bills. Suppose that the Fed purchased $100M of T-bills from Joe’s Trading Company (JTC). If JTC repurchases $100M of T-bills from other T-bill dealers, then the Fed’s attempt to create money will have been circumvented.

Back 4

F
In this case, whomever sells the T-bills to JTC will have simply taken JTC’s “place” as owner of $100M of newly created money

Front 5

In comparison to the U.S. Federal Reserve, the People’s Bank of China (China’s central bank) is more willing to use changes in the reserve requirement to control the money supply in China.

Back 5

T
Discussed in class, the PBOC has recently changed reserve requirements.

Front 6

Suppose an insurance company first collects premiums from policyholders' and then invests that money in U.S. govenment bonds. The policies written by the insurance company are therefore primary securities.

Back 6

F
The policies written by the insurance company are secondary securities.

Front 7

A major difference between banks and other nonfinancial firms is the high degree of leverage in commercial banks.

Back 7

T

Front 8

Consider the role of J.P. Morgan, as displayed in “The Great Game” video. Morgan’s main contribution to solving the 1907 banking crisis was to play the role of national bank examiner, helping to make sure that unsound banks went out of business.

Back 8

F
Morgan played the role of “lender of last resort,” provided needed liquidity to the banking system. This role was formalized with the introduction of the Federal Reserve in 1913.

Front 9

The U.S. has a global comparative advantage in its FIs, however that advantage has been decreasing of late.

Back 9

T
The U.S. is facing particularly competition from international IPOs, especially in London.

Front 10

The "federal funds rate" is the overnight rate that the U.S. Treasury department pays to investors on T-Bills.

Back 10

F
Overnight rate on interbank loans of federal reserves.

Front 11

Loans to customers are classified on a bank’s balance sheet as assets.

Back 11

T

Front 12

The process of deposit withdrawal, usually because of lower interest rates paid by FIs, for reinvestment elsewhere is called:
a. regulator forebearance.
b. disintermediation
c. off-balance-sheet financing.
d. Regulation Q ceilings.
e. none of the above.

Back 12

b. disintermediation

Front 13

The strongest argument for an independent Federal Reserve rests on the view that subjecting the Fed to more political pressures would impart:
a. a counter-cyclical bias to monetary policy
b. a tendency for higher volatility in monetary policy
c. a deflationary bias to monetary policy
d. an inflationary bias to monetary policy

Back 13

d. an inflationary bias to monetary policy

Front 14

Suppose there were a sharp drop in global oil prices, leading to a positive impact on U.S. GDP. What response best describes the most likely effect of the drop in oil prices on the Fed Funds Rate?
a. The rate would increase due to a rightward shift in the demand for funds.
b. The rate would decrease due to a leftward shift in the demand for funds.
c. The rate would decrease due to a rightward shift in the supply of funds.
d. The rate would increase due to a leftward shift in the supply of funds.
e. The rate would change, but for reason(s) not listed above.

Back 14

a. The rate would increase due to a rightward shift in the demand for funds.

Front 15

The following are special functions that are performed by FIs at a macro level except:
a. intergenerational wealth transfers or time intermediation.
b. denomination intermediation.
c. credit allocation.
d. transmission of monetary policy.
e. interbank lending and investing.

Back 15

e. interbank lending and investing.