FINALTERM EXAMINATION
Spring 2010
MGT411- Money & Banking (Session - 4)
Time: 90 min
Marks: 69
Question No: 1 ( Marks: 1 ) - Please choose one
Among the following reasons, which is the most appropriate cause of inefficiency of the barter system over monetary system? ► Barter system involves commodities
► Barter system involves double coincidence of wants
► Barter system lacks a system for future payments
► Barter system lacks a system for storage of value
Question No: 2 ( Marks: 1 ) - Please choose one
A Financial Intermediary: ► Is an agency that guarantees a loan
► Is involved in direct finance
► Would be used in indirect finance
► None of the given options
Question No: 3 ( 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: 4 ( Marks: 1 ) - Please choose one
Commissions paid to an insurance broker are an example of which of the following? ► Risk transfer
► Information asymmetry
► Transaction costs
► All of the given options
Question No: 5 ( Marks: 1 ) - Please choose one
Which of the following market allowed networks of dealers that are connected electronically? ► New York Stock Exchange
► NASDAQ
► Large exchanges in London
► Large exchanges in Tokyo
Question No: 6 ( Marks: 1 ) - Please choose one
If you put $1,000 per year into bank at 4% interest, how much would you have saved after 40 years? ► $90,000
► $98,826
► $82,286
► $85,880
Question No: 7 ( Marks: 1 ) - Please choose one
The relationship between the price and the interest rate for a zero coupon bond is best described as _________. ► Volatile
► Stable
► Inverse
► No relationship
Question No: 8 ( Marks: 1 ) - Please choose one
If the annual interest rate is 6% (.06); the price of a one year Treasury bill would be: ► $94.00
► $94.33
► $95.25
► $96.10
Question No: 9 ( Marks: 1 ) - Please choose one
Which of the following would probably NOT earn an A rating from Standard & Poor's: ► 30 years bond issued by the U.S. Treasury
► New vegetarian fast-food chain
► 90 days T-Bills issued by the U.S. Treasury
► Both 30 years bond and 90 days T-Bills issued by U.S. Treasury
Question No: 10 ( Marks: 1 ) - Please choose one
Expectation hypothesis focuses on which one of the following? ► Risk premium
► Risk free interest rate
► Yield to maturity
► None of the given options
Question No: 11 ( Marks: 1 ) - Please choose one
Other things remaining equal, the liquidity premium theory is based upon the idea that ____________. ► Investors prefer long-term bonds
► Investors prefer short-term bonds
► Investors are indifferent between short-term and long-term bonds
► Investors prefer intermediate-term bonds
Question No: 12 ( Marks: 1 ) - Please choose one
The shape of the yield curve is usually: ► Upward sloping
► Downward sloping
► Upward sloping for shorter maturities and downward sloping for longer maturities
► Flat
Question No: 13 ( Marks: 1 ) - Please choose one
Common stocks (or corporate stocks): ► Are short term debt instruments
► Entitle the holder to contractual payments
► Were poor investments over the period 1982‑1996
► Allows the holder to share in the earnings of the firm
Question No: 14 ( Marks: 1 ) - Please choose one
Stock market bubbles can lead to: ► An inefficient allocation of resources
► Stock market crashes
► Patterns of volatile returns from the stock market
► All of the given options
Question No: 15 ( 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: 16 ( Marks: 1 ) - Please choose one
A stand by letter of credit is a form of: ► Loan
► Insurance
► Security
► Deposits
Question No: 17 ( Marks: 1 ) - Please choose one
The difference between a bank's reserves and their required reserves is equal to which of the following? ► Equity
► Excess reserves
► Net interest income
► None of the given options
Question No: 18 ( 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: 19 ( Marks: 1 ) - Please choose one
Which one of the following refers to the risk assessment and loss reimbursement guarantee by the individual risk experts of the relevant field? ► Underwriting process
► Insurance process
► Research process
► None of the given options
Question No: 20 ( Marks: 1 ) - Please choose one
All of the followings are the primary source of funds for Government sponsored Enterprise EXCEPT? ► Commercial paper
► Bonds
► Loan guarantees
► Policy benefits to be paid out to future retirees
Question No: 21 ( Marks: 1 ) - Please choose one
The "trade off" which can impact bank's likelihood of faliure is described as: ► The larger the bank in asset size the more likely it will fail
► The more competitive the banking environment, the more likely the bank will fail
► The more profitable the bank, the less liquid the bank will be and the more likely it will fail
► The greater the regulation from government the more likely the bank will fail
Question No: 22 ( Marks: 1 ) - Please choose one
Khushhali bank is: ► A Finance company
► A Securities firm
► A Government sponsored enterprise
► An insurance company
Question No: 23 ( Marks: 1 ) - Please choose one
___________ is the strategy of buying and selling government securities: ► Open market operations
► Reserve requirement
► Discount loans
► Cash withdrawal
Question No: 24 ( Marks: 1 ) - Please choose one
Instruments that the central bank controls directly are known as: ► Operating instruments
► Intermediate instruments
► Financial instruments
► None of the given options
Question No: 25 ( Marks: 1 ) - Please choose one
Which one of the following is extended usually overnight to sound institutions on a very short-term basis? ► Primary credit
► Secondary credit
► Seasonal credit
► All of the given options
Question No: 26 ( Marks: 1 ) - Please choose one
Inflation in the long run would be determined by which one of the following? ► The exchange rate
► Aggregate demand
► The rate of money growth
► Aggregate supply
Question No: 27 ( Marks: 1 ) - Please choose one
Which one of the following is vertical at the point where current output equals potential output? ► Short run aggregate supply curve
► Aggregate demand curve
► Long run aggregate supply curve
► Monetary policy reaction curve
Question No: 28 ( 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: 29 ( 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: 30 ( Marks: 1 ) - Please choose one
The Fed was reluctant to make discount loans beacause of which one of the following reason? ► Beacause it was a destabilizing force for financial markets
► Beacause it resulted in banks in poor financial standing
► Beacause it pushed the discount rate above the target federal funds rate
► Beacause it proved to be a very stabilizing force for financial markets
Question No: 31 ( 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: 32 ( Marks: 1 ) - Please choose one
Inflation in the long run would be determined by which one of the following? ► The exchange rate
► Aggregate demand
► The rate of money growth
► Aggregate supply
Question No: 33 ( Marks: 1 ) - Please choose one
Complete crowding-out will occur if: ► The money supply rises when Government purchases increases
► An increase in Government purchases does not change Consumption
► Taxes rise when Government purchases increases
► An increase in Government purchases causes an equal fall in Consumption, Investment, and Net Exports
Question No: 34 ( Marks: 1 ) - Please choose one
Bank can borrow by using a ___________ or repo which is a short term collateralized loan. ► Letter of credit
► Discounted loan
► Repurchase agreement
► Federal funds
Question No: 35 ( Marks: 1 ) - Please choose one
What happens when a bank does not meet customer’s request for immediate funds? ► There will be risk of failure even with positive net worth
► Liquidity will drive it out of business
► There will be risk of failure with negative net worth
► None of the given options
Question No: 36 ( Marks: 1 ) - Please choose one
Which of the following are the primary uses of funds of Finance Company? ► Cash, loans, securities
► Corporate bonds, government bonds
► Commercial paper, bonds, mortgages
► Bonds, bank loans, commercial paper
Question No: 37 ( Marks: 1 ) - Please choose one
Which of the following are not under the control of a central bank? ► Govt. budget
► Fiscal policy
► Securities market
► All of the given options
Question No: 38 ( Marks: 1 ) - Please choose one
The ______________ framework is made up of the objectives of central banks and requirements that central bank be independent, accountable and good communicator. ► Monetary policy
► Fiscal policy
► Insurance policy
► Trade policy
Question No: 39 ( Marks: 1 ) - Please choose one
“Pooling the knowledge of a number of people yields better decisions than decision making by an individual” represent which of the following principle of central bank design?
► Independence
► Decision making by committee
► Accountability and transparency
► Policy framework
Question No: 40 ( Marks: 1 ) - Please choose one
If the cost of the currency is the interest it would earn on deposits then what would be its benefit?
► Higher risk and lower liquidity
► Higher risk and higher liquidity
► Lower risk and lower liquidity
► Lower risk and higher liquidity
Question No: 41 ( 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: 42 ( 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: 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 higher real interest rate reduces consumption, investment, and net exports causing aggregate demand (output) to ________. ► Fall
► Rise
► Remain constant
► Incomplete information
Question No: 45 ( Marks: 1 ) - Please choose one
In which of the following situation part of the economy’s capacity is idle, and firms tend to raise their prices and wages less than they did when current output equaled potential output? ► When current output is below potential output
► When current output is exceeds potential output
► When current output equals potential output
► None of the given options
Question No: 46 ( Marks: 1 ) - Please choose one
In which of the following situation firms increase their prices and wages more than they would if they were operating at normal levels? ► When current output is below potential output
► When current output exceeds potential output
► When current output equals potential output
► None of the given options
Question No: 47 ( 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: 48 ( Marks: 1 ) - Please choose one
An increase in aggregate demand causes a temporary increase in which of the following? ► Out put
► Inflation
► Both output and inflation
► Incomplete information
Question No: 49 ( Marks: 3 )
Discuss velocity both in long and short run.Question No: 50 ( Marks: 3 )
What is the effect of an increase in potential output on inflation and output?Question No: 51 ( Marks: 5 )
If banks offers Mr. A a choice, that whether he leaves his entire monthly salary in his account or shifting funds back and forth between checking account and bond fund. What should be Mr. A's frequency of shifting the funds between the bond fund and checking account?(Note: Bond fund pays interest but adds a service charge of Rs.20 for each withdrawal)
Question No: 52 ( Marks: 5 )
Briefly explain the reasons that why the government gets involved in the financial system.Question No: 53 ( Marks: 5 )
A well-designed policy framework helps policymakers establish credibility. Discuss the principles of central bank design.
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