Deck 20: The Money Supply and Banking Systems

Question 1

The term bubble is used to describe a market situation in which low demand for an asset reduces its price far below its true economic value.

Answer 1

False
Explanation:Bubble refers to a market situation in which frenzied demand for an asset pushes the price of that asset far beyond its true economic value.

Question 2

Both Fannie Mae and Freddie Mac are agencies of the FDIC.

Answer 2

False
Explanation:Federal Deposit Insurance Corporation is the federal agency responsible for protecting money in customer accounts and managing the transition of assets whenever a bank fails Fannie Mae The government sponsored enterprise responsible for guaranteeing and funding home mortgages.

Question 3

A borrower is foreclosing when he stops making payments on his mortgage.

Answer 3

False
Explanation:Foreclosures are situations in which lenders take possession of homes after borrowers default on their mortgage payments.

Question 4

If the Fed sells Treasuries in open-market operations,the country's money supply increases.

Question 5

Both Fannie Mae and Freddie Mac participate in the secondary mortgage market by purchasing loans originated by banks and other lenders.

Question 6

Finance companies are non-bank institutions that lend money to consumers and businesses for a wide variety of purposes.

Question 7

Non-bank companies that use their own funds to offer mortgages are known as mortgage brokers.

Question 8

If the Fed decreases the reserve requirement,banks will have less money to lend.

Question 9

Negative amortization occurs when the balance on your mortgage decreases over time.

Question 10

Loan-to-value (LTV)is commonly defined as the amount of a loan relative to a house's assessed value.

Question 11

If you have reliable income,sufficient assets and a good credit history,you would likely qualify for a prime mortgage.

Question 12

Discount rate is the interest rate that member banks charge each other to borrow money overnight from the funds they keep in the Federal Reserve accounts.

Question 13

Savings and loan associations are not-for-profit,member-owned cooperatives that focus on offering home mortgage loans.

Question 14

If the Fed buys Treasuries on the open market,the country's money supply increases.

Question 15

Investment banks are banks that assist high net-worth individuals in managing real estate,establishing trust funds,and planning philanthropic giving.

Question 16

Federal funds rate is the interest rate that member banks pay when they borrow funds from the Fed.

Question 17

Thrift banks offer a variety of services related to initial public stock offerings and mergers and acquisitions.

Question 18

Money is anything generally accepted as a means of paying for goods and services.

Question 19

If you purchase a house,do some repairs and then resell it for a significant profit,you are flipping the house.

Question 20

The prime rate is the interest rate that a bank charges its most credit-worthy customers.

Question 21

Dodd-Frank Act created the Financial Stability Oversight Council to monitor for systemic risks.

Question 22

Which of the following is an example of an open market operation?

A) Fed reducing the discount rate for banks
B) Fed imposing selective credit controls
C) Fed buying Treasury bonds
D) Fed increasing the discount rate for banks
E) Fed increasing the reserve requirement on deposits

Question 23

Dodd-Frank Act is a legislation aimed at reforming the banking industry.

Question 24

Which of the following federal actions is aimed at increasing the money supply in markets?

A) The Fed imposes more selective credit controls on loans.
B) The Fed buys Treasury bonds from the market.
C) The Federal Reserve raises the discount rate.
D) The Federal Reserve controls the issue of new loans.
E) The Federal Reserve increases the reserve requirement.

Question 25

________ is the government-sponsored enterprise responsible for guaranteeing and funding home mortgages.

A) The secondary mortgage market
B) Freddie Mac
C) Fannie Mae
D) The NYSE
E) The Federal Deposit Insurance Corporation

Question 26

Foreclosures are situations in which lenders take possession of homes after borrowers default on their mortgage payments.

Question 27

By altering margin requirements,the Fed is able to influence ________.

A) the foreign exchange value of other currencies trading with the dollar
B) how much cash is tied up in stock market transactions
C) the types of collateral accepted to issue loans
D) how banks receive securities for the loans that they issue
E) the terms of credit for various types of short-term funding alternatives

Question 28

The ________ is the federal agency responsible for protecting money in customer accounts and managing the transition of assets whenever a bank fails.

A) Federal National Loan Corporation
B) Federal Deposit Insurance Corporation
C) Federal Home Loan Association
D) Federal Mortgage Corporation
E) Federal National Mortgage Association

Question 29

A security based on auto loans is not an example of an asset-backed security.

Question 30

Credit freeze is a situation in which the federal government bans the issue of new loans.

Question 31

When the Federal Reserve buys or sells U.S.Treasury bonds,bills and notes,it is influencing the money supply through ________.

A) imposing reserve requirements
B) offering discount rates
C) selective credit controls
D) open-market operations
E) changing the value of derivatives

Question 32

Money serves as a ________ when it is used to measure the value of goods and services.

A) unit of accounting
B) means of payment
C) store of value
D) medium of exchange
E) standard of deferred payment

Question 33

The ________ rate is the interest rate that Federal Reserve member banks charge each other to borrow money from the funds they keep in the Federal Reserve accounts.

A) federal reserve
B) discount
C) prime member
D) federal funds
E) federal leaves rate

Question 34

During a liquidity crisis,companies can't get enough cash to meet their operating needs.

Question 35

The Fed sets the federal funds rate by ________.

A) lending money directly to consumers
B) issuing a mandatory directive
C) issuing a selective directive
D) buying and selling Treasuries
E) securitizing loans issued by member banks

Question 36

Which of the following federal actions is aimed at reducing the money supply in markets?

A) The Fed liberalizes credit controls actions on loans.
B) The Fed buys treasury bills from the market.
C) The Federal Reserve raises the discount rate.
D) The Federal Reserve reduces the reserve requirement.
E) The Federal Reserve promotes new loans to small businesses.

Question 37

________ rate is the rate a bank charges its best loan customers.

A) Federal funds
B) Discount
C) Prime
D) Paper
E) Overnight

Question 38

________ refers to sums of money,equal to a certain percentage of their deposits,that banks are legally required to keep on hand.

A) Securities
B) Mortgages
C) Reserves
D) Savings
E) Collaterals

Question 39

Credit derivatives based on home mortgages are known as mortgage-backed securities.

Question 40

Money serves as a ________ when it is used as a way of accumulating wealth until it is needed.

A) unit of accounting
B) means of payment
C) store of value
D) medium of exchange
E) standard of deferred payment

Question 41

________ banks offer a variety of services related to initial public stock offerings,mergers and acquisitions.

A) Merchant
B) Retail
C) Thrift
D) Private
E) Investment

Question 42

Which of the following is a tool available to the Fed to manage the money supply?

A) federal insurance scheme
B) federal funds rate
C) national credit union
D) deposit insurance
E) credit rating agencies

Question 43

Which of the following is a service that is typically offered by investment banks?

A) current accounts
B) personal loans
C) stock offerings
D) home loans
E) collateralized loans

Question 44

________ banking refers to a range of banking services for high-net-worth individuals and families,such as managing real estate and other investments.

A) Investment
B) Retail
C) Thrift
D) Private
E) Merchant

Question 45

________ are non-bank companies that initiate loans on behalf of a mortgage lender in exchange for a fee.

A) Mortgage brokers
B) Credit unions
C) Thrifts
D) Loan associations
E) Independent mortgage companies

Question 46

________ is a secondary mortgage quasi-independent corporation created in 1970.

A) The secondary mortgage market
B) Freddie Mac
C) Fannie Mae
D) The NYSE
E) The Federal Deposit Insurance Corporation

Question 47

Banks that provide financial services to consumers are called ________.

A) loan associations
B) retail banks
C) thrift banks
D) credit unions
E) merchant banks

Question 48

Jackson Group,Inc.is an American multinational banking firm.It offers such services as stock market brokerage,underwriting,and initial public offering.Jackson Group is an example of a(n)________.

A) merchant bank
B) credit union
C) thrift bank
D) private bank
E) investment bank

Question 49

________ are non-bank companies that use their own funds to offer mortgages.

A) Mortgage agencies
B) Mortgage brokers
C) Credit unions
D) Loan associations
E) Independent mortgage companies

Question 50

EBL is a financial institution headquartered in Rochester,New York.Membership in EBL is open to residents of Rochester and is financed by the members themselves.EBL accepts deposits from its members and provides loans to its members.EBL provides a low-cost finance option to the residents of Rochester.EBL is a ________.

A) loan association
B) retail bank
C) credit union
D) thrift bank
E) merchant bank

Question 51

Independent mortgage companies are non-bank companies that ________.

A) initiate loans on behalf of an investment bank
B) use their own funds to offer mortgages
C) use pooled funds to offer mortgages
D) initiate loans on behalf of a mortgage lender
E) offer opinions about the creditworthiness of borrowers

Question 52

________ are not-for-profit,member-owned cooperatives that offer deposit accounts and lending services to consumers and small businesses.

A) Loan associations
B) Retail banks
C) Credit unions
D) Thrift banks
E) Merchant banks

Question 53

Banking institutions that offer deposit accounts and focus on offering home mortgage loans are known as ________.

A) merchant banks
B) retail banks
C) thrift banks
D) private banks
E) credit unions

Question 54

The Fed decides to lower the discount rate offered to banks in the United States.This would ________.

A) slow down economic activities
B) lead to high interest rates
C) slow down market activity
D) increase the money supply
E) reduce the availability of credit

Question 55

________ offer financial services to businesses,particularly in the area of international finance.

A) Investment banks
B) Retail banks
C) Private banks
D) Credit unions
E) Merchant banks

Question 56

Rhombus bank is a bank that focuses on home mortgages.The bank has 283 offices and has issued more than 0.1 million home loans to people with different income levels.The bank also accepts deposits to generate money for providing home loans.Rhombus bank is best referred to as a(n)________.

A) merchant bank
B) credit union
C) thrift bank
D) private bank
E) investment bank

Question 57

________ are non-bank institutions that lend money to consumers and businesses for such purposes as cars,home improvements,and purchases.

A) Finance companies
B) Mortgage brokers
C) Thrifts
D) Credit unions
E) Loan associations

Question 58

DBS bank has formed a special department to attract investments from wealthy individuals.The new department aims to obtain accounts that maintain a minimum balance of $20,000 or more.It also aims to offer premium credit cards and asset management services to such individuals.This is an example of ________.

A) investment banking
B) retail banking
C) thrift banking
D) merchant banking
E) private banking

Question 59

The Fed decides to increase the reserve requirements on the deposits of banks.This would ________.

A) reduce the money supply
B) lead to low interest rates
C) intensify market activity
D) boost economic activities
E) increase the availability of credit

Question 60

Loather Bank is a commercial bank in Italy.The bank offers financial services to individuals in Italy.The major products of the bank include personal loans,savings accounts,credit cards,and debit cards.Loather Bank is a(n)________.

A) investment bank
B) retail bank
C) thrift bank
D) credit union
E) merchant bank

Question 61

Andrew has a low credit score and his home loan application was rejected by many banks.However,RS bank offers a home loan to him with loan-to-value at 80 percent.This loan is an example of a(n)________.

A) subprime mortgage
B) high LTV loan
C) option ARM
D) zero LTV loan
E) unsecured loan

Question 62

Prime mortgages refer to home loans that ________.

A) offer loan-to-value as high as 125 percent
B) require high levels of documentation
C) are offered at a very high interest rate
D) lead to negative amortization
E) are offered to the most creditworthy customers

Question 63

In an adjustable rate mortgage,________.

A) collateral is not accepted as security
B) initial interest rates are very high
C) amortization is always positive
D) borrowers will have a low credit rating
E) people can buy more house than they can afford

Question 64

________ is a market situation in which frenzied demand for an asset pushes the price of that asset far beyond its true economic value.

A) Liquidity crisis
B) Bubble
C) Default
D) Asset crisis
E) Credit freeze

Question 65

The dot-com bubble occurred due to ________.

A) faulty securitization by investment bankers
B) the lack of infrastructure to build web sites
C) subprime lending by commercial bankers
D) the rush among internet companies to go public
E) reduced governmental spending in the technology sector

Question 66

________ is a payment situation in which the balance owed on a loan increases over time rather than decreases.

A) Loan-to-value shock
B) Subprime crisis
C) Payment shock
D) Negative amortization
E) Loan depreciation

Question 67

A mortgage loan that has a variable interest rate over the life of the loan is known as a(n)________ mortgage.

A) adjustable term
B) secondary
C) subprime
D) prime
E) adjustable rate

Question 68

Experian,TransUnion,and Equifax are the three major ________ in the United States.

A) credit rating agencies
B) mortgage brokers
C) investment bankers
D) credit unions
E) finance companies

Question 69

In the secondary mortgage market,________.

A) mortgage originators sell their loans to investors
B) deposits are collected to fund mortgages
C) non-banking companies issue prime loans
D) stocks are traded to fund mortgages
E) non-banking companies issue subprime loans

Question 70

Labex Chemicals has invented a new vaccine for pneumonia in children.The vaccine is hyped to bring in huge profits for the firm.Because of this hype,the market value of Labex's shares increase by 300 percent.Many experts believe that this appreciation is much more than the likely benefits that the shareholders will receive.This situation exemplifies a(n)________.

A) liquidity crisis
B) bubble
C) payment shock
D) asset crisis
E) credit freeze

Question 71

A(n)________ is a licensed professional who is hired to give an independent assessment of a home's value.

A) value analyst
B) appraiser
C) broker
D) thrift
E) loan agent

Question 72

________ is a situation in which borrowers stop making payments on a loan.

A) Liquidity crisis
B) Bubble
C) Foreclosure
D) Default
E) Securitization

Question 73

The LTV value of the home loans issued by a bank is 80 percent.This means that the ________.

A) borrowers must make a down payment of at least 20 percent
B) loan is offered at a low interest rate
C) loan is offered at prime rate to borrowers
D) interest charged on the loan amount is 8 percent
E) borrowers should provide a third-party guarantee for 80 percent of the loan amount

Question 74

________ is a process in which debts,such as mortgages,are pooled together and transformed into investments.

A) Stock splitting
B) Collateralization
C) Securitization
D) Amortization
E) Derivatization

Question 75

You have purchased your first home for $100,000,and the mortgage lender tells you that you will need a down payment of $15,000 because it will only lend you 85% of the purchase price.This percentage is known as the ________.

A) mortgage-ownership ratio
B) loan-to-value
C) prime mortgage ratio
D) ownership criterion
E) mortgage-to-price

Question 76

________ helped fuel the housing bubble by expanding the secondary market for subprime loans.

A) Collateralization
B) Privatization
C) Securitization
D) Mortgaging
E) Amortization

Question 77

Charles buys a house and waits till its value rises.He then resells the house to make a big profit.This act of making profit by reselling is referred to as ________.

A) credit swapping
B) flipping
C) defaulting
D) foreclosing
E) securitization

Question 78

Lower interest rates will ________.

A) tempt people buy cheaper homes
B) lead to low prices of houses
C) boost the housing market
D) make the credit procedures stricter
E) have an overall negative impact in the housing market

Question 79

Which of the following is an example of an asset-backed security?

A) a debenture issued by a reputed U.S. corporation
B) a derivative based on auto loans
C) a home loan issued by a bank
D) equity share of a U.S. company
E) a preference share issued by a U.S corporation

Question 80

________ refers to a situation in which a lender takes possession of the collateralized home after the borrower defaults on his or her mortgage payments.

A) Liquidity crisis
B) Foreclosure
C) Securitization
D) Credit freeze
E) Negative amortization