Deck 4: Financial Intermediaries and the Banking System

Question 1

The international banking market, in terms of size, is dominated by banks from

A) the United States.
B) Europe.
C) Bermuda.
D) Asia.
E) Canada.

Answer 1

Europe.

Question 2

Social Security is a ____ pension plan.

A) fully funded
B) private
C) pay-as-you go
D) noncontributory
E) divested

Answer 2

pay-as-you go

Question 3

Each of the following is classified as a thrift financial institution, except

A) commercial bank.
B) savings and loan association.
C) savings bank.
D) credit union.
E) All of the above are thrift institutions.

Answer 3

commercial bank.

Question 4

Which of the following is not an asset of a bank?

A) business deposits
B) consumer loans
C) deposits in other banks
D) government securities
E) All of the above are bank assets.

Question 5

Life insurance protects

A) the insured from premature death.
B) the beneficiaries of the insured from the economic consequences of death.
C) beneficiaries from premature death.
D) the insured from fatal risks faced by the insured.
E) None of the above.

Question 6

Most of the largest banks in the world are based in

A) the United States.
B) Japan.
C) the Cayman Islands.
D) Europe.
E) Bermuda.

Question 7

The asset of Federal Reserve banks associated with open market operations is

A) Federal Reserve notes.
B) U.S.government securities.
C) loans to member banks.
D) float.
E) None of the above.

Question 8

A fractional reserve banking system might be in trouble if

A) one depositor wanted his (her) money returned.
B) one borrowing customer paid off the loan.
C) all borrowing customers paid off their loans.
D) all deposit customers wanted to withdraw their money.
E) None of the above.

Question 9

Which of the following powers or tools of Federal Reserve monetary policy has the greatest impact on the money supply?

A) discount rate
B) Regulation Q
C) open market operations
D) bank examination
E) All of the above have about the same impact.

Question 10

The major asset of savings and loans is

A) mortgage-backed securities.
B) construction loans.
C) residential (home) mortgages.
D) cash and investment accounts.
E) government securities.

Question 11

Which statement is not true about life insurance companies?

A) They have relatively predictable inflows and outflows.
B) Their liabilities are long-term in nature.
C) They invest heavily in short-term highly marketable securities.
D) They sell contracts that offer financial protection against premature death.
E) All of the above.

Question 12

The maximum amount of FDIC deposit insurance per eligible deposit account is

A) $50,000
B) $100,000
C) $250,000
D) $500,000
E) greater than $1,000,000.

Question 13

Historically, credit unions were

A) organized during World War I to provide savings institutions to service personnel overseas.
B) organized with humanitarian goals.
C) founded to provide consumers with low-cost loans and encourage thrift for members.
D) first organized in the United States.
E) All of the above.

Question 14

All else equal, a decrease in reserve requirements will cause

A) state and local government expenditures to fall.
B) inflation expectations to fall.
C) an increase in the Fed Funds rate.
D) excess reserves to increase.
E) All of the above will occur.

Question 15

Pension funds whose contributions are not large enough to actually cover the benefits to be paid out when all employees retire are termed

A) divested.
B) vested.
C) unfunded, or underfunded.
D) funded.
E) None of the above.

Question 16

If bank managers lobby to maintain America's traditional "dual banking" structure, they want

A) an option of either federal or state bank chartering.
B) to maintain the right to make loans and take deposits.
C) the right to fight competition.
D) the option of remaining a bank or a bank holding company.
E) All of the above.

Question 17

An increase in depository institutions' reserves will cause

A) the Fed Funds rate to rise.
B) planned inventory investment to fall.
C) depository institutions to lend more freely.
D) foreign investors to buy more T-Bills.
E) None of the above.

Question 18

A goldsmith who operated under strict 100 percent reserve requirements

A) was similar to today's depository institutions.
B) served only a safekeeping function in the economy.
C) was able to make loans by issuing deposit receipts to borrowers.
D) acted as an important credit institution in the local economy.
E) All of the above.

Question 19

The major federal regulator of mutual funds is the

A) Federal Deposit Insurance Corporation.
B) Federal Trade Commission.
C) Federal Reserve System.
D) Securities and Exchange Commission.
E) None of the above.

Question 20

Unlike the United States, many countries grant their banks the authority for

A) full merchant banking, including investment banking and ownership of companies to which they lend.
B) deposit banking.
C) forming bank holding companies.
D) lending to foreign companies and countries.
E) All of the above.

Question 21

Which of the following is not a reason for the rapid expansion of U.S.banks overseas?

A) the establishment of the Edge Act
B) overall expansion of U.S.world trade
C) the growth of multinational corporations
D) the International Bank Act of 1978
E) None of the above.

Question 22

The primary responsibility of the Federal Open Market Committee (FOMC) is to

A) establish a level and growth of the money supply through open market operations to produce a stable economic environment.
B) supervise the examination of state member banks.
C) change the reserve requirements of banks.
D) determine the level of Federal Reserve notes allowed in circulation.
E) None of the above.

Question 23

All else equal, the money supply should decrease when

A) banks withdraw currency from the Fed.
B) the Fed makes loans at the discount window.
C) the Fed sells securities on the open market.
D) the Fed buys securities on the open market.
E) None of the above

Question 24

All of the following are reasons to regulate depository institutions except

A) to promote safety and soundness.
B) to affect the structure of banking.
C) to make sure banks' earnings are competitive with other financial institutions.
D) to protect the interest of consumers.
E) None of the above.

Question 25

Suppose the Federal Reserve increases deposits at financial institutions by $50 billion through its open market operations.If the reserve requirement for all deposits is 8%, what is the maximum impact the Fed's actions can have on total deposits?

A) $575 billion increase
B) $54.3 billion increase
C) $625 billion increase
D) An increase greater than $1 trillion
E) Total deposits would decrease, but there is not enough information to compute the amount.

Question 26

The primary tools of the Federal Reserve monetary policy include all of the following except

A) changing the discount rates.
B) open market operations.
C) changes in reserve requirements.
D) changes in the Federal Funds rate.
E) All of the above are monetary policy tools used by the Fed.

Question 27

Suppose the reserve requirement for transaction deposits is 10% and it is 5% for nontransaction deposits.What is the total reserve requirement for a bank with total deposits equal to $800 million, if $600 million of these deposits are classified as transaction deposits?

A) $80 million
B) $60 million
C) $70 million
D) $100 million
E) None of the above.

Question 28

Federal deposit insurance has

A) prevented bank depositor panics, but not bank failures.
B) prevented bank panic and bank failures.
C) prevented bank failures, but not bank depositor panic.
D) not prevented bank depositor panics, but has eliminated bank failures.
E) None of the above

Question 29

The major regulator of investment companies is the

A) state in which they are incorporated.
B) bank holding companies that own them.
C) Securities and Exchange Commission.
D) Federal Reserve System.
E) U.S.Treasury.

Question 30

While the Treasury collects most of its receipts through commercial banks, its expenditures (checks) are drawn upon

A) the Federal Reserve Board of Governors.
B) national banks.
C) Federal Reserve banks.
D) federal financing banks.
E) None of the above.

Question 31

The Federal Reserve System established

A) a system for federal chartering of banks.
B) a system for controlling bank note issuance.
C) a source of liquidity for the banking system.
D) the beginning of demand deposit accounts.
E) None of the above.

Question 32

The 1978 International Bank Act

A) prohibited foreign banks from establishing any new U.S.banking operations.
B) allowed U.S.banks to engage in a wider range of nonbanking activities overseas.
C) allowed U.S.banks to take equity positions in overseas business ventures.
D) reduced the competitive advantage of foreign banks over U.S.banks.
E) All of the above.

Question 33

Early goldsmiths began to function as modern banks when they began to operate under a fractional reserve policy and

A) loaned gold.
B) issued receipts for gold deposited.
C) issued deposit receipts to borrowers in return for a note (loan).
D) when they received a banking charter from the government.
E) All of the above.

Question 34

A small state bank currently has reserves equal to $300,000.If the state reserve requirement is 20%, but the bank feels more comfortable with maintaining a 30% reserve, what amount of deposits does the bank currently have?

A) $1,500,000
B) $600,000
C) $1,000,000
D) $300,000
E) None of the above.

Question 35

All but which of the following financial institutions would you expect to be able to get federal deposit insurance for their customers?

A) bank holding companies
B) credit unions
C) commercial banks
D) savings and loan associations
E) None of the above.

Question 36

The most frequent common bond for credit union formation is

A) occupational.
B) church-related or religious affiliation.
C) geographical.
D) ethnicity factors.
E) political affiliation.

Question 37

A small state bank currently has reserves equal to $300,000.If the state reserve requirement is 20%, but the bank currently maintains a 30% reserve, how much are the excess reserves the bank currently has?

A) $200,000
B) $100,000
C) $300,000
D) $500,000
E) None of the above.

Question 38

The original purpose of deposit insurance was to

A) prevent bank runs by large depositors.
B) increase the regulatory monitoring of banks.
C) force the banks to invest in less risky investments.
D) prevent bank panics by insuring the small deposits of many people.
E) All of the above.

Question 39

The largest amount of pension assets are associated with

A) private pension funds.
B) social security.
C) government-administered pension funds.
D) insured pension plans with life insurance companies.
E) None of the above.

Question 40

A small state bank currently has reserves equal to $300,000.If the state reserve requirement is 20%, but the bank currently maintains a 30% reserve, what amount of reserves would the bank need if it met the reserve requirements exactly?

A) $200,000
B) $100,000
C) $300,000
D) $1,000,000
E) None of the above.

Question 41

A(n) ____ is a depository institution that is owned by its depositors, who are members of a common organization or association, such as an occupation, a religious group, or a community.

A) pension fund
B) commercial bank
C) credit union
D) insurance company
E) mutual fund

Question 42

Bank panics can cause an economic recession.

Question 43

The Fed banks are supervised by a central governing body called

A) the Board of Governors
B) the Federal Open Market Committee
C) the Chairman of the Fed
D) the Federal Banking Committee

Question 44

Fractional reserves mean that banks maintain less than 100 percent of customer deposits in liquid assets, or reserves.

Question 45

A(n) ____ is an investment company that accepts money from savers and then use these funds to buy various types of financial assets.

A) savings and loans
B) insurance company
C) mutual savings bank
D) mutual fund
E) commercial bank

Question 46

The primary regulator of investment companies, such as mutual funds, is the Securities and Exchange Commission (SEC).

Question 47

If the federal reserve purchases $100 million worth of government securities in open market operations, what is the maximum amount of change in the money supply if the reserve requirement is 8% and banks hold no excess reserves?

A) Decrease by $1.25 billion
B) Increase by $1.25 billion
C) Decrease by $1.15 billion
D) Increase by $1.15 billion

Question 48

Banks are regulated because they provide several important services to their local and national economies.

Question 49

The Federal Reserve has decided it wants to increase interest rates by decreasing the money supply through deposits held at financial intermediaries.All else equal, if the reserve requirement is 10% for all deposits, and the Fed wants to decrease deposits by $100 million, which of the following actions should be taken? Assume no excess reserves exist in the banking system.

A) Buy government securities from dealers totaling $1 billion.
B) Sell government securities to dealers totaling $111 million.
C) Buy government securities from dealers totaling $11.1 million.
D) Sell government securities to dealers totaling $11.1 million.
E) None of the above.

Question 50

Goldsmiths became banks when they began to hold fractional reserves and make loans.

Question 51

Which of the following is not a benefit associated with financial intermediaries?

A) reduced costs
B) fund indivisibility
C) financial flexibility
D) diversification of risk

Question 52

What is the maximum change in total deposits at financial institutions if the Fed sells $120 billion of government securities to dealers, and the reserve requirement applicable to all deposits is 10%?

A) $1.20 trillion decrease
B) $133 billion increase
C) $1.08 trillion increase
D) $1.08 trillion decrease
E) None of the above.

Question 53

A mutual fund that invests primarily in short-term, low risk securities like commercial paper and Treasury bills are called ____ mutual funds.

A) value
B) growth
C) money market
D) indexed

Question 54

Suppose the Federal Reserve increases deposits at financial institutions by $50 billion through its open market operations.If the reserve requirement for all deposits is increased from 8% to 10% at the same time the Fed increases deposits, what is the maximum impact the Fed's actions can have on total deposits?

A) $575 billion increase
B) $450 billion increase
C) $2.5 trillion increase
D) Actually, deposits would decrease, but there is not enough information to determine by what amount.
E) None of the above.

Question 55

Which of the following is not a major provision of the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010?

A) New organizations to protect and inform consumers will be created
B) greater transparency for trading exotic securities will be required
C) stockholders will be permitted to have a say on corporate governance, including executive compensation, through nonbinding votes
D) Fannie Mae and Freddie Mac will be liquidated

Question 56

Suppose the Federal Reserve increased deposits by $100 billion, but the reserve requirement on all deposits was 100%.What impact would the change in deposits have on the money supply?

A) The money supply would increase by $100 billion.
B) The money supply would increase by an infinite amount.
C) The money supply would decrease by $100 billion.
D) The money supply would decrease by an infinite amount.
E) The money supply would not change.

Question 57

With 100 percent reserve banking, little or no lending is possible.

Question 58

If the reserve requirement for banks is fixed at 10% and the Fed wishes to decrease the money supply by $500 billion, what type of open market operation should the Fed undertake?

A) Sell $55.56 billion in government securities
B) Purchase $55.56 billion in government securities
C) Sell $50.00 billion in government securities
D) Purchase $50.00 billion in government securities

Question 59

Which of the following financial institutions is most likely to be the cheapest source of funds for individual borrowers?

A) credit unions
B) savings and loans
C) commercial bank
D) insurance company
E) finance company

Question 60

Mutual funds that invest primarily in instruments that generate fairly constant annual cash flows such as bonds and preferred stocks are ____.

A) income funds
B) growth funds
C) value funds
D) money market funds
E) social funds

Question 61

A decrease in reserve requirements should result in an increase in the total level of member bank reserves.

Question 62

The Federal Reserve System controls the money supply and is not a bank regulator.

Question 63

The Federal Reserve has a major influence on financial markets.

Question 64

The primary function of the Federal Reserve is economic stabilization through control of the level and growth of the money supply.

Question 65

Mutual savings banks are owned by depositors, as are mutual S&Ls.

Question 66

The Federal Reserve's most influential policy is its reserve requirement policy.

Question 67

All else equal, the nation's money supply increases when the Federal Reserve purchases U.S.Treasury securities.

Question 68

U.S.bank regulators allow U.S.banks overseas to engage in all banking activities allowed by the host country.

Question 69

The deposits of federal credit unions are insured by the Federal Deposit Insurance Corporation.

Question 70

The Edge Act of 1919 permitted U.S.banks to create banking facilities in foreign countries that were regulated by the foreign government, not by the Federal Reserve.

Question 71

The Federal Reserve can change the level of member bank reserves as well as reserve requirements.

Question 72

The maximum change in the money supply created by a fractional reserve banking system decreases whenever reserve requirements are increased.

Question 73

Federal deposit insurance has prevented the failure of depository institutions.

Question 74

An increase in the money supply does not affect the supply of loanable funds.

Question 75

Depository institutions create money when they use their excess reserves to make loans or acquire new investments.

Question 76

When the Federal Reserve sells an asset to the private sector, the money supply declines.

Question 77

Demand deposits represent the largest asset category for commercial banks.

Question 78

The Federal Open Market Committee basically establishes our nation's monetary policy.

Question 79

Federal deposit insurance has prevented widespread bank failures and panics.

Question 80

The Federal Reserve is an independently funded federal agency of Congress, thus is independent of the political processes of Washington.