Question

1.) If only the party that knows if a security has a low probability of default or a
high probability of default is the issuer (borrower) of the security, then a likely outcome is
A. markets are more efficient.
B. no securities are ever sold.
C. investors only purchase the least-risky securities at high prices.
D. investors are willing to pay low prices for securities and only risky securities are sold.

2.) Once borrowers have taken out a loan, they may act in their own self interest
instead acting in the interest of the lender. An example is a mortgage borrower “walking”,
altering the property or using it for something other than the agreed upon use. This is an
example of
A. adverse selection problem.
B. lemon problem.
C. free-rider problem.
D. moral hazard problem.

3. (3 points) The majority of revenue generated by banks comes from
A. lending funds to the government.
B. charging fees to households that deposit with the bank for banking services.
C. returns on equity securities
D. making loans to households and firms.

4. (3 points) Small banks
A. act more competitively than large banks.
B. usually charge more on loans relative to what is paid to depositors compared to large
banks.
C. are generally more efficient than large banks.
D. are growing in number

5. Which of the following best describes the current banking system in the United
States?
A. The market is dominated by 10 large banks and there are very few small banks operating
any more.
B. There are more than 10,000 small banks and the market share held by the 10 largest banks
totals less than 10%
C. There are a few large banks with significant market share and there are thousands of small
banks, but the number has been declining.
D. There are a few large banks with significant market share and the number of small banks
has been growing.
6. One of the downsides of FDIC insurance is that it
A. provides bankers with incentives to take on more risk with depositors funds.
B. discourages households from depositing funds with risky banks.
C. is costly to taxpayers.
D. makes contagion problems associated with

7. Which of the following would normally lead to an INCREASE in both the
M1 and M2 money multipliers.
A. Households hold a higher fraction of deposits in currency
B. The reserve requirement is decreased
C. Banks increase holdings of excess reserves relative to deposits
D. The reserve requirement is increased

8.)
During the financial crisis of 2007-2009,
A. yields on all types of securities fell.
B. yields on all types of securities rose.
C. yields on Treasury securities fell while yields on corporate securities rose.
D. yields on Treasury rose while yields on corporate securities fell.

9.) SELECT ALL the true statements about the Federal Funds rate (FFR).
A. The FFR is a market determined interest rate.
B. The FFR is explicitly set be the Federal Reserve.
C. The FFR the interest rates that banks pay/receive when they borrow/lend from/to each
other overnight.
D. The FFR cannot be influenced by open market operations.
E. The FFR is the interest rate that banks pay for loans from the Federal Reserve.

10.) An open market sale of securities by the Federal Reserve
A. increases the monetary base.
B. decreases the monetary base.
C. increases the money multiplier.
D. decreases the money multiplier.

Answer 1

1.) If only the party that knows if a security has a low probability of default or a
high probability of default is the issuer (borrower) of the security, then a likely outcome is
A. markets are more efficient.
B. no securities are ever sold.
C. investors only purchase the least-risky securities at high prices.
D. investors are willing to pay low prices for securities and only risky securities are sold.

Correct option is option:

D. investors are willing to pay low prices for securities and only risky securities are sold.

Investors as they do not have any knowledge will be ready to pay less and hence only high risk securities will be sold as they will be ready to accept whatever investment that comes in. Market will be inefficient and some securities will still be sold. Option C is incorrect as question mentions only issuers know about return probability.

2.) Once borrowers have taken out a loan, they may act in their own self interests
instead acting in the interest of the lender. An example is a mortgage borrower “walking”,
altering the property or using it for something other than the agreed upon use. This is an
example of

Answer is D.Moral hazard problem.

A. adverse selection problem.It occurs when insurance provider ends top selecting more risky customers.
B. lemon problem.: it occurs due to asymmetric information between buyers and sellers.
C. free-rider problem.it occurs when goods offered are free and non excludable.
D. moral hazard problem.Moral hazard occurs when party to contract changes behaviour post purchase.

Hence D is correct option.

3. (3 points) The majority of revenue generated by banks comes from

Correct option is D. making loans to households and firms.

This is a main source of income,

banks pay interest on deposits and

4. (3 points) Small banks

Correct option is B. usually charge more on loans relative to what is paid to depositors compared to large
banks.

Small banks give less amount of loans but with less paperwork and hence charge higher rates of interest.