FINALTERM EXAMINATION
Spring 2010
MGT411- Money & Banking (Session - 4)
Time: 90 min
Marks: 69
Question No: 1 ( Marks: 1 ) - Please choose one
If a person has a large amount of currency or big bank account at a point in time, which statement suites best for him?
► He has money with him
► He earns income
► He is wealthy
► He is not a taxpayer
Question No: 2 ( Marks: 1 ) - Please choose one
Wealth can be held in number of other forms but we use to hold money because of which one of the following reason? ► It is the only mode of payment
► It is an asset
► It is most liquid
► It is the only store of value
Question No: 3 ( Marks: 1 ) - Please choose one
In electronic transfer the most common method is to send money through a system maintained by Federal reserve called __________. ► Fedex
► Fedwire
► Fedtransfer
► Fedmoney
Question No: 4 ( Marks: 1 ) - Please choose one
Which of the following statement truly represents the main difference between debit card and store value card? ► Debit card is operated by ATM machine while Store value card doesn’t
► Debit card appearance is different from Store value card
► Debit card is not specific for user but store value card is specific
► Debit card is specific for user but store value card is not
Question No: 5 ( Marks: 1 ) - Please choose one
E money is really a form of which one of the following? ► Paper money
► Fiat money
► Government money
► Private money
Question No: 6 ( Marks: 1 ) - Please choose one
The process of financial intermediation: ► Creates a net cost to an economy but is unavoidable
► Is used primarily in underdeveloped countries
► Is always used when a borrower needs to obtain funds
► Increases the economy's ability to produce
Question No: 7 ( Marks: 1 ) - Please choose one
You receive a check for $100 two years from today. The discounted present value of this $100 is: ► $100/(1+i)
► $100*(1+i)2
► $100*(1+i)
► $100/(1+i)2
Question No: 8 ( Marks: 1 ) - Please choose one
Which of the following statement is correct? ► Higher the future value of payment shorter will be the time
► Lower the future value of payment the longer will be the time
► Lower the future value of payment the shorter will be the time
► Higher the future value of payment longer will be the time
Question No: 9 ( Marks: 1 ) - Please choose one
Mary is planning on taking out a mortgage loan for her new house. She is given the choice of two different banks: Bank A has quoted annual rate of 8% compounded semi-annually and Bank B has a quoted annual rate of 7.5% compounded for a certain number of times a year. Which bank should Mary choose? ► Bank A
► Bank B
► Indifferent between Bank A and Bank B
► Insufficient information
Question No: 10 ( Marks: 1 ) - Please choose one
If YTM is greater than the coupon rate the price of the bond is __________. ► Greater than its face value
► Lower than its face value
► Equals to its face value
► Insufficient information is given
Question No: 11 ( Marks: 1 ) - Please choose one
Mr. Ghazanfar wants to invest Rs.2,000 in a bond. If this bond is expected to receive a return of Rs.100 per month and a tax of Rs.3 will be deducted on this return. Then Mr. Ghazanfar made his decision by considering which of the following fact? ► He is attracted by Rs.100 return per month
► He considers Rs.100 less deduction for tax i.e.Rs.97
► He takes into consideration only the portion of tax which is deducted
► His decision will not be affected by any of the given factors
Question No: 12 ( Marks: 1 ) - Please choose one
The Dividend-Discount Model of stock valuation: ► Takes the annual dividend, adds it to the expected future selling price and divides by the number of years to get the current price
► Takes the net present value of expected dividends and add it to the future sale price of the stock
► Takes the net present value of the expected future price of the stock and add the annual dividend
► Is an application of the net present value formula
Question No: 13 ( Marks: 1 ) - Please choose one
A bank can usually offer a saver a higher return for the same risk because: ► The bank can usually purchase assets at a higher cost than any one saver
► The bank can pool the resources of larger savers and purchase lower denominated assets
► Economies of scale can be applied by the bank in its purchase of assets
► None of the given options
Question No: 14 ( Marks: 1 ) - Please choose one
Which of the following represents correct equation for balance sheet of the bank? ► Total banks assets = Total banking liability + Banks Capital
► Total banks assets + Banks Capital = Total banking liability
► Total banks assets + Banks Capital +Total banking liability = 0
► Banks Capital = Total banking liability + Total banks assets
Question No: 15 ( Marks: 1 ) - Please choose one
Which of the following is correct answer for the difference between Bank assets and liabilities? ► Bank Capital
► Net worth
► Bank profit
► Bank capital and net worth
Question No: 16 ( Marks: 1 ) - Please choose one
A bank's Return on Equity is calculated by which of the following? ► Dividing the banks liabilities by the bank's capital
► Dividing the bank's net profit after taxes by the bank's capital
► Bank's assets plus the net profit after taxes and dividing this sum by the bank's capital
► Dividing the bank's net profit after taxes by the sum of the bank's assets and its liabilities
Question No: 17 ( Marks: 1 ) - Please choose one
Securities firms include _________. ► Brokerage firms
► Investment banks
► Mutual fund companies
► All of the given options
Question No: 18 ( Marks: 1 ) - Please choose one
Monetary policy is under the control of which of the following in case of U.S.? ► The Federal Reserve
► The President
► The U. S. Treasury
► The U.S. Senate
Question No: 19 ( Marks: 1 ) - Please choose one
The specific goals of central banks include all of the following EXCEPT: ► High and stable real growth
► Low and stable inflation
► High levels of imports
► Low and stable unemployment rates
Question No: 20 ( Marks: 1 ) - Please choose one
To use money growth as a short term monetary policy instrument, a central bank must believe that _____________. ► Deposit expansion multiplier is volatile and unpredictable
► Only money matters
► There is an unpredictable relationship between money aggregates and inflation
► There is some stable link between the monetary base and the money aggregates
Question No: 21 ( Marks: 1 ) - Please choose one
Credit risk arises as a result of which one of the following consequences? ► It arises when loan is not repaid
► It arises because of sudden demands of funds
► It arises when two sides of the balance sheet do not match up
► It arises when banks make additional profit by using derivatives
Question No: 22 ( Marks: 1 ) - Please choose one
American Bank actively manages a large portfolio of bonds. It trades to enhance the portfolio's profitability. Which of the following risk American Bank would face most probably? ► Market risk
► Operational risk
► Technology risk
► Insolvency risk
Question No: 23 ( Marks: 1 ) - Please choose one
Monetary Base is a factor that affects the quantity of money. This factor is controlled by which of the following? ► Central bank
► Bank regulators
► Commercial banks
► Non bank public
Question No: 24 ( Marks: 1 ) - Please choose one
The real purchasing power of money in circulation is expressed as which of the following? ► MV·PY
► M/P
► PY
► M/Y
Question No: 25 ( Marks: 1 ) - Please choose one
According to the modern quantity theory, changes in aggregate spending are primarily due to: ► Consumption changes
► Investment changes
► Money supply changes
► Interest rate changes
Question No: 26 ( Marks: 1 ) - Please choose one
According to real business cycle theory, aggregate economic fluctuations are caused by changes in: ► The money supply
► Fiscal policy
► High unemployment
► The natural rate level of output
Question No: 27 ( Marks: 1 ) - Please choose one
Spreading involves: ► Finding assets whose returns are perfectly negatively correlated
► Building a portfolio of assets whose returns move together
► Investing in bonds and avoiding stocks during bad times
► Adding assets to a portfolio that moves independently
Question No: 28 ( Marks: 1 ) - Please choose one
Which of the following statement is true about relationship between Loans and Assets? ► Loans make up about one-third of total assets.
► Loans make-up about one-half of total assets.
► Loans make up about two-thirds of total assets.
► Loans make up about one-fourth of total assets.
Question No: 29 ( Marks: 1 ) - Please choose one
How a bank can use liability management to obtain additional funds?
► By borrowing from central bank
► By borrowing from other bank
► By attracting additional deposits
► All of the given options
Question No: 30 ( Marks: 1 ) - Please choose one
____________degrades the information content of prices and impedes the market’s function of allocating resources to their best uses. ► Inflation
► Deflation
► Zero inflation
► None of the given options
Question No: 31 ( Marks: 1 ) - Please choose one
Which of the following are goals of the Central Bank? ► Low, stable inflation
► Predictable value of the currency
► Avoiding deflation
► All of the above
Question No: 32 ( Marks: 1 ) - Please choose one
Which of the following is NOT a function of the Central Bank? ► Conduct economic research
► Adjust tax policy
► Control the money supply
► All of these are the functions of the Central Bank
Question No: 33 ( Marks: 1 ) - Please choose one
“Policy makers must be held accountable to the public they serve and clearly communicate their objectives, decisions and methods” represent which of the following principle of central bank design? ► Decision making by committe
► Accountability and transparency
► Policy framework
► Independence
Question No: 34 ( Marks: 1 ) - Please choose one
Which of the following are the components of the monetary base? ► Currency in the hands of the public and reserves of the banking system
► Deposits of the government and currency in the hands of the public
► Deposits of the government and reserves of the banking system
► Loan to commercial bank and currency in the hands of the public
Question No: 35 ( Marks: 1 ) - Please choose one
What is (are) the prerequisite of smooth functioning of central bank? ► Transparency
► Independence
► Accountability
► All of the given options
Question No: 36 ( Marks: 1 ) - Please choose one
Monetary base and quantity of money have_____________ ► Direct relation
► Inverse relation
► No relation
► Incomplete information
Question No: 37 ( Marks: 1 ) - Please choose one
Banks may seek _____________due to a temporary shortfall in reserves or because they have longer-term problems that they need to work out. ► Primary credit
► Secondary credit
► Seasonal credit
► All of the given options
Question No: 38 ( Marks: 1 ) - Please choose one
If we label the quantity of money M and the monetary base MB, the money multiplier m is defined by which of the following relationship? ► M= m x MB
► M= m / MB
► M= m – MB
► M= m + MB
Question No: 39 ( Marks: 1 ) - Please choose one
According to the Friedman’s recommendations, how central bank would stabilize inflation? ► By keeping money growth constant only if velocity were constant
► By keeping money growth lower only if velocity were lower
► By keeping money growth higher only if velocity were higher
► By keeping money growth higher only if velocity were lower
Question No: 40 ( Marks: 1 ) - Please choose one
Higher the level of uncertainty about the future, the higher the demand for money and the _________ the velocity of money. ► Incomplete information
► Lower
► Higher
► Stable
Question No: 41 ( Marks: 1 ) - Please choose one
Portfolio demand for money goes up as the riskiness of the alternative __________ ► Falls
► Rises
► Remain stable
► Cannot be determined
Question No: 42 ( Marks: 1 ) - Please choose one
Portfolio demand for money goes up as wealth __________ ► Falls
► Rises
► Remain stable
► Cannot be determined
Question No: 43 ( Marks: 1 ) - Please choose one
There must be some level of the __________at which aggregate demand equals potential output. ► Real interest rate
► Nominal interest rate
► Effective interest rate
► None of the given options
Question No: 44 ( Marks: 1 ) - Please choose one
The monetary policy reaction curve is located so that the central bank’s target inflation is consistent with the long-run ____________, which equates aggregate demand with potential output. ► Real interest rate
► Nominal interest rate
► Effective interest rate
► None of the given options
Question No: 45 ( Marks: 1 ) - Please choose one
What will be effect on the aggregate demand curve, if current output is very sensitive to inflation?
► Aggregate demand curve will be relatively steep
► Aggregate demand curve will be relatively flat
► Aggregate demand curve will be downward sloping
► Aggregate demand curve will be relatively upward sloping
Question No: 46 ( Marks: 1 ) - Please choose one
If inflation remains steady over shorter periods, while real output adjusts, what will be its effect on the short run aggregate supply curve at the current level of inflation?
► Aggregate supply curve must be steep
► Aggregate supply curve must be flat
► Aggregate supply curve must be downward sloping
► Aggregate supply curve must be upward sloping
Question No: 47 ( Marks: 1 ) - Please choose one
In which of the following condition(s) the inflation tends to rise or fall? ► When current output is greater than potential output
► When current output is less than potential output
► When there is an output gap
► All of the given options
Question No: 48 ( Marks: 1 ) - Please choose one
Inflation falls and output rises until the economy returns to the point where current output _______ potential output and inflation equals the central bank’s target. ► Equals
► Greater than
► Lower than
► Incomplete information
Question No: 49 ( Marks: 3 )
What are the factors on which the size of money multiplier depends?Question No: 50 ( Marks: 3 )
What is the effect of an increase in potential output on inflation and output?Question No: 51 ( Marks: 5 )
“Central bank can stabilize the economy”. Discuss.Question No: 52 ( Marks: 5 )
Fill in the required table for the factors affecting the quantity of money (M).Factors | Who controls it | Change | Impact on quantity of money (M) |
Monetary Base | ? | Increase | Increase |
Required reserve-to-ratio | ? | Increase | ? |
Excess ratio to deposit ratio | ? | Increase | Decrease |
Currency to deposit ratio | ? | Increase | ? |
Question No: 53 ( Marks: 5 )
Briefly explain the reasons that why the government gets involved in the financial system.
