FI 412 Test 2 2025 – Study Guide & Financial Concepts Review
A - correct answer ✔✔ A financial crisis occurs when:
A. a particularly large disruption to information flows occurs in financial markets
B. there are predictable market disruptions.
C. financial frictions decrease sharply.
D. capital is allocated to its most productive uses.
tends to decrease - correct answer ✔✔ an increase in adverse selection and moral hazard in
credit markets ___________ bank lending.
B - correct answer ✔✔ Financial crises
A. often begin with financial liberalization or innovation
B. occur when information flows in financial markets experience a particularly large disruption.
C. is followed by an economic boom.
D. occur when financial frictions decrease sharply.
defaults - correct answer ✔✔ occur when a borrower cannot make his loan payments.
deleveraging - correct answer ✔✔ rising defaults from subprime mortgages led to a weakening
of balance sheets of banks and other financial institutions. With less capital available, these
financial institutions sold off assets and limited the availability of credit to households and
businesses. This process is referred to as:
credit spread - correct answer ✔✔ The difference between the interest rate on loans to
households and businesses and the interest rate on completely safe assets that are sure to be
paid off, such as U.S. Treasury securities.
,A - correct answer ✔✔ Why do credit spreads rise during financial crises?
A. Credit spreads rise because asymmetric information problems increase, making it more
difficult to judge the risk of potential borrowers.
B. Credit spreads rise because depositors with productive investment opportunities withdraw
their funds from banks, which creates an incentive to lend to borrowers with riskier investment
opportunities.
C. Credit spreads rise because the government becomes the only institution that is able to lend
money to borrowers.
D. None of the above are correct.
B - correct answer ✔✔ The many regional Federal Reserve banks resulted from a compromise
between parties favoring:
A. the establishment of a central bank and those who opposed its establishment.
B. a private central bank and those favoring a government institution.
C. a Board of Governors in Washington, D.C., and those who favored its establishment in New
York City.
D. None of the above are correct.
C - correct answer ✔✔ There was no central bank in the US between 1836 & 1913 because of
the:
A. support for moneyed interests
B. prominent support for centralized power
C. expiration of the charter of the Second Bank of the US
D. push by the American public for the existence of central banks
12 - correct answer ✔✔ There are ____ regional Federal Reserve banks in the Federal Reserve
system
,D - correct answer ✔✔ In what ways can the regional Federal Reserve Banks influence the
conduct of monetary policy?
A. By having five of their presidents sit on the FOMC.
B. Through their administration of the discount facilities at each bank.
C. By having members serve on the Federal Advisory Council.
D. All of the above are correct.
C - correct answer ✔✔ Which of the following functions is not performed by the twelve Federal
Reserve Banks?
A. Withdrawing damaged currency and issuing new currency.
B. Acting as liaisons with the business community.
C. Setting the reserve requirement.
D. Clearing checks.
E - correct answer ✔✔ Why is the New York Federal Reserve always a voting member on the
FOMC?
A. The New York Federal Reserve district contains many of the largest commercial banks in the
United States.
B. The New York Federal Reserve is actively involved in the bond and foreign exchange markets.
C. It is the only Federal Reserve bank that is a member of the Bank for International Settlements
(BIS).
D. Only A and C are correct.
E. All of the above are correct.
C - correct answer ✔✔ The president of the United States can exert influence over the Federal
Reserve in all of the following ways except:
A. appointing a new chairman to the Board of Governors.
B. appointing new members to the Board of Governors.
, C. reducing the Fed's net earnings.
D. influencing congressional decisions that might reduce the independence of the Fed.
B - correct answer ✔✔ How does the Federal Reserve have a high degree of instrument
independence?
A. The Federal Reserve can contract with independent experts to choose the appropriate fiscal
instruments.
B. The Federal Reserve can choose any method it wants in order to achieve a given set of policy
objectives.
C. The Federal Reserve is not subject to the influence of Congress.
D. The Federal Reserve is able to set the goals of monetary policy.
B - correct answer ✔✔ If the Federal Reserve has a specific mandate from Congress to achieve
"maximum employment and low, stable prices," then how does the Fed have goal
independence?
A. The Fed is free to discuss the assigned goals with Congress.
B. The Fed is free to interpret exactly what these objectives mean.
C. The Fed can choose any method it wants in order to achieve the assigned goal.
D. The Fed is able to change its goals frequently.
political business cycle - correct answer ✔✔ a situation in which monetary policy is
expansionary prior to an election and contractionary after an election is known as
independent Federal Reserve - correct answer ✔✔ is less likely to produce higher inflation and
less likely to produce a political business cycle
D - correct answer ✔✔ Greater central bank independence is associated with
A. lower inflation and lower unemployment.
A - correct answer ✔✔ A financial crisis occurs when:
A. a particularly large disruption to information flows occurs in financial markets
B. there are predictable market disruptions.
C. financial frictions decrease sharply.
D. capital is allocated to its most productive uses.
tends to decrease - correct answer ✔✔ an increase in adverse selection and moral hazard in
credit markets ___________ bank lending.
B - correct answer ✔✔ Financial crises
A. often begin with financial liberalization or innovation
B. occur when information flows in financial markets experience a particularly large disruption.
C. is followed by an economic boom.
D. occur when financial frictions decrease sharply.
defaults - correct answer ✔✔ occur when a borrower cannot make his loan payments.
deleveraging - correct answer ✔✔ rising defaults from subprime mortgages led to a weakening
of balance sheets of banks and other financial institutions. With less capital available, these
financial institutions sold off assets and limited the availability of credit to households and
businesses. This process is referred to as:
credit spread - correct answer ✔✔ The difference between the interest rate on loans to
households and businesses and the interest rate on completely safe assets that are sure to be
paid off, such as U.S. Treasury securities.
,A - correct answer ✔✔ Why do credit spreads rise during financial crises?
A. Credit spreads rise because asymmetric information problems increase, making it more
difficult to judge the risk of potential borrowers.
B. Credit spreads rise because depositors with productive investment opportunities withdraw
their funds from banks, which creates an incentive to lend to borrowers with riskier investment
opportunities.
C. Credit spreads rise because the government becomes the only institution that is able to lend
money to borrowers.
D. None of the above are correct.
B - correct answer ✔✔ The many regional Federal Reserve banks resulted from a compromise
between parties favoring:
A. the establishment of a central bank and those who opposed its establishment.
B. a private central bank and those favoring a government institution.
C. a Board of Governors in Washington, D.C., and those who favored its establishment in New
York City.
D. None of the above are correct.
C - correct answer ✔✔ There was no central bank in the US between 1836 & 1913 because of
the:
A. support for moneyed interests
B. prominent support for centralized power
C. expiration of the charter of the Second Bank of the US
D. push by the American public for the existence of central banks
12 - correct answer ✔✔ There are ____ regional Federal Reserve banks in the Federal Reserve
system
,D - correct answer ✔✔ In what ways can the regional Federal Reserve Banks influence the
conduct of monetary policy?
A. By having five of their presidents sit on the FOMC.
B. Through their administration of the discount facilities at each bank.
C. By having members serve on the Federal Advisory Council.
D. All of the above are correct.
C - correct answer ✔✔ Which of the following functions is not performed by the twelve Federal
Reserve Banks?
A. Withdrawing damaged currency and issuing new currency.
B. Acting as liaisons with the business community.
C. Setting the reserve requirement.
D. Clearing checks.
E - correct answer ✔✔ Why is the New York Federal Reserve always a voting member on the
FOMC?
A. The New York Federal Reserve district contains many of the largest commercial banks in the
United States.
B. The New York Federal Reserve is actively involved in the bond and foreign exchange markets.
C. It is the only Federal Reserve bank that is a member of the Bank for International Settlements
(BIS).
D. Only A and C are correct.
E. All of the above are correct.
C - correct answer ✔✔ The president of the United States can exert influence over the Federal
Reserve in all of the following ways except:
A. appointing a new chairman to the Board of Governors.
B. appointing new members to the Board of Governors.
, C. reducing the Fed's net earnings.
D. influencing congressional decisions that might reduce the independence of the Fed.
B - correct answer ✔✔ How does the Federal Reserve have a high degree of instrument
independence?
A. The Federal Reserve can contract with independent experts to choose the appropriate fiscal
instruments.
B. The Federal Reserve can choose any method it wants in order to achieve a given set of policy
objectives.
C. The Federal Reserve is not subject to the influence of Congress.
D. The Federal Reserve is able to set the goals of monetary policy.
B - correct answer ✔✔ If the Federal Reserve has a specific mandate from Congress to achieve
"maximum employment and low, stable prices," then how does the Fed have goal
independence?
A. The Fed is free to discuss the assigned goals with Congress.
B. The Fed is free to interpret exactly what these objectives mean.
C. The Fed can choose any method it wants in order to achieve the assigned goal.
D. The Fed is able to change its goals frequently.
political business cycle - correct answer ✔✔ a situation in which monetary policy is
expansionary prior to an election and contractionary after an election is known as
independent Federal Reserve - correct answer ✔✔ is less likely to produce higher inflation and
less likely to produce a political business cycle
D - correct answer ✔✔ Greater central bank independence is associated with
A. lower inflation and lower unemployment.
