ECON 303 Chapter 10 Study Questions
1) The modern commercial banking system began in America when the
(a) Bank of United States was chartered in New York in 1801.
(b) Bank of North America was chartered in Philadelphia in 1782.
(c) Bank of United States was chartered in Philadelphia in 1801.
(d) Bank of North America was chartered in New York in 1782.
Answer: B
2) The Second Bank of the United States was denied a new charter by
(a) President Andrew Jackson.
(b) Vice President John Calhoun.
(c) President Benjamin Harrison.
(d) President John Q. Adams.
Answer: A
3) To eliminate the abuses of the state-chartered banks, the _____ created a new banking system of federally chartered banks, supervised by the _____.
(a) National Bank Act of 1863; Office of the Comptroller of the Currency
(b) Federal Reserve Act of 1863; Office of the Comptroller of the Currency
(c) National Bank Act of 1863; Office of Thrift Supervision
(d) Federal Reserve Act of 1863; Office of Thrift Supervision
Answer: A
4) The legislation that separated investment banking from commercial banking until its repeal in 1999 is known as the:
(a) National Bank Act of 1863.
(b) Federal Reserve Act of 1913.
(c) Glass-Steagall Act.
(d) McFadden Act.
Answer: C
5) In the 1950s the interest rate on three-month Treasury bills fluctuated between 1 percent and 3.5 percent; in the 1980s it fluctuated between ____ percent and ____ percent.
(a) 5; 15
(b) 4; 11.5
(c) 4; 18
(d) 5; 10
Answer: A
6) Adjustable rate mortgages
(a) protect financial institutions from declining earnings when interest rates rise.
(b) benefit households when interest rates are falling.
(c) have many attractive attributes, explaining why so few households now seek fixed-rate mortgages.
(d) do only (a) and (b) of the above.
(e) do only (b) and (c) of the above.
Answer: D
7) Individuals purchasing homes for the first time might prefer financing the purchase with a fixed-rate mortgage
(a) if they have limited incomes that would make it difficult for them to make ends meet during periods of rising interest rates.
(b) if they would rather not be subject to the interest-rate risk due to rising rates.
(c) if they believed that interest rates would be likely to rise and remain at a level higher than the current rate.
(d) for any of the above reasons.
(e) for none of the above reasons.
Answer: D
8) The agreement to provide a standardized commodity to a buyer on a specific date at a specific future price is
(a) a put option.
(b) a call option.
(c) a futures contract.
(d) a legal contract.
(e) a mortgage-backed security.
Answer: C
9) An instrument developed to help investors and institutions hedge interest-rate risk is
(a) a put option.
(b) a call option.
(c) a financial derivative.
(d) a mortgage-backed security.
(e) a Treasury security.
Answer: C
10) New computer technology has
(a) increased the cost of financial innovation.
(b) increased the demand for financial innovation.
(c) reduced the cost of financial innovation.
(d) reduced the demand for financial innovation.
Answer: C
11) So-called fallen angels differ from junk bonds in that
(a) junk bonds refer to newly issued bonds with low credit ratings, whereas fallen angels refer to previously bonds that have had their credit ratings fall below Baa.
(b) junk bonds refer to previously bonds that have had their credit ratings fall below Baa, whereas fallen angels refer to newly issued bonds with low credit ratings.
(c) junk bonds have ratings below Baa, whereas fallen angels have ratings below C.
(d) fallen angels have ratings below Baa, whereas junk bonds have ratings below C.
Answer: A
12) Sweep accounts
(a) have made reserve requirements nonbonding for many banks.
(b) sweep funds out of deposit accounts into long-term securities.
(c) enable banks to avoid paying interest to corporate customers.
(d) reduce banks’ assets.
(e) all of the above.
Answer: A
13) Since 1974, commercial banks’ importance as a source of funds for nonfinancial borrowers
(a) has shrunk dramatically, from around 40 percent of total credit advanced to 30 percent by 1999.
(b) has shrunk dramatically, from around 70 percent of total
credit advanced to below
50 percent by 1999.
(c) has expanded dramatically, from around 50 percent of total
credit advanced to above
70 percent by 1999.
(d) has expanded dramatically, from around 30 percent of total
credit advanced to above
50 percent by 1999.
Answer: A
14) One factor contributing to the decline in income advantages that banks once had is the increased competition from the commercial paper market which has grown from _____ percent of commercial and industrial bank loans to over _____ percent today.
(a) 10; 20
(b) 5; 20
(c) 10; 40
(d) 5; 40
Answer: B
15) The dismal performance of the banking industry in the 1980s and early 1990s has led to a large number of bank failures and mergers that have reduced the number of commercial banks from around _____ in the 1970s to about _____ today.
(a) 25,000; 11,500
(b) 15,000; 8,500
(c) 20,000; 12,500
(d) 15,000; 5,500
Answer: B
16) The ability to use one resource to provide different products and services is
(a) economies of scale.
(b) economies of scope.
(c) diversification.
(d) divestiture.
(e) vertical integration.
Answer: B
17) The business term for economies of scope is
(a) economies of scale.
(b) diversification.
(c) consolidation.
(d) synergies.
(e) cooperation.
Answer: D
18) Although it has a population about half that of the United States, Japan has
(a) many more banks.
(b) only 10 percent of the number of banks.
(c) only 5 percent of the number of banks.
(d) only 1 percent of the number of banks.
Answer: D
19) As the banking system in the United States evolves, it is expected that
(a) the number and importance of small banks will increase.
(b) the number and importance of large banks will decrease.
(c) small banks will grow at the expense of large banks.
(d) the number and importance of large banks will increase.
(e) there will be no change in the relative size or importance of large and small banks.
Answer: D
20) The legislation overturning the Glass-Steagall Act is
(a) the McFadden Act.
(b) the Douglas Amendment.
(c) the Garn-St. Germain Act
(d) the Riegle-Neal Act.
(e) the Gramm-Leach-Bliley Act.
Answer: E
21) The main center of the Eurodollar market is
(a) London.
(b) Basel.
(c) Paris.
(d) New York.
Answer: A
22) Eurodollars are
(a) dollar-dominated deposits held in banks outside the United States.
(b) deposits held by U.S. banks in Europe.
(c) deposits held by U.S. banks in foreign countries.
(d) dollar-dominated deposits held in U.S. banks by Europeans.
Answer: A
23) Reasons for holding Eurodollars include
(a) the fact that Eurodollar deposits are insured by the FDIC.
(b) the fact that dollars are widely used to conduct international transactions.
(c) the fact that minimum transaction sizes are very low, making Eurodollars an attractive savings instrument for consumers.
(d) the fact that Eurodollar deposits are heavily regulated.
(e) all of the above reasons.
Answer: B
24) International banking facilities (IBFs) that operate in the United States
(a) accept time deposits from foreigners but are not subject to either reserve requirements on any restrictions on interest payments.
(b) make loans to foreigners but not to domestic residents.
(c) have grown rapidly with the encouragement of American governments.
(d) all of the above.
(e) only (a) and (b) of the above.
Answer: D