UARK Financial Markets and Institutions
Exam 1 Questions and Answers
When reserve requirements increase, interest rates ____. - -Increase ; banks
must hold more reserves causing lending supply to decrease driving up
interest rates.
- The Federal Reserve ____ the money supply when it sells government
securities. - -Decreases ; when the Fed sells securities to the market, the
funds are recycled back to the Fed so the monetary base decreases. This is a
part of open market operations.
- True or false? High stock prices are a goal of monetary policy. - -False ;
the Fed has nothing to do with stock prices directly and focuses only on the
Dual Mandate.
- True or false? If the amount of cash in the economy decreases, the Fed
may offset their effects with open market sales. - -False ; Selling will
decrease the cash/money supply but the Fed would want to increase it in this
case.
- True or false? The Fed perfectly controls the money supply. - -False ; the
Fed doesn't control the money supply, it just influences it through directly
controlling the monetary base
- The Fed may influence the Fed Funds Rate in all the following ways
except...
A. buying bonds in the open market
B. selling in the REPO market
C. exercising its regulatory power over interest rates
adjusting the interest on reserves - -C ; Regulatory power is NOT a monetary
policy tool.
- An "expansionary" fiscal policy would likely include...
A. tax increases
B. budget deficits
C. lowering the Discount Rate
D. budget surpluses - -B ; Expansionary fiscal policy means an increase in
government spending (usually financed by deficit spending).
- An increase in the money supply should ultimately cause...
, A. higher business investment and higher household borrowing
B. lower business investment and higher exports
C. lower household borrowing and lower exports
D. lower business investment and higher household spending - -A ; an
increase in the money supply lowers interest rates.
- Which of these financial instruments are capital market instruments?
A. Commercial paper
B. Federal funds - overnight
C. Mortgage loans
D. 6-month CDs - not 1 year - -C ; the key difference is maturity - money
market instruments are <1 year while capital markets are 1+ years.
- A bank makes a 3-year fixed-rate loan of $1 million to a business and funds
the loan with ten 1-year certificates of deposit of $100,000 gathered from 10
different depositors at the bank. Which of the characteristics below of
financial intermediation is not represented in this transaction?
A. currency transformation
B. financial intermediation
C. denomination divisibility
maturity transformation - -A ; in this example it did perform a maturity
transformation (transformed from ST -> LT), acted as an intermediary and
denomination divisibility (collected 10 transactions and transformed into one
large).
- What is the fundamental function of the financial system in the US? - -To
channel funds from those who have extra money to those who need funding.
- Why are direct financing transactions more costly or inconvenient than
intermediated transactions"? - -Because of the high transaction costs and
asymmetric information. Only big corporations may be able to overcome
these obstacles. Financial intermediaries decrease these costs and take
advantage of economies of scale.
- What is the concept of financial intermediation? How does the possibility of
financial intermediation increase the efficiency of the financial system? - -
Financial intermediation is the process by which financial institutions
mediate unmatched preferences of ultimate borrowers (DSUs) and ultimate
lenders (SSUs). Financial intermediaries buy financial claims with one set of
characteristics from DSUs, then issue their own liabilities with different
characteristics to SSUs. Thus, financial intermediaries "transform" claims to
make them more attractive to both DSUs and SSUs. This increases the
amount and regularity of participation in the financial system, makes
financial markets more efficient.
Exam 1 Questions and Answers
When reserve requirements increase, interest rates ____. - -Increase ; banks
must hold more reserves causing lending supply to decrease driving up
interest rates.
- The Federal Reserve ____ the money supply when it sells government
securities. - -Decreases ; when the Fed sells securities to the market, the
funds are recycled back to the Fed so the monetary base decreases. This is a
part of open market operations.
- True or false? High stock prices are a goal of monetary policy. - -False ;
the Fed has nothing to do with stock prices directly and focuses only on the
Dual Mandate.
- True or false? If the amount of cash in the economy decreases, the Fed
may offset their effects with open market sales. - -False ; Selling will
decrease the cash/money supply but the Fed would want to increase it in this
case.
- True or false? The Fed perfectly controls the money supply. - -False ; the
Fed doesn't control the money supply, it just influences it through directly
controlling the monetary base
- The Fed may influence the Fed Funds Rate in all the following ways
except...
A. buying bonds in the open market
B. selling in the REPO market
C. exercising its regulatory power over interest rates
adjusting the interest on reserves - -C ; Regulatory power is NOT a monetary
policy tool.
- An "expansionary" fiscal policy would likely include...
A. tax increases
B. budget deficits
C. lowering the Discount Rate
D. budget surpluses - -B ; Expansionary fiscal policy means an increase in
government spending (usually financed by deficit spending).
- An increase in the money supply should ultimately cause...
, A. higher business investment and higher household borrowing
B. lower business investment and higher exports
C. lower household borrowing and lower exports
D. lower business investment and higher household spending - -A ; an
increase in the money supply lowers interest rates.
- Which of these financial instruments are capital market instruments?
A. Commercial paper
B. Federal funds - overnight
C. Mortgage loans
D. 6-month CDs - not 1 year - -C ; the key difference is maturity - money
market instruments are <1 year while capital markets are 1+ years.
- A bank makes a 3-year fixed-rate loan of $1 million to a business and funds
the loan with ten 1-year certificates of deposit of $100,000 gathered from 10
different depositors at the bank. Which of the characteristics below of
financial intermediation is not represented in this transaction?
A. currency transformation
B. financial intermediation
C. denomination divisibility
maturity transformation - -A ; in this example it did perform a maturity
transformation (transformed from ST -> LT), acted as an intermediary and
denomination divisibility (collected 10 transactions and transformed into one
large).
- What is the fundamental function of the financial system in the US? - -To
channel funds from those who have extra money to those who need funding.
- Why are direct financing transactions more costly or inconvenient than
intermediated transactions"? - -Because of the high transaction costs and
asymmetric information. Only big corporations may be able to overcome
these obstacles. Financial intermediaries decrease these costs and take
advantage of economies of scale.
- What is the concept of financial intermediation? How does the possibility of
financial intermediation increase the efficiency of the financial system? - -
Financial intermediation is the process by which financial institutions
mediate unmatched preferences of ultimate borrowers (DSUs) and ultimate
lenders (SSUs). Financial intermediaries buy financial claims with one set of
characteristics from DSUs, then issue their own liabilities with different
characteristics to SSUs. Thus, financial intermediaries "transform" claims to
make them more attractive to both DSUs and SSUs. This increases the
amount and regularity of participation in the financial system, makes
financial markets more efficient.
