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ECO Group Exercise Chapter 9 and 10 MCQs Answers

Group Exercise DChapter 91) Information costsA) are the costs of buying and selling financial claims.B) include the costs that savers incur to determine the credit worthiness of borrowers.C) include the costs borrowers incur to discover the best investments to make with the money they have borrowed.D) are zero in financial markets, but high for transactions carried out through financial intermediaries.2) Which of the following is NOT an example of transactions costs?A) high interest ratesB) lawyers’ feesC) brokerage commissionsD) minimum investment requirements3) The presence of information and transactions cost result in all of the following EXCEPT:A) reduced efficiency of financial markets.B) higher returns for saversC) some funds not being lent at allD) borrowers need to pay more for funds4) Which of the following does NOT represent a way in which financial intermediaries take advantage of economies of scale?A) paying lower brokerage fees per dollar investedB) paying lower legal fees per dollar investedC) purchasing sophisticated computer systemsD) paying lower taxes per dollar invested5) Which of the following is NOT true of adverse selection?A) It would not exist in a world of perfect information.B) It arises because borrowers typically know more than lenders.C) It describes a lender’s problem of distinguishing the good-risk applicants from the bad-risk applicants.D) It describes a lender’s problem in verifying borrowers are using their funds as intended.6) The “lemons problem” is overcome in the used car market byA) strict government regulation of private deals between individual buyers and sellers of used cars.B) most used cars selling for well below their true values.C) “lemon insurance” policies being offered by insurance companies.D) the existence of used car dealers who are concerned about maintaining their reputations.7) Why is adverse selection more likely in financial markets when interest rates rise?A) The remaining borrowers are more likely to be risky.B) Higher interest rates are likely to hurt the economy.C) If firms have to pay higher interest rates, they may choose to use the funds differently than they first intended.D) Banks eliminate risky borrowers by raising interest rates.8) Credit rationing refers toA) the increase in the interest rate that occurs when the demand for credit increases.B) the increase in the interest rate that occurs when the supply of credit increases.C) the increase in the interest rate that occurs when the supply of credit decreases.D) a restriction in the availability of credit.9) Private information-collection firms fail to eliminate the adverse selection problem becauseA) the law does not allow them to disclose private information about the creditworthiness of firms.B) they do not monitor borrowers after loans have been made.C) some investors who do not pay for their services will still profit from them.D) most companies refuse to provide them with any information.10) Lenders prefer to lend to firms with high net worth becauseA) such firms are usually willing to pay higher interest rates.B) the owners of such firms have more to lose if the firm defaults on a loan.C) the government requires most bank loans to be made to such firms.D) such firms usually are unable to raise funds directly through financial markets.11) A firm’s principals are itsA) shareholders.B) management.C) values.D) customers.12) Moral hazard is not eliminated in debt financing becauseA) borrowers have an incentive to assume greater risk than is in the interest of the lender.B) firms with a great deal of debt often go bankrupt.C) principal-agent problems are greater with debt financing than with equity financing.D) the use of restrictive covenants tends to increase moral hazard.13) The main reason why banks are the leading source of external finance for businesses isA) the interest rates on bank loans are usually lower than interest rates on corporate bonds.B) banks have an information-cost advantage in reducing adverse selection problems.C) interest paid on bank loans is deductible against the corporate income tax, whereas interest paid on corporate bonds is not.D) government regulators encourage small businesses to obtain funding from banks.14) Venture capital firms attempt to overcome the principal-agent problem byA) investing only in industries with high profit rates.B) charging high interest rates on loans.C) holding large equity stakes in the firms they invest in.D) avoiding investing in common stock.15) In the late 2000s, which of the following was the primary source of external financing for small to medium-size firms?A) mortgagesB) bank loans other than mortgagesC) trade creditD) other loans16) Smaller firms tend to rely on financial intermediaries instead of financial markets for external financing due toA) transactions costs.B) adverse selection.C) moral hazard.D) all of the above.Chapter 101) On a bank’s balance sheet, assets areA) the uses of acquired funds.B) the sources of acquired funds.C) those items owed by the bank to depositors and others.D) by definition equal to the bank’s liabilities.2) Which of the following is NOT a bank liability?A) checkable depositsB) CDsC) mortgage loansD) borrowings from the Federal Reserve3) Which of the following represented the largest liability on the balance sheet of U.S. commercial banks in 2014: 2024 – Essay Writing Service. Custom Essay Services Cheap?A) checkable depositsB) loansC) nontransaction depositsD) borrowings4) A key difference between small-denomination and large-denomination time deposits is thatA) small-denomination time deposits pay no interest.B) large-denomination time deposits may be bought and sold on secondary markets.C) large-denomination time deposits carry a significant penalty for early withdrawal.D) small-denomination time deposits carry a significant penalty for early withdrawal.5) Banks use repurchase agreements toA) ensure that payments on consumer loans are made on time.B) borrow funds from business firms or other banks.C) guard against price fluctuations on long-term bonds.D) ensure that they always have enough funds on hand to meet their federal tax liabilities.6) Which asset is sometimes referred to as a bank’s secondary reserves?A) vault cashB) U.S. government securitiesC) repurchase agreementsD) federal funds7) What percentage of bank assets were in loans in 2014: 2024 – Essay Writing Service. Custom Essay Services Cheap?A) 8%B) 20%C) 37%D) 60%8) In 2014: 2024 – Essay Writing Service. Custom Essay Services Cheap, net worth was about what percentage of total funds raised by banks?A) 2%B) 7%C) 13%D) 35%9) If you deposit a $50 check in the bank, the immediate impact on your bank’s balance sheet will be aA) $50 increase in reserves and a $50 increase in checkable deposits.B) $50 decrease in reserves and a $50 increase in checkable deposits.C) $50 increase in reserves and a $50 decrease in checkable deposits.D) $50 decrease in liabilities and a $50 increase in checkable deposits.10) A bank’s revenue comes from all of the following EXCEPTA) interest earned on vault cash.B) fees for services provided.C) interest on loans.D) interest on securities.11) If a bank has a capital to asset ratio of 0.1 and a return on assets of 2%, what is its return on equity?A) 0.2%B) 2.1%C) 5%D) 20%12) In order to reduce the likelihood of excessive leverage in the banking system, governments have traditionallyA) imposed capital requirements on commercial banks.B) imposed capital requirement on investment banks.C) imposed capital requirements on both commercial and investment banks.D) imposed asset requirements on all banks.13) As of 2014: 2024 – Essay Writing Service. Custom Essay Services Cheap, about how many banks were there in the United States?A) 57B) 2000C) 6200D) 14,00014) Which of the following is NOT an example of off-balance-sheet lending?A) a swapB) a standby letter of creditC) a loan commitmentD) a loan sale15) The United States has a dual banking system in the sense thatA) the public may deposit money in either commercial banks or savings-and-loan associations.B) banks offer both demand deposits and time deposits to savers.C) banks are chartered by the federal government and by state governments.D) banks both take in deposits and make loans.16) Congress introduced deposit insurance in response toA) the savings-and-loan crisis of the 1980s.B) the banking crisis of the 1930s.C) the demise of the Second Bank of the United States in 1836.D) the demise of the First Bank of the United States in 1811.17) The McFadden Act of 1927A) separated commercial banking from investment banking.B) put a tax on the issuance of bank notes by state banks.C) prohibited national banks from operating branches outside their home states.D) established the Federal Reserve System.18) In the current U.S. economy, who plays the role of lender of last resort?A) The Securities and Exchange CommissionB) The Federal Deposit Insurance CorporationC) The Federal Reserve SystemD) The Social Security Administration19) Geographic restrictions on banksA) reduce their ability to take advantage of economies of scale.B) raise the costs of their providing risk-sharing, liquidity, and information services.C) reduce their exposure to credit risk.D) reduce the amount of local lending they undertake20) When you deposit $50 in your account at First National Bank and a $100 check you have written on this account is cashed at Chemical Bank, thenA) the assets of First National rise by $50.B) the assets of Chemical Bank rise by $50.C) the reserves at First National fall by $50.D) the liabilities at Chemical Bank rise by $50.21) If a bank has $100,000 of checkable deposits, a required reserve ratio of 20 percent, and it holds $40,000 in reserves, then the maximum deposit outflow it can sustain without altering its balance sheet isA) $30,000.B) $25,000.C) $20,000.D) $10,000.22) Bankers’ concerns regarding the optimal mix of excess reserves, secondary reserves, borrowings from the Fed, and borrowings from other banks to deal with deposit outflows is an example ofA) liability management.B) liquidity management.C) managing interest rate risk.D) managing credit risk.23) A bank with insufficient reserves can increase its reserves byA) lending federal funds.B) calling in loans.C) buying short-term Treasury securities.D) buying municipal bonds.24) Banks that actively manage liabilities will most likely meet a reserve shortfall byA) calling in loans.B) borrowing federal funds.C) selling municipal bonds.D) seeking new deposits.25) Bank capital has both benefits and costs for the bank owners. Higher bank capital ________ the likelihood of bankruptcy, but higher bank capital ________ the return on equity for a given return on assets.A) reduces; reducesB) increases; increasesC) reduces; increasesD) increases; reduces26) If a bank needs to raise the amount of capital relative to assets, a bank manager might choose toA) buy back bank stock.B) pay higher dividends.C) shrink the size of the bank.D) sell securities the bank owns and put the funds into the reserve account.27) Suppose a bank has $90 million in liabilities, $100 million in assets, and after-tax profit of $2 million? what is its return on assets? What is its return on equity?ROA= $2 million/$100 million= 0.02ROA= 2%ROE= $2 million/$10 million or 2% x $100 million/ $10 million= 0.2ROE= 20%

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