MGT411- Money & Banking (Session - 1) - Final Term

FINALTERM EXAMINATION

Spring 2010

MGT411- Money & Banking (Session - 1)

Ref No: 1451565

Time: 90 min

Marks: 69

Question No: 1 ( Marks: 1 ) - Please choose one

The loans made between borrowers and lenders:

► Are liabilities to the lenders and assets to the borrowers since the borrower obtains the funds

► Are assets to the lenders and liabilities of the borrowers since the promises are made to the lenders

► Are assets to the borrowers as he obtains funds and also the liability to the borrowers as he has to pay it

► Are not part of either's assets or liabilities until the loans are repaid

Question No: 2 ( Marks: 1 ) - Please choose one

The future value of $200 at a 5% per year interest rate at the end of one year is:

► $195.00

► $210.00

► $197.50

► $100

Ans : 210

Question No: 3 ( Marks: 1 ) - Please choose one

If at 5% interest rate, $100 payment has a PV of $90.70. Then what will be the PV value of $200 payment? (Without applying formula).

► $45.35

► $272.1

► $181.4

► $362.8

Question No: 4 ( Marks: 1 ) - Please choose one

The interest rate that is involved in _____________ calculation is referred to as discount rate

► Present value

► Future value

► Intrinsic value

► Discount value

Ans ► Present value

Question No: 5 ( Marks: 1 ) - Please choose one

If a bond sells at a premium, where price exceeds face value, then we would expect to see:

► Market interest rate the same as the coupon rate

► Market interest rates above the coupon rate

► Market interest rates below the coupon rate

► None of the given options

Ans ► Market interest rates above the coupon rate

Question No: 6 ( Marks: 1 ) - Please choose one

The risk premium for an investment:

► Increases with risk

► Is a fixed amount added to the risk free return

► Is negative for U.S. Treasury Securities

► Is negative for risk averse investors

Ans ► Increases with risk

Question No: 7 ( Marks: 1 ) - Please choose one

Which of the following patterns of term structure occur most frequently?

► Ascending yield curve

► Descending yield curve

► Flat yield curve

► Humped yield curve

► Flat yield curve

Question No: 8 ( Marks: 1 ) - Please choose one

Which one of the following is true for the relationship between the yield of taxable and tax exempt bond?

► Higher the tax rate wider the gap between the yield of taxable and tax exempt bond

► Taxable bond yield is always greater than tax exempt bond

► Higher the tax rate shorter the gap between yield of taxable and tax exempt bond

► Lower the tax rate wider the gap between yield of taxable and tax exempt bond

Question No: 9 ( Marks: 1 ) - Please choose one

If the tax rate is higher than gap between yield on taxable and tax exempt bond?

► Shorter

► Wider

► No gap

► Any thing can be possible

Question No: 10 ( Marks: 1 ) - Please choose one

A graph in which time to maturity is along x-axis and yield to maturity is along y-axis is called __________.

► Government curve

► SWAP curve

► Yield curve

► LIBOR curve

Question No: 11 ( Marks: 1 ) - Please choose one

A share of common stock represents ___________.

► A claim from a lender to a borrower

► A share in the company's assets

► A share of ownership of the company

► An unlimited liability to the owner of the stock

Question No: 12 ( Marks: 1 ) - Please choose one

Deflation compounds information problems because:

► It increases a company's net worth

► It reduces the dollar value of assets while the dollar value of liabilities stays constant

► It tends to understate a company's assets and overstate their liabilities

► It always harms lenders

Question No: 13 ( Marks: 1 ) - Please choose one

Which of the following is a Bank Liability?

► Reserves

► Treasury bonds

► Loans

► Federal fund borrowings

Question No: 14 ( Marks: 1 ) - Please choose one

A stand by letter of credit is a form of:

► Loan

► Insurance

► Security

► Deposits

Question No: 15 ( Marks: 1 ) - Please choose one

Which of the following is the primary source of funds for Depository institutions?

► Short term loans

► Shares sold to customers

► Savings and time deposits

► Commercial papers

Question No: 16 ( Marks: 1 ) - Please choose one

Under the purchase and assumption method of dealing with a failed bank, the FDIC ______________.

► Sells the failed bank to the Federal Reserve

► Finds another bank to take over the insolvent bank

► Takes over the day to day management of the bank

► Sells off the profitable loans of the failed bank in an open auction

Question No: 17 ( Marks: 1 ) - Please choose one

"The Government is too big to fail" policy applies to the______________.

► Bank run in specific highly populated states which impacts a large percent of the total population

► Banks that have branches in more than two states

► Large corporate payroll accounts held by some banks where many people would lose their income

► Large banks whose failure would certainly start a widespread panic in the financial system

Question No: 18 ( Marks: 1 ) - Please choose one

An open market purchase of U.S. Treasury securities by the Fed will cause the Fed's balance sheet to show _________.

► A decrease in the asset of securities and a decrease in the liability of reserves

► A decrease in the liability of reserves

► No change in the size of balance sheet except composition of assets

► An increase in the asset category of securities and the liability category of reserves

Question No: 19 ( Marks: 1 ) - Please choose one

If M = the quantity of money, m the money multiplier, MB the Monetary Base; C = Currency, D = Deposits; R = Reserves, RR equals required reserves; and ER = excess reserves; then m would equal:

► M/MB

► R/ER

► C + D

► C + D – ER

Question No: 20 ( Marks: 1 ) - Please choose one

Key assumptions behind the quantity theory of money include which of the following?

► The change in nominal GDP is zero

► Percentage change in the price level equals the percentage change in real GDP

► The velocity of money is constant

► The money supply is fixed

Question No: 21 ( Marks: 1 ) - Please choose one

A rate of inflation that is less than the growth rate of money for a country could be explained by which one of the following?

► A decreasing velocity of money

► A contracting real economy

► A constant velocity of money

► A increasing velocity of money

Question No: 22 ( Marks: 1 ) - Please choose one

Interest rate risk arises as a result of which one of the following consequences?

► It arises when banks make additional profit by using derivatives

► 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

Question No: 23 ( Marks: 1 ) - Please choose one

Which one of the following is NOT true for gap analysis?

► It is the difference between the yield on interest sensitive assets and liabilities

► It is the difference in the maturity of assets and liabilities

► Banks manage credit risk by using gap analysis

► It is a formal study of what a business is doing currently and where it wants to go in the future

Question No: 24 ( 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: 25 ( Marks: 1 ) - Please choose one

Excess reserve-to-deposit ratio 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: 26 ( Marks: 1 ) - Please choose one

Aggregate demand curve slopes down because of many reasons which of the following is NOT the reason of its downward slope?

► Higher inflation increases real money balances

► Higher inflation induces policymakers to raise the real interest rate

► Rising inflation also reduces wealth

► Rising inflation lowers consumption

Question No: 27 ( Marks: 1 ) - Please choose one

Which of the following is NOT an example of financial institutions?

► Bank

► Securities firm

► Stock exchange

► Insurance company

Question No: 28 ( Marks: 1 ) - Please choose one

Which of the following has created an opportunity for small investors to participate in economic activity?

► Mutual funds

► Small corporations

► Stock brokers

► Small investors cannot take part in economic activity

Question No: 29 ( Marks: 1 ) - Please choose one

Managing _______ is a major concern for today’s banks.

► Trading risk

► Interest rate risk

► Systematic risk

► Other risk

Question No: 30 ( Marks: 1 ) - Please choose one

Which of the following is a combination of auto insurance?

► Life insurance and property insurance

► Life insurance and causality insurance

► Property insurance and casualty insurance

► Life insurance and saving account

Question No: 31 ( Marks: 1 ) - Please choose one

Which of the following are the primary uses of funds of depositor institution?

► Cash, loans, securities

► Corporate bonds, government bonds, stocks

► Commercial paper, bonds, mortgages

► Mortgages, consumer loans, business loans

Question No: 32 ( Marks: 1 ) - Please choose one

Why central bank occupies a privileged position in a country?

► It controls the availability of money

► It controls credit in a country’s economy

► All of the given options

► It has monopoly on the issuance of currency

Question No: 33 ( Marks: 1 ) - Please choose one

Which of the following are goals of the Central Bank?

► Price stability

► Stable output growth

► Stable financial system

► All of the above

Question No: 34 ( Marks: 1 ) - Please choose one

Which of the following is NOT a function of the Central Bank?

► Conduct economic research

► Regulate brokers and insurance companies

► Evaluate bank mergers

► These are all functions of the fed.

Question No: 35 ( Marks: 1 ) - Please choose one

Which of the following can expand the size of the balance sheet of a central bank and the monetary base?

► Open market operations

► Discounted loans

► Foreign exchange intervention

► All of the given options

Question No: 36 ( Marks: 1 ) - Please choose one

Difference between _______ and required reserve is the excess reserves.

► Deposits

► Securities

► Currency

► Reserve

Question No: 37 ( Marks: 1 ) - Please choose one

The withdrawal reduces the banking system’s____________, which is a decrease in its assets, and if the funds come from a checking account, there is a matching decrease in liabilities.

► Vault cash

► Securities

► Reserves

► Currency

Question No: 38 ( Marks: 1 ) - Please choose one

Required reserve ratio and quantity of money have __________.

► Direct relation

► Inverse relation

► No relation

► Incomplete information

Question No: 39 ( Marks: 1 ) - Please choose one

The quantity of money people hold for transaction purposes does NOT depends upon:

► Nominal income

► Cost of holding money

► Availability of substitutes

► Real income

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

Which of the following has a great influence on the aggregate demand?

► Real interest rate

► Nominal interest rate

► Effective interest rate

► None of the given options

Question No: 42 ( Marks: 1 ) - Please choose one

Which of the following is (are) the factor(s) of aggregate demand?

► Investment

► Govt. purchases

► All of the given options

► Consumption

Question No: 43 ( Marks: 1 ) - Please choose one

When current inflation raises Monetary policymakers raise the real interest rate, moving _________along the monetary policy reaction curve

► Right

► Left

► Upward

► Downward

Question No: 44 ( Marks: 1 ) - Please choose one

Which of the following is shown by the aggregate demand curve?

► How sensitive current output is to given change in current inflation

► Current output is not sensitive to given change in current inflation

► Current output and current inflation both move in the same direction

► None of the given options

Question No: 45 ( Marks: 1 ) - Please choose one

Which of the following reason(s) can shift the short run aggregate supply curve?

► Deviation of current output from potential output

► Changes in external factors driving production costs

► When current output is equal to potential out put

► Deviation of current output from potential output and Changes in external factors driving production costs

Question No: 46 ( Marks: 1 ) - Please choose one

Which of the following is determined by the intersection of the aggregate demand curve with the short-run aggregate supply curve?

► Short-run equilibrium

► Long-run equilibrium

► Both short-run and long-run equilibrium

► None of the given options

Question No: 47 ( Marks: 1 ) - Please choose one

When current output exceeds potential, the resulting expansionary gap exerts upward pressure on inflation, shifting the short-run aggregate supply curve _____________.

► Right

► Left

► Upward

► Downward

Question No: 48 ( Marks: 1 ) - Please choose one

Policymakers can shift the aggregate demand curve by shifting their monetary policy reaction curve, but which of the following cannot be shifted by them?

► Short-run aggregate supply curve

► Long-run aggregate demand curve

► Short-run aggregate demand curve

► None of the given options

Question No: 49 ( Marks: 3 )

What is the effect of an increase in potential output on inflation and output?

Question No: 50 ( Marks: 3 )

Give an account of different components of aggregate demand?

Question No: 51 ( Marks: 5 )

Give brief explanation of the following.

a)What is Target funds rate?

b) How it is controlled?

c)What will be the impact of target federal rate on economy?

Question No: 52 ( Marks: 5 )

A well-designed policy framework helps policymakers establish credibility. Discuss the principles of central bank design.

Question No: 53 ( Marks: 5 )

“Monetary policy makers react to changes in current inflation by changing the real interest rate”. Discuss.