Deck 20: The Money Supply and Banking Systems

Question 1

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

Answer 1

False
Explanation: Thrift banks are banking institutions that offer deposit accounts and focus on offering home mortgage loans.

Question 2

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

Answer 2

True
Explanation: Loan-to-value is the percentage of an asset's market value that a lender is willing to finance when offering a loan. The rest of the purchase price has to be paid by the buyer as a down payment.

Question 3

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

Answer 3

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

Question 4

Equifax,Experian,and TransUnion are the major credit-rating agencies for businesses and securities.

Question 5

The Federal Reserve requires all depository institutions (those that accept deposits from customers)to hold a portion of those deposits in reserve.

Question 6

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

Question 7

The 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 8

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

Question 9

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.

Question 10

The federal funds rate is also known as the overnight rate.

Question 11

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

Question 12

Investment banks provide services to the general public.

Question 13

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

Question 14

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

Question 15

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

Question 16

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

Question 17

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

Question 18

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

Question 19

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

Question 20

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

Question 21

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 22

________ 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 23

The Federal Reserve establishes the federal funds rate and influences the money supply by buying and selling Treasuries (negotiable U.S.Government debt obligations)in the open market.If the Fed buys Treasuries,the money supply will ________ and the federal funds rate will ________.

A) decrease, decrease
B) decrease, increase
C) increase, stabilize
D) increase, decrease
E) stabilize, increase

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

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

Question 26

The ________ is a fundamental driver of economic behavior because it influences short-term and long-term interest rates,foreign exchange rates,and inflation.

A) retail banking manifesto
B) amortization ratio
C) global prime rate
D) federal funds rate
E) prime mortgage market

Question 27

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 28

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

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

Question 29

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

Question 30

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

Question 31

As an aggregate measure of the money supply,M1 consists of cash held by the public,as well as money in a variety of checking accounts.

Question 32

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) temporary store of value
D) medium of exchange
E) standard of deferred payment

Question 33

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 34

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

Question 35

The Dodd-Frank Act aims to reform the banking industry.

Question 36

________ 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 37

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 38

Leading up to the market meltdown of 2008,investors that purchased mortgage-backed securities (MBSs)also bought ________ to transfer the risk of those securities to someone else,in case those MBSs failed.

A) adjustable-rate mortgages
B) credit-default swaps
C) loan-to-value notes
D) asset-backed equivalents
E) debt-security derivatives

Question 39

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

Question 40

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

A) Fed reducing the discount window 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 41

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 42

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 43

________ 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 44

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 45

________ 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 46

________ 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 47

All ________ must become members of the Federal Reserve System and ________ may choose to join.

A) national banks, savings and loans
B) credit unions, state banks
C) national banks, state banks
D) state banks, national banks
E) investment banks, credit unions

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 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 50

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 51

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 52

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

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

Question 53

________ 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 54

Investment banks offer all of the following services EXCEPT ________.

A) facilitating mergers, acquisitions, and sales
B) underwriting initial public offerings
C) offering checking and savings accounts
D) managing and advising on investments
E) enabling clients to trade commodities

Question 55

________ 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 56

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 57

________ 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 58

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 59

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 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

The ________ concept played a huge role in risky and/or fraudulent subprime mortgage loans because lenders could make such loans and then use credit default swaps to avoid the consequences by passing the risk on to another party or institution.

A) frozen credit
B) moral hazard
C) discounted lending
D) economic transgeneration
E) negative amortization

Question 62

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

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

Question 63

In a ________,borrowers stop making payments on a loan.

A) liquidity crisis
B) bubble
C) foreclosure
D) default
E) market squeeze

Question 64

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 65

A ________ 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) flash crash
E) credit freeze

Question 66

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 67

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) fiscal shock
D) asset crisis
E) credit freeze

Question 68

As a part of the Fed's function of designing and implementing monetary policy,the ________ decides on monetary policy.

A) Federal Committee for Money Management (FCMM)
B) Federal Institute for Financial Oversight (FIFO)
C) Federal Savings and Loan Insurance Corporation (FSLIC)
D) Federal Open Market Committee (FOMC)
E) Federal Deposit Insurance Corporation (FDIC)

Question 69

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

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

Question 70

In response to the Great Depression,the ________ restricted investment banks and commercial banks from crossing into each other's businesses and potentially abusing their fiduciary duties at the expense of customers.

A) Buckley-Gore Act
B) Smoot-Hawley Act
C) Gramm-Rudman Act
D) Dodd-Frank Act
E) Glass-Steagall Act

Question 71

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 72

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 ratio
C) prime mortgage ratio
D) tangible-asset ratio
E) mortgage-to-price ratio

Question 73

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) swapping
B) flipping
C) retrenching
D) vaulting
E) catapulting

Question 74

The Dodd-Frank Act includes the Volker rule,which ________.

A) makes sure consumers get clear and accurate information about financial services
B) aims to stop banks from making risky trades that undermine their financial stability and put their customers at risk
C) seeks to prevent government bailouts of individual firms
D) provides for more rigorous rules regarding transparency and accountability of credit rating practices
E) aims to provide more transparency and accountability in the market for derivatives, hedge funds, and other financial products

Question 75

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

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

Question 76

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 77

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 78

An adjustable rate mortgage entices borrowers with "teaser" rates that lower their payments in the early years but make them vulnerable to ________ as the "real" rates kick in.

A) fiscal reconciliation
B) buyer's remorse
C) subprime envy
D) payment shock
E) loan-to-value aggregation

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

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