AMERICAN UNIVERSITY OF RAS AL KHAIMAH

SCHOOL OF BUSINESS

Course: Money and Banking

Course Code: ECON 310

Test 3

Student Name:…………………………………Student ID:…………………..

(This Test 3 counts for 20% of your total marks to pass this course)
MULTIPLE CHOICE QUESTIONS (30 marks)

1. When people or firms that are worse-than-average risks are most likely to enter a contract that is offered
to everyone, the problem is called
a. irrational expectations.
b. adverse selection.
c. opportunity cost.
d. moral hazard.
2. A bank offers credit cards with a 25 percent interest rate, when its competitors' cards have just a 15
percent interest rate. Despite the high rate, the bank finds itself losing money because many of its
customers fail to repay the balances on their cards. The bank's losses are most likely to have occurred
because of
a. bad management.
b. the lock-in effect.
c. redlining.
d. adverse selection.

3. A covenant is a
a. legally enforced part of a loan contract that requires the borrower to act in a certain way or
to use the borrowed funds for a particular purpose.
b. net worth requirement.
c. law preventing banks from charging a very high interest rate, above 18 percent in most
states.
d. type of debt security that is backed by a financial intermediary.

4. Accounting rules require that a bank's ____ equals its ____.

a. equity capital; assets plus liabilities.
b. assets; liabilities minus equity capital.
c. liabilities; assets plus equity capital.
d. liabilities; assets minus equity capital.
5. The reserve requirement is 0 percent on the first $8 million in transaction deposits, 3 percent on amounts
between $8 million and $50 million, and 10 percent on amounts above $50 million. A bank with
transaction deposits totaling $47 million has required reserves equal to
a. $0.47 million.
b. $1.05 million.
c. $1.17 million.
d. $1.41 million.

6. The interest rate in the market for loans of reserves between banks is the
a. three-month Treasury bill rate.
b. reserve ratio.
c. discount rate.
d. federal funds rate.
 7. A bank's spread equals
a. the bank's average profit per dollar of assets.
b. the bank's return on equity.
c. the average interest rate on all the bank's investments minus the inflation rate.
d. the average interest rate on the bank's assets minus the average interest rate on its
liabilities.
8. In a recent year, a bank earned $12 million in interest on its assets of $177 million, it paid out $8 million
in interest on its liabilities (excluding capital) of $172 million, and it paid its workers $3 million in total
compensation. The bank's spread is
a. 2.1 percent.
b. 2.5 percent.
c. 2.9 percent.
d. 3.3 percent.

9. Securitization is the process by which a bank sells a loan (which it made previously) to
a. investors.
b. the government.
c. itself.
d. the borrower.
10. When the Fed began paying interest on reserves, reserve balances
a. increased dramatically.
b. decreased dramatically.
c. decreased only slightly.
d. increased only slightly.

11. Which of the following is NOT a reason that the government regulates banks?
a. To reduce the externalities caused by bank problems
b. To stabilize the money supply
c. To prevent bank runs
d. To keep banks large

12. When a bank run spreads from one bank to another, there is said to be
a. contagion.
b. a loss of credibility.
c. a loss of reserves.
d. an over-run.

13. The government serves as a lender of last resort because it

a. will make loans to anyone, regardless of their level of wealth or income.
b. does not discriminate in loan markets.
c. guarantees to supply funds to solvent banks that need cash.
d. gives money to prop up the banking industry.

14. When the Federal Reserve makes a loan to a bank at the discount window,
a. the Fed requires that the loan be repaid the next day.
b. the interest rate is the federal funds rate.
c. the loan is backed by collateral.
d. the Fed requires the bank to buy additional deposit insurance.
15. The too-big-to-fail policy is a policy under which bank regulators will not close a bank that is deemed to
a. have one of the top ten biggest headquarters buildings.
b. have at least one account with a balance greater than $1 million.
c. be so large that its closure would affect the financial system and cause other banks to fail.
d. be larger than the Federal Reserve System.

16. When the FDIC handles an insolvent bank by closing the bank, selling off the assets, paying off insured
depositors, and then paying off creditors of the bank if funds remain, the method is called
a. payoff.
b. purchase and assumption.
c. assistance.
d. foreclosure.
17. A commercial bank that gets its charter from a state government (the state in which its headquarters are
located) is called a ________ bank.
a. local
b. community
c. charter
d. state

18. The Federal Reserve is the main supervisor for

a. national banks that are part of a financial holding company or a bank holding company.
b. national banks that are not in a financial holding company or a bank holding company.
c. state banks that are not members of the Federal Reserve and are not in a financial holding
company or a bank holding company.
d. state banks that do not have FDIC insurance.

19. Someone who has an average cash balance of $45, and who spends $15 per day, visits the ATM once
every ____ days.
a. 4
b. 5
c. 6
d. 7
20. If the nominal interest rate is 5 percent, someone who has a 15 percent probability of having his cash lost
or stolen and who spends $10 each day, and who has the total cost of holding cash = (365/T) + T, faces a
cost of going to the ATM of
a. $1.
b. $2.
c. $3.
d. $4.

21. If the nominal interest rate is 3 percent and the cost of going to the ATM is $1.50, someone who has a 12
percent probability of having his cash lost or stolen and has the total cost of holding cash = (547.50/T) +
(0.375  T) spends ____ per day.
a. $20
b. $15
c. $10
d. $5
22. If the nominal interest rate declines, then the number of days between visits to the ATM ____ and the
quantity of money demanded ____.
a. rises; rises
b. rises; falls
c. falls; falls
d. falls; rises

23. In the ATM model, if the probability of loss or theft decreases, then the number of days between visits to
the ATM ____ and the quantity of money demanded ____.
a. rises; rises
b. rises; falls
c. falls; falls
d. falls; rises
24. A general-equilibrium model is a model in which
a. all key macroeconomic variables are endogenous.
b. one or more key macroeconomic variables are exogenous.
c. one and only one key macroeconomic variable is exogenous.
d. no key macroeconomic variables are endogenous.

25. In the liquidity-preference model, an increase in prices causes the nominal interest rate to ____ and the
equilibrium quantity of money to ____.
a. increase; increase
b. increase; remain unchanged
c. decline; remain unchanged
d. decline; decline

26. Suppose the money demand function is

MD = P  [(0.25  Y)  (100  i)],
where Y is expressed in billions of dollars and i is expressed in percentage points. If P = 2, Y = 5,000, and
i = 5, then the nominal quantity of money demanded equals
a. 750.
b. 1,000.
c. 1,500.
d. 2,000.
27. Suppose the money demand function is
MD = P  [(0.25  Y)  (100  i)],
where Y is expressed in billions of dollars and i is expressed in percentage points. If P = 2, Y = 5,000, and
i = 5, then the real quantity of money demanded equals
a. 750.
b. 1,000.
c. 1,500.
d. 2,000.
28. A model that allows variables to change over time is a
a. static model.
b. dynamic model.
c. partial-equilibrium model.
d. general-equilibrium model.
 29. A change to a variable in a model that causes other variables to deviate from their long-run equilibrium
values in the short run or in the long run is a
a. deviation.
b. shock.
c. standard deviation.
d. disequilibrium catalyst.

30. In a dynamic model of money, when an increase in income causes an increase in money demand, thus
leading to a higher nominal interest rate, this effect is known as
a. the price-level effect.
b. the income effect.
c. the liquidity effect.
d. the inflationary effect.

___________________________________NO MORE QUESTIONS_________________________________

FOR INSTRUCTOR USE ONLY

Student Percentage
Marks Marks
Question Learning Gained.
Assigned Obtained
Outcomes
1-10 10 2
11-20 10 2, 4
21-30 10 3