UARK Financial Markets and Institutions Exam 1 Questions And
Answers Verified
1. When reserve requirements Increase ; banks must hold more reserves causing lending sup-
increase, interest rates . ply to decrease driving up interest rates.
2. The Federal Reserve the Decreases ; when the Fed sells securities to the market, the funds
money supply when it sells are recycled back to the Fed so the monetary base decreases.
government securities. This is a part of open market operations.
3. True or false? High stock False ; the Fed has nothing to do with stock prices directly and
prices are a goal of monetary focuses only on the Dual Mandate.
policy.
4. True or false? If the amount False ; Selling will decrease the cash/money supply but the Fed
of cash in the economy de- would want to increase it in this case.
creases, the Fed may offset
their effects with open mar-
ket sales.
5. True or false? The Fed per- False ; the Fed doesn't control the money supply, it just influ-
fectly controls the money ences it through directly controlling the monetary base
supply.
6. The Fed may influence the C ; Regulatory power is NOT a monetary policy tool.
Fed Funds Rate in all the fol-
lowing ways except...
A. buying bonds in the open
market
B. selling in the REPO market
C. exercising its regulatory
power over interest rates
adjusting the interest on re-
serves
, UARK Financial Markets and Institutions Exam 1 Questions And
Answers Verified
7. An "expansionary" fiscal poli- B ; Expansionary fiscal policy means an increase in government
cy would likely include... spending (usually financed by deficit spending).
A. tax increases
B. budget deficits
C. lowering the Discount
Rate
D. budget surpluses
8. An increase in the mon- A ; an increase in the money supply lowers interest rates.
ey supply should ultimately
cause...
A. higher business invest-
ment and higher household
borrowing
B. lower business investment
and higher exports
C. lower household borrow-
ing and lower exports
D. lower business invest-
ment and higher household
spending
9. Which of these financial in- C ; the key ditterence is maturity - money market instruments are
struments are capital market <1 year while capital markets are 1+ years.
instruments?
A. Commercial paper
B. Federal funds - overnight
, C. Mortgage loans
D. 6-month CDs - not 1 year
10. A bank makes a 3-year A ; in this example it did perform a maturity transformation
fixed-rate loan of $1 million (transformed from ST -> LT), acted as an intermediary and
to a business and funds the denomination divisibility (collected 10 transactions and trans-
loan with ten 1-year certifi- formed into one large).
cates of deposit of $100,000
gathered from 10 differ-
ent depositors at the bank.
Which of the characteristics
below of financial intermedi-
ation is not represented in
this transaction?
A. currency transformation
B. financial intermediation
C. denomination divisibility
maturity transformation
11. What is the fundamental To channel funds from those who have extra money to those who
function of the financial sys- need funding.
tem in the US?
12. Why are direct financing Because of the high transaction costs and asymmetric infor-
transactions more costly or mation. Only big corporations may be able to overcome these
inconvenient than intermedi- obstacles. Financial intermediaries decrease these costs and
ated transactions"? take advantage of economies of scale.
13. What is the concept of fi- Financial intermediation is the process by which financial insti-
nancial intermediation? How tutions mediate unmatched preferences of ultimate borrowers
does the possibility of finan- (DSUs) and ultimate lenders (SSUs). Financial intermediaries
Answers Verified
1. When reserve requirements Increase ; banks must hold more reserves causing lending sup-
increase, interest rates . ply to decrease driving up interest rates.
2. The Federal Reserve the Decreases ; when the Fed sells securities to the market, the funds
money supply when it sells are recycled back to the Fed so the monetary base decreases.
government securities. This is a part of open market operations.
3. True or false? High stock False ; the Fed has nothing to do with stock prices directly and
prices are a goal of monetary focuses only on the Dual Mandate.
policy.
4. True or false? If the amount False ; Selling will decrease the cash/money supply but the Fed
of cash in the economy de- would want to increase it in this case.
creases, the Fed may offset
their effects with open mar-
ket sales.
5. True or false? The Fed per- False ; the Fed doesn't control the money supply, it just influ-
fectly controls the money ences it through directly controlling the monetary base
supply.
6. The Fed may influence the C ; Regulatory power is NOT a monetary policy tool.
Fed Funds Rate in all the fol-
lowing ways except...
A. buying bonds in the open
market
B. selling in the REPO market
C. exercising its regulatory
power over interest rates
adjusting the interest on re-
serves
, UARK Financial Markets and Institutions Exam 1 Questions And
Answers Verified
7. An "expansionary" fiscal poli- B ; Expansionary fiscal policy means an increase in government
cy would likely include... spending (usually financed by deficit spending).
A. tax increases
B. budget deficits
C. lowering the Discount
Rate
D. budget surpluses
8. An increase in the mon- A ; an increase in the money supply lowers interest rates.
ey supply should ultimately
cause...
A. higher business invest-
ment and higher household
borrowing
B. lower business investment
and higher exports
C. lower household borrow-
ing and lower exports
D. lower business invest-
ment and higher household
spending
9. Which of these financial in- C ; the key ditterence is maturity - money market instruments are
struments are capital market <1 year while capital markets are 1+ years.
instruments?
A. Commercial paper
B. Federal funds - overnight
, C. Mortgage loans
D. 6-month CDs - not 1 year
10. A bank makes a 3-year A ; in this example it did perform a maturity transformation
fixed-rate loan of $1 million (transformed from ST -> LT), acted as an intermediary and
to a business and funds the denomination divisibility (collected 10 transactions and trans-
loan with ten 1-year certifi- formed into one large).
cates of deposit of $100,000
gathered from 10 differ-
ent depositors at the bank.
Which of the characteristics
below of financial intermedi-
ation is not represented in
this transaction?
A. currency transformation
B. financial intermediation
C. denomination divisibility
maturity transformation
11. What is the fundamental To channel funds from those who have extra money to those who
function of the financial sys- need funding.
tem in the US?
12. Why are direct financing Because of the high transaction costs and asymmetric infor-
transactions more costly or mation. Only big corporations may be able to overcome these
inconvenient than intermedi- obstacles. Financial intermediaries decrease these costs and
ated transactions"? take advantage of economies of scale.
13. What is the concept of fi- Financial intermediation is the process by which financial insti-
nancial intermediation? How tutions mediate unmatched preferences of ultimate borrowers
does the possibility of finan- (DSUs) and ultimate lenders (SSUs). Financial intermediaries
