With respect to the money and capital markets, money market securities generally have, while capital market securities are typically expected to have a: Financial Institution Monetary Theory Other, UTN, Malaysia

University Universiti Tenaga Nasional (UTN)
Subject Financial Institution Monetary Theory

1. Concerning the money and capital markets, money market securities generally have, while capital market securities are typically expected to have a.
A. less liquidity; higher annualized return
B. more liquidity; lower annualized return
C. less liquidity; lower annualized return
D. more liquidity; higher annualized return

2. About the payments system the huge number of low-value transactions is:
A. cleared by real-time gross settlement (RTGS).
B. netted and settled at the end of each day.
C. settled immediately by banks’ settlement accounts at the Reserve Bank of
D. none of the above.

3. Which of the following statements is incorrect? An exchange settlement account (ESA) is:
A. an account held by deposit-taking institutions at the Reserve Bank of Australia(RBA).
B. used to transfer funds to and from to settle transactions in the payments system.
C. an account whose balance represents bank reserves.
D. the account used by the Commonwealth government for all its spending and all its income.

4. Which of the following statements is incorrect?
A. Financial markets attract funds from investors and channel the funds to
B. Money markets enable corporations to borrow funds on a short-term basis
so that they can support their existing operations.
C. Financial institutions serve solely as intermediaries with the financial
markets and never serve as investors.
D. Investors seek to invest their funds in the stock of firms that are presently
undervalued and have much potential to improve.

5. ‘Intermediaries, by managing the deposits they receive, can make long-term loans while satisfying savers’ preferences for liquid claims.’ This statement is referring to which important attribute of financial intermediation?
A. Asset transformation.
B. Maturity transformation.
C. Credit risk transformation.
D. Liability management.

6. If you purchase an Australian government bond, that bond is:
A. an asset to you but a liability for the Australian government.
B. an asset to you as well as an asset for the Australian government.
C. is a liability to you but an asset to the Australian government.
D. a liability to you as well as a liability for the Australian government.

7. Most financial intermediaries issue financial claims and purchase
financial claims.
A. direct; direct.
B. indirect; indirect.
C. direct; indirect.
D. indirect; direct.

8. An example of the problem is when a corporation uses the funds
raised from selling bonds to fund corporate expansion to pay for Caribbean cruises for all of its employees and their families.
A. adverse selection
B. moral hazard
C. credit risk
D. risk sharing

9. Fisher’s quantity theory of money suggests that the demand for money is purely a function of and has no effect on the demand for money.
A. Income; interest rates have
B. Interest rates; income has
C. Government spending; interest rates have
D. Expectations; income has
10. Keynes argued that the precautionary component of the demand for money was primarily determined by the level of people who he believed were
proportional to.
A. incomes; wealth
B. incomes; age
C. transactions; income
D. transactions; age

11. Keynes argued that when people perceive current interest rates to be above the ‘normal’ value of interest rates, people would expect bond prices too so the quantity of money demanded would
A. increase; increase
B. increase; decrease
C. decrease; decrease
D. decrease; increase

12. The Baumol-Tobin analysis suggests that an increase in the brokerage fee for buying and selling bonds will cause the demand for money too and the demand for bonds to
A. increase; increase
B. increase; decrease
C. decrease; increase
D. decrease; decrease

13. In Friedman’s modern quantity theory, velocity depends upon the ratio of:
A. Money to prices.
B. Actual to permanent income.
C. Interest rates to actual income.
D. Prices to interest rates.

14. When banks hold excess reserves:
A. The size of the ‘true’ money multiplier becomes infinite.
B. The size of the ‘true’ money multiplier is less than the simple deposit multiplier would suggest.
C. The size of the ‘true’ money multiplier is equal to the size of the simple deposit multiplier.
D. The size of the ‘true’ money multiplier is greater than the simple deposit multiplier would suggest.

15.  in the money supply creates excess money, causing interest rates
to everything else held constant.
A. A decrease; demand for; rise
B. An increase; demand for; fall
C. An increase; supply of; rise
D. A decrease; supply of; fall

16. According to the expectations theory of term structure, if next year’s short-term interest rate is expected to be lower than the current short-term rate, the:
A. Current short-term rate will be equal to the current long-term rate.
B. Current short-term rate will be higher than the current long-term rate.
C. Current short-term rate will be lower than the current long-term rate.
D. Yield curve will be downward sloping.

17. The liquidity premium theory of the term structure assumes:
A. that interest rates on long-term bonds respond to supply and demand conditions for those bonds.
B. investors prefer short-term bonds, as they have lower interest-rate risk.
C. that an average of expected short-term rates is an important component of
interest rates on long-term bonds.
D. all of the above.

18. The assumption that prices for short-term and long-term securities are determined in the different maturity ranges is the basis for the approach to explaining the term structure.
A. liquidity premium
B. expectations
C. segmented markets
D. yield curve

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19. Which of the following statements is incorrect?
A. The greater the default risk of a bond, the greater its yield.
B. The better credit rating a bond gets, the higher its yield.
C. The higher is the probability of non-payment on a bond, the higher is its
D. Government bonds have lower yields than corporate bonds of similar

20. The federal government demand for loanable funds is  If the budget deficit was expected to increase, the federal government demand for loanable funds would
A. interest elastic; decrease
B. interest elastic; increase
C. interest inelastic; increase
D. interest inelastic; decrease

21. If the Central Bank injects reserves into the banking system and they are held as excess reserves, then the monetary base and the money supply
A. remains unchanged; remains unchanged
B. remains unchanged; increases
C. increases; increases
D. increases; remains unchanged

22. The Central Bank can use three policy tools to manipulate the money supply: open market operations, which affect the changes in borrowed reserves (i.e. discount rate), which affect and changes in reserve requirements, which affect the
A. money multiplier; monetary base; monetary base
B. monetary base; money multiplier; monetary base
C. monetary base; monetary base; money multiplier
D. money multiplier; money multiplier; monetary base

23. The Reserve Bank of Australia will engage in a repurchase agreement when it wants to reserve in the banking system.
A. increase; permanently
B. increase; temporarily
C. decrease; temporarily
D. decrease; permanently

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24. The velocity of money is defined as:
A. The average number of times that a dollar is spent in buying the total amount of final goods and services.
B. The ratio of the money stock to high-powered money.
C. The ratio of the money stock to interest rates.
D. The average number of times a dollar is spent on buying financial assets only.

25. When a bank sells government bonds to the Reserve Bank of Australia, reserves in the banking system  and the monetary base  everything else
held constant.
A. increase; increases
B. increase; decreases
C. decrease; increases
D. decrease; decreases

26. Banks face the problem in loan markets because bad credit risks are
the ones likely to seek loans.
A. adverse selection
B. moral hazard
C. moral suasion
D. international fraud

27. When the financial system has achieved a high degree of efficiency.
A. Borrowers can borrow money at the highest possible cost
B. Surplus spending units can receive the lowest return on their savings
C. Transaction costs are low
D. Lenders have a limited choice of financial investments

28. Denomination divisibility refers to the ability of financial institutions to:
A. Raise short-term funds to lend for longer periods
B. Raise funds in one currency to lend in another currency
C. Raise many small amounts to lend larger amounts
D. Spread risk

29. Which of the following does NOT reflect the members within the 5 sector Model
A. Ruling party of the nation
B. Banks
C. Petroleum companies
D. No answer

30. Which of the following is NOT an example of leakages within the 5 sector Model
A. Internal purchases
B. Savings
C. Taxes
D. Importations

31. Why does a bank needs to distinguish between borrowers of good and bad quality?
A. Otherwise loans are made with an interest rate that reflects the average quality.
B. Along the process some high-quality borrowers will drop out
C. Only A
D. A & B

32 Which of the following is the key issue for all financial products and services?
A. Profitability
B. Cash Flow
C. Risk management
D. Default management

33. Which of the following are NOT the main benefits of intermediation?
A. Asset transformation
B. Competitive advantage
C. Currency transformation
D. Maturity flexibility

34. Which of the following statements is true in Keynes’ theory of money demand, when Do interest rates fall?
A. Money demand is negatively related to interest rates
B. Opportunity cost of holding money increases
C. Money demand decreases
D. Don’t know the answer

35. In Tobin’s speculative demand for money, the factors impacting money demand are?
A. income
B. Interest rates
C. Risk-return trade-off
D. All the above

36. Which of the following statements reflects the thrust of Friedman’s theory of money demand?
A. Money demand is relative to interest rates
B. Money demand is positively related to money demand
C. Incentive to hold money depends on consumer behaviour
D. Assets are positively related to money demand

37. Which of the following is true in Friedman’s theory of money demand?
A. Velocity is predictable and stable
B. Velocity arises from general income levels
C. Velocity is more of a short-term variable
D. Velocity is dependable on government policies

38. Individuals gain access to the financial markets by transacting with
financial intermediaries.
A. Directly
B. Indirectly
C. Through agents
D. Independently

39. Which of the following are the components of a “true money multiplier”
A. Foreign currency deposits, reserve requirement, the excess reserve ratio
B. Domestic currency deposit, reserve requirement, the reserve ratio
C. Currency deposit ratio, reserve requirement ratio, the excess reserve ratio
D. Deposit ratio, reserve requirement ratio, excess ratio

40. Commercial banks’ ability to create money depends on…..
A. Depositors
B. Currency deposit ratio
C. Demand for credit
D. Outflow of foreign currency

41. Which of the following situations is an example of indirect finance?
A deficit spending unit (DSU) issues a financial claim that is bought by:
A. a surplus spending unit (SSU) in the primary market.
B. a DSU borrowing money from a friend.
C. a DSU borrowing money from a bank.
D. a DSU borrowing money directly from an investor.

42. In the market for money, an interest rate below equilibrium results in excess money and the interest rate will
A. demand for; rise
B. demand for; fall
C. supply of; fall
D. supply of; rise

43. If investors expect higher future interest rates, the yield curve generated by the liquidity premium theory is and then the yield curve implied by
the expectations theory.
A. ascending; steeper
B. ascending; flatter
C. descending; steeper
D. descending; flatter

44. Which of the following is part of M1?
A. Bank’s current deposits from the private non-bank sector
B. Loans made by banks to the private non-bank sector
C. Bank term deposits from the private non-bank sector
D. Bank saving deposits from the private non-bank sector

45. Suppose that Firstbank with no excess reserves receives a deposit into an
account of $10,000 in currency. If the required reserve ratio is 0.15 (i.e., 15%), what is the maximum amount that Firstbank can lend out?
A. $8,500
B. $30,000
C. $15,000
D. $1,500

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