1-A money market mutual fund invests in: Select one: a. short-term debt and gove
ID: 2443909 • Letter: 1
Question
1-A money market mutual fund invests in:
Select one:
a. short-term debt and government securities.
b. long-term debt and government securities.
c. stocks.
d. real estate.
2-The amount by which the money supply expands with each additional dollar in reserves is the:
Select one:
a. reserve ratio.
b. discount rate.
c. fractional reserve.
d. money multiplier.
3-An insolvent bank is one that:
Select one:
a. borrows in the market for federal funds.
b. borrows at the discount window.
c. has more liabilities than assets.
d. sells in the open market.
4-
Which is TRUE of the structure of the Fed?
Select one:
a. All seven members of the Board of Governors are appointed by the President.
b. The President serves as a member of the Board of Governors.
c. The Secretary of the Treasury chairs the Federal Open Market Committee.
d. The President is a member of the Federal Open Market Committee.
5-The Term Auction Facility involves the Federal Reserve:
Select one:
a. buying and selling government bonds.
b. lending reserves directly to banks.
c. providing reserves to banks through an auction.
d. competing with investment banks for Treasury securities.
6-
Which is an example of moral hazard?
Select one:
a. Only people with very high risk of default on loans borrow from banks.
b. Drivers have less incentive to avoid accidents after getting auto insurance.
c. When one bank fails, other banks become more cautious in lending.
d. People living along the Gulf Coast are more likely to buy flood insurance.
7-
Under fractional reserve banking, banks:
Select one:
a. hold all deposits in a special kind of vault known as a fraction.
b. hold only a fraction of deposits in reserve, lending the rest.
c. do not reveal to their customers the fraction of deposits held in reserve.
d. make only a fraction of customers' deposits available on demand.
8-
Systemic risk is present when:
Select one:
a. a bank or other financial institution acts recklessly, hoping that the Fed and regulators will later bail them out.
b. the U.S. government defaults on Treasury securities.
c. the failure of one financial institution will bring down other institutions as well.
d. the Fed increases the money supply when it should decrease it.
Explanation / Answer
Answer :
1) Option a. Short term debt and government securities.
Explanation: Money market mutual funds invests in short term securities (like Treasury bills and commercial papers. )
2) Option d. Money Multiplier.
Explanation: Money multiplier depicts the increase in the amount of money in circulation created by banks ability to lend money out of the deposits that they have.
3) Option c. Has more liabilities than assets.
Explanation: The assets of such banks are considered to be worthless than its liabilities. Insolvent bank is one which is not able to pay its own debts.
4) Option a. All members of the board of governors is appointed by the president.
Explanatio: The members of the board of governors are appointed by the president on approval of the senate.
5) Option c. Providing reserves to banks through an auction.
Explanation: TAF is used by federal reserve as a monetary program for increasing liquidity. Under this program the Federal reserves can auction short term loans to the depository instituions. This auctions allows banks to borrow funds at at lower rate which is lesser than the discount rate.
6) Option b. Drivers have less incentive to avoid accidents after getting auto insurance.
Explanation: Moral hazard can be defined as a situation in which one party engages in taking risk because it knows that the other party bears any consequences of the act that has taken by him. For example an auto driver who has an insurance knows that, in case of an accident he would be given 100% percent insurance by the insurance company. There fore he might be less cautious while driving.
7) Option c. Hold only a fraction of deposits lending the rest.
Explanation: Under fractional reserve banking system the bank is supposed to keep a small fraction of the money as reserves, the rest of the amount can be lent in the form of loans . For e.g. if you deposit $50000 at the bank and the bank has a reserve requirement ratio of 10percent the bank must keep $5000 on reserve and can lend out the $45000 as loan.
8) Option c. The failure of one financial institution will bring down other instituions as well.
Explanation: Cross sectional dimension of systematic risk explains that the financial system as a whole is an interconnected balance sheets. As a result the shock in one institution can spread it to others as well.
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