MGT411 Final Paper 2010

FINALTERM EXAMINATION

Spring 2010

MGT411- Money & Banking (Session - 2)

Ref No: Time: 90 min

Marks: 69

Student Info
StudentID:
Center:	OPKST
ExamDate:	12 Aug 2010

For Teacher's Use Only
Q No.	1	2	3	4	5	6	7	8	Total
Marks
Q No.	9	10	11	12	13	14	15	16
Marks
Q No.	17	18	19	20	21	22	23	24
Marks
Q No.	25	26	27	28	29	30	31	32
Marks
Q No.	33	34	35	36	37	38	39	40
Marks
Q No.	41	42	43	44	45	46	47	48
Marks
Q No.	49	50	51	52	53
Marks

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

If more students didn't pay back their student loans then which of the following statement would imply?

► Student loans may become more difficult to obtain

► The interest rate on student loans would increase

► Fewer people may attend college

► All of the given options

Question No: 2 ( 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: 3 ( Marks: 1 ) - Please choose one

A derivative instrument:

► Gets its value and payoff from the performance of the underlying instrument

► Is a high risk financial instrument used by highly risk averse savers

► Comes into existence after the underlying instrument is in default

► Should be purchased prior to purchasing the underlying security

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

Repurchase agreements are:

► The most liquid of all money market instruments

► In use for hundreds of years

► Loans of deposits at the Federal Reserve

► Short term loans with Treasury bills as collateral

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

The future value of $100 left in a savings account earning 4.5% for two and a half years is best expressed by:

► $100(1.045)3/2

► $100( 0.45)2.5

► $100(1.045)2.5

► 100 x 2.5 x (1.045)

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

Asma deposits funds into a CD account at her bank. The CD account has an annual interest of 4.0%. If Asma leaves the funds in the CD account for entire two years she will have $1081.60. What amount is Asma depositing?

► $960.60

► $900.00

► $1005.00

► $1000.00

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

If ABC Inc. and XYZ Inc. have returns that are perfectly negatively correlated:

► Adding XYZ Inc. to a portfolio that consists of only ABC Inc. will reduce risk

► Adding ABC Inc. to a portfolio that includes only XYZ Inc. will increase risk

► Adding XYZ Inc. to a portfolio that consists of only ABC Inc. will neither increase nor decrease the risk of the portfolio

► Adding XYZ Inc. to a portfolio that consists of only ABC Inc. will lower systematic risk

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

Which of the following best expresses the formula for determining the price of a U.S. Treasury bill per $100 of face vale?

► $100(1 + i)

► $100/ (1 + i) ⁿ

► $100/ (1 + i)

► 1 + $100/ (1 + i) ⁿ

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

Current yield is equal to which of the following?

► Price paid / yearly coupon payment

► Price paid *yearly coupon payment

► Yearly coupon payment / face value of bond

► Yearly coupon payment / price paid

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

Which of the following ratings shows “Highest quality and credit worthiness”?

► AAA

► AA

► BB

► A

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

	Bond A	Bond B
Maturity	5 years	10 years
Default risk	5%	5%
Tax rate	30%	30%
Yield	?	?

See the above table and choose the one option which is NOT correct about the yield of Bond A and Bond B?

► Bond tax status and default rate are not the only factors that affect the yield of the two bonds

► Bond A has different yield from that of Bond B because of change in maturity period

► Yields of both the bonds are not disturbed by maturity period

► Yield of Bond B depends on what people expect to happen in years to come

Question No: 12 ( 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: 13 ( Marks: 1 ) - Please choose one

One way for a bank to deal with liquidity risk is ____________.

► To hold sufficient excess reserves

► To charge all borrowers from the same industry an average rate for that industry

► To avoid making loans to borrowers from a broad spectrum

► To limit the number of loans made in any year

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

An insurance company provides liability insurance to a bakery protecting the owner against claims from customers. One area of coverage is protection against food poisoning claims. The insurance company may periodically send an employee into the bakery to observe food preparation and food storage processes. The insurance company is trying to avoid which of the following?

► Paying claims

► Adverse selection

► Moral hazard

► Transaction cost

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

Regulators of credit unions are which of the following?

► Office of thrift Supervision

► State authorities

► National Credit Union Administration

► Federal Reserve System

Question No: 16 ( 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: 17 ( 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: 18 ( Marks: 1 ) - Please choose one

In "gap analysis," the gap is the difference between a bank's _________ and __________.

► Deposits and loans

► Long-term securities and short-term securities

► Rate-sensitive assets and rate-sensitive liabilities

► Assets and liabilities

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

Interest rate charged by the central bank on loans to commercial banks is known as:

► Discount rate

► Inflation rate

► Internal rate of return

► All of the given options

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

The portfolio demand for money reflects which of the following?

► The money we hold for our everyday transactions

► The money we hold to purchase stocks and bonds and other financial securities

► The portion of wealth people desire to hold in the form of money

► None of the given option

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

Which of the following will not shift Aggregate Supply left?

► A new cost-reducing production technology

► A sudden increase in energy prices

► An increase in the expected price

► An increase in the wage rate

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

If over time prices and output both rise, then

► Aggregate Demand must increase more than long-run supply increases

► Long-run supply must decrease more than Aggregate Demand increases

► Aggregate Demand must increase less than long-run supply increases

► Aggregate Demand must increase as much as long-run supply increases

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

When you need more units of money to buy the same amount of good which you bought a month or a year ago. What does it mean?

► Your economy has a high economic growth rate

► Your economy’s GDP value is more than previous year

► Price in your economy is falling causing deflation

► Price in your economy is raising causing inflation

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

Which one of the following statement is true for investment if all other factors are held constant?

► An investment with less risk should sell for a lower price and offer a lower return

► An investment with more risk should sell for a lower price and offer a higher return

► An investment with less risk should sell for a lower price and offer a higher return

► An investment with more risk should offer a lower return and sell for a higher price

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

Which of the following is the formula for calculating the ROA (Return on assets)?

► ROA = Net profit before taxes / bank capital

► ROA = Net profit after taxes / total assets

► ROA = Net profit after taxes / bank capital

► ROA = Net profit before taxes / total assets

Question No: 26 ( Marks: 1 ) - Please choose one

Which of the following is the formula for calculating ROE (Return on equity)?

► ROE = Net profit before taxes / bank capital

► ROE = Net profit after taxes / total assets

► ROE = Net profit after taxes / bank capital

► ROE = Net profit before taxes / total assets

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

If bank’s interest margin is currently improving, what will be its effect on the profitability of the bank?

► There will be negative effect on the Bank’s profitability

► There will be positive effect on the Bank’s profitability

► There will be no effect on the Bank’s profitability

► It cannot be determined

Question No: 28 ( 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: 29 ( Marks: 1 ) - Please choose one

What kind of risk will involve when loans will not be repaid?

► Interest-rate risk

► Credit risk

► Trading risk

► Inflation risk

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

Which of the following policy is used by the central banks to stabilize economic growth and inflation in a country?

► Trade policy

► Fiscal policy

► Monetary policy

► Demand management policy

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

Why govt. wants to control the printing of money?

► To control the amount of currency

► To control deflation in a country

► Losing control of the amount of currency means losing control of inflation

► Tight control of the amount of currency means losing control of inflation

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

During the period of _______the central bank increases the interest rate in order to control the inflation in the economy.

► Recession

► Boom

► Recovery

► Recession or boom

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

The amount of ________ a bank holds depends on the costs and benefits of holding them.

► Excess reserves

► Required reserve

► Actual reserve

► None of the given options

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

Which of the following are the components of the bank reserves?

► Deposits of the Government + Currency in the hands of the public

► Deposits of the Government + deposits at the central bank

► Currency in the hands of the public + Vault cash

► Vault cash + deposits at the central bank

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

Among the asset side of the balance sheet of a central bank which of the following item represent the function of central bank as Banker’s bank?

► Deposits of the Government

► Loan to commercial bank

► Currency

► Reserves

Question No: 36 ( 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: 37 ( Marks: 1 ) - Please choose one

Which of the following situation reduce(s) the impact of a given change in reserves on the total deposits in the system?

► The desire of a bank to hold excess reserves

► The desire of account holders to withdraw cash

► The desire of a bank to hold excess reserves and the desire of account holders to withdraw cash both

► None of the given options

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

Reserve equation can be expressed as:

► Reserves = required reserve + excess reserve

► Reserves = required reserve - excess reserve

► Reserves = required reserve / excess reserve

► Reserves = (required reserve) x (excess reserve)

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

With the velocity growth of 2% and money growth of 3.5%, equation of exchange tells us that policy makers should set inflation objective of 3%, according to this equation what would be the real growth?

► 8%

► 4%

► 2.5%

► 1%

Question No: 40 ( Marks: 1 ) - Please choose one

The lower the cost of shifting money between accounts, the lower the money holdings and the _______the velocity.

► Lower

► Higher

► Stable

► Incomplete information

Question No: 41 ( 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: 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 is high or current output is running above potential output, central bankers will __________nominal interest rates.

► Raise

► Fall

► Stabilize

► Incomplete information

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

The monetary policy reaction curve is set so that when current inflation equals target inflation, the ________________equals the long-run real interest rate.

► Real interest rate

► Nominal interest rate

► Effective interest rate

► None of the given options

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

Monetary policy makers react to changes in current inflation by changing the __________

► Effective interest rate

► None of the given options

► Nominal interest rate

► Real interest rate

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

If policymakers react aggressively to a movement of current inflation away from its target level with a large change in the real interest rate, the monetary policy reaction curve will be ___________ and the aggregate demand curve is __________.

► Steep, flat

► Flat, steep

► Flat, flat

► Steep, steep

Question No: 47 ( 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: 48 ( Marks: 1 ) - Please choose one

Real business cycle theory’s assumption that prices and wages are flexible implies that:

► Short-run aggregate demand curve is irrelevant

► Long-run aggregate demand curve is irrelevant

► Short-run aggregate supply curve is irrelevant

► Long-run aggregate supply curve is irrelevant

Question No: 49 ( Marks: 3 )

What are the factors that affect the quantity of money?

Question No: 50 ( Marks: 3 )

Discuss the impact of rise in real interest rate on the component of aggregates demand.

Components of Aggregate demand	Effects of a rise in the real interest rise	Impact on the component of Aggregate demand
Consumption
Investment
Net exports

Question No: 51 ( Marks: 5 )

Discuss the impact of inflation shock on output and inflation.

Question No: 52 ( Marks: 5 )

Write down the unique role of depository institutions.

Question No: 53 ( Marks: 5 )

Which relationship is shown by the monetary policy reaction curve?

What will be the change in monetary policy reaction curve if the given factors change?

a. An increase in the Central Bank’s Inflation Target

b. An increase in the Long-run real interest rate