FINAL EXAM

ACADEMY OF
Fall/ 2020
POLICY AND DEVELOPMENT
International School of Economics and Finance Money, Banking and Financial Markets
TEST CODE: 02B Time: 90 minutes

Part 1 has 38 multiple choice questions. Each question is worth 0.25 point.
Total is 9,5 point. Student can choose either Test 01A, Test 01B or Test
01C.

1) In a barter economy the number of prices in an economy with N goods is

A) [N(N - 1)]/2.
B) N(N/2).
C) 2N.
D) N(N/2) - 1.

2) Which of the following bonds would you prefer to be buying?

A) a $10,000 face-value security with a 10 percent coupon selling for $9,000
B) a $10,000 face-value security with a 7 percent coupon selling for $10,000
C) a $10,000 face-value security with a 9 percent coupon selling for $10,000
D) a $10,000 face-value security with a 10 percent coupon selling for $10,000

3) Bank capital is equal to ________ minus ________.

A) total assets; total liabilities
B) total liabilities; total assets
C) total assets; total reserves
D) total liabilities; total borrowings

4) A bond that is bought at a price below its face value and the face value is repaid at a
maturity date is called a
A) simple loan.
B) fixed-payment loan.
C) coupon bond.
D) discount bond.

5) If the maturity of a debt instrument is less than one year, the debt is called
A) short-term.
B) intermediate-term.
C) long-term.
D) prima-term.

6) Which of the following are reported as liabilities on a bank's balance sheet?

A) reserves
B) checkable deposits
C) consumer loans
D) deposits with other banks

7) If the required reserve ratio is 10 percent, currency in circulation is $400 billion,

checkable deposits are $1000 billion, and excess reserves total $1 billion, then the
monetary base is
A) $400 billion.
B) $401 billion.
C) $500 billion.
D) $501 billion.

8) When $1 million is deposited at a bank, the required reserve ratio is 20 percent, and
the bank chooses not to make any loans but to hold excess reserves instead, then, in the
bank's final balance sheet
A) the assets at the bank increase by $1 million.
B) the liabilities of the bank decrease by $1 million.
C) reserves increase by $200,000.
D) liabilities increase by $200,000.

9) If borrowers with the most risky investment projects seek bank loans in higher
proportion to those borrowers with the safest investment projects, banks are said to face
the problem of
A) adverse credit risk.
B) adverse selection.
C) moral hazard.
D) lemon lenders.

10) When the ________ interest rate is low, there are greater incentives to ________ and
fewer incentives to ________.
A) nominal; lend; borrow
B) real; lend; borrow
C) real; borrow; lend
D) market; lend; borrow

11) Reserves are equal to the sum of

A) required reserves and excess reserves.
B) required reserves and vault cash reserves.
C) excess reserves and vault cash reserves.
D) vault cash reserves and total reserves.

12) The three players in the money supply process include

A) banks, depositors, and the National Treasury.
B) banks, depositors, and borrowers.
C) banks, depositors, and the central bank.
D) banks, borrowers, and the central bank.

13) In order to reduce the ________ problem in loan markets, bankers collect
information from prospective borrowers to screen out the bad credit risks from the
good ones.
A) moral hazard
B) adverse selection
C) moral suasion
D) adverse lending

14) In general, banks make profits by selling ________ liabilities and buying ________
assets.
A) long-term; shorter-term
B) short-term; longer-term
C) illiquid; liquid
D) risky; risk-free

15) Bank's make their profits primarily by issuing

A) equity.
B) negotiable CDs.
C) loans.
D) NOW accounts.

16) Which of the following are reported as liabilities on a bank's balance sheet?
A) reserves
B) checkable deposits
C) consumer loans
D) deposits with other banks

17) Assuming initially that the required reserve ratio = 15%, the currency-deposit ratio
= 40%, and the excess reserve ratio = 5%, an increase in the excess reserve ratio to 10%
causes the M1 money multiplier to ________, everything else held constant.
A) increase from 2.15 to 2.33
B) decrease from 2.33 to 2.15
C) increase from 1.54 to 1.67
D) decrease from 1.67 to 1.54

18) Assuming initially that the required reserve ratio = 10%, the currency-deposit ratio
= 40%, and the excess reserve ratio = 0, a decrease in the required reserve ratio to 5%
causes the M1 money multiplier to ________, everything else held constant.
A) increase from 2.8 to 3.11
B) decrease from 3.11 to 2.8
C) increase from 2 to 2.22
D) decrease from 2.22 to 2

19) Everything else held constant, an increase in the required reserve ratio on checkable
deposits will cause
A) the money supply to rise.
B) the money supply to remain constant.
C) the money supply to fall.
D) checkable deposits to rise.

20) If the required reserve ratio is 10 percent, currency in circulation is $400 billion,
checkable deposits are $800 billion, and excess reserves total $0.8 billion, then the
money supply is ________ billion.
A) $8000
B) $1200
C) $1200.8
D) $8400

21) In the model of the money supply process, the depositor's role in influencing the
money supply is represented by
A) the currency holdings.
B) the currency holdings and excess reserve.
C) the currency holdings and borrowed reserve.
D) the market interest rate.

22) The ratio that relates the change in the money supply to a given change in the
monetary base is called the
A) money multiplier.
B) required reserve ratio.
C) deposit ratio.
D) discount rate.

23) If a $10,000 face-value discount bond maturing in one year is selling for $5,000, then
its yield to maturity is
A) 5 percent.
B) 10 percent.
C) 50 percent.
D) 100 percent.

25) The ________ of a coupon bond and the yield to maturity are inversely related.
A) price
B) par value
C) maturity date
D) term

26) If $22,050 is the amount payable in two years for a $20,000 simple loan made today,
the interest rate is
A) 5 percent.
B) 10 percent.
C) 22 percent.
D) 25 percent.

28) The ________ is the final amount that will be paid to the holder of a coupon bond.
A) discount value
B) coupon value
C) face value
D) present value

29) Which of the following are TRUE of fixed payment loans?

A) The borrower repays both the principal and interest at the maturity date.
B) Installment loans and mortgages are frequently of the fixed payment type.
C) The borrower pays interest periodically and the principal at the maturity date.
D) Commercial loans to businesses are often of this type.

30) What is the present value of $500.00 to be paid in two years if the interest rate is 5
percent?
A) $453.51
B) $500.00
C) $476.25
D) $550.00

31) The concept of ________ is based on the common-sense notion that a dollar paid to
you in the future is less valuable to you than a dollar today.
A) present value
B) future value
C) interest
D) deflation

32) Ranking assets from most liquid to least liquid, the correct order is
A) savings bonds; house; currency.
B) currency; savings bonds; house.
C) currency; house; savings bonds.
D) house; savings bonds; currency.

33) If there are four goods in a barter economy, then one needs to know ________ prices
in order to exchange one good for another.
A) 8
B) 6
C) 5
D) 4

34) The total collection of pieces of property that serve to store value is a person's
A) wealth.
B) income.
C) money.
D) credit.

35) To an economist, ________ is anything that is generally accepted in payment for

goods and services or in the repayment of debt.
A) wealth
B) income
C) money
D) credit
36) If the aggregate price level at time t is denoted by Pt, the inflation rate from time t -
1 to t is defined as
A) πt = (Pt - Pt - 1)/Pt - 1.
B) πt = (Pt + 1 - Pt - 1)/Pt - 1.
C) πt = (Pt + 1 - Pt )/Pt.
D) πt = (Pt - Pt - 1)/Pt.

37) Which of the following can be described as direct finance?

A) You take out a mortgage from your local bank.
B) You borrow $2500 from a friend.
C) You buy shares of common stock in the secondary market.
D) You buy shares in a mutual fund.

38) Financial markets promote economic efficiency by

A) channeling funds from investors to savers.
B) creating inflation.
C) channeling funds from savers to investors.
D) reducing investment.
Part 2 has two short essay questions. Student must answer both questions.
Each question worth 2 points

1) Distinguish between direct finance and indirect finance. Why do the financial
intermediaries exist?

Direct vs. Indirect Finance

- Direct financing is when you apply for a car loan through the lender directly, such as a bank
or financial company. In this case, you know what you can spend before going to the
dealership.
- Indirect finance occurs when you go through a third party, and see what type of options are
available to you. This often occurs after you have an idea of which vehicle you want.

Advantages and Disadvantages of Direct and Indirect Finance

- Direct Financing
Advantages: Flexibility is one of the main advantages of direct finance, as you can customize
it just the way you like. You can apply for a variety of different loans, and you can even
apply before or after you visit the dealership. You will also have more control over the
process by working with your lender.
Disadvantages: This method is much more time-consuming, and it also requires more
research on your end so you know exactly what type of loan you need.
- Indirect Financing
Advantages: One of the advantages of indirect financing is being able to expedite the entire
process. The finance center has the ability to search for a variety of different loans at once.
Disadvantages: With indirect financing, you might pay more in exchange for a more
expedited process. Therefore, it’s important to consider whether this fits your lifestyle.

2 ) Explain how excess reserve and cash holding ratio affect the money multiplier .
Using mathematics to prove the relationship between money multiplier and cash
holding ratio, excess reserve. Give an example for this matter
The money multiplier, also called the credit multiplier, measures the extent to which
commercial banks increase the money supply. This multiplier is equal to the ratio between
the total money supply and the base money supply.

Symbol:
m is the currency multiplier
M is the total money supply
H is the powerful money supply
C is the amount of cash
D is the amount of deposit
R is the amount of money that commercial banks have to reserve and keep in their accounts
at the central bank

The formula for the money supply: m = M / H = (C+D) / (C+R)

Since commercial banks only have to reserve at their accounts with the central bank a portion
of their bank deposits, R is less than D. Therefore, m is greater than 1. Any increase in H will
make for the total money supply to increase more than that.

Special case:
m = 1, ie H = M 100% reserve commercial bank, does not create money (does not lend).
m = infinity, ie commercial banks do not reserve, people do not keep cash.

Suppose, customer A deposits 100 dong in the first bank as a check deposit. A 10% reserve
ratio means that the bank will keep 10% of the deposit as a reserve and lend out the rest. so
let's calculate the extra money the Bank (created) when using the business as lending.

It can be said simply that the money multiplier is the inverse of the reserve ratio in this case
money multiplier = 1/10% = 10

=> amount of money the bank can generate = 100*10 = 1000 dong

It can be seen how the amount of money a bank generates depends on the reserve ratio

The higher the reserve ratio, the smaller the amount of deposits that banks lend and the
smaller the money multiplier