MGT411 Final Paper 2010

FINALTERM  EXAMINATION

Spring 2010

MGT411- Money & Banking (Session - 3)

Time: 90 min

Marks: 69

Question No: 1    ( Marks: 1 )    - Please choose one

 _____________ are organized to eliminate the need of costly information gathering.

       ► Central banks

       ► Commercial banks

       ► Stock exchanges

       ► Insurance companies

   

Question No: 2    ( Marks: 1 )    - Please choose one

 Which one of the following financial instrument is NOT primarily used as store of value?

       ► Banks loans

       ► Asset-backed securities

       ► Insurance contracts

       ► Stocks

   

Question No: 3    ( Marks: 1 )    - Please choose one

 Which one of the following is NOT an example of Centralized exchange?

       ► New York Stock Exchange

       ► NASDAQ

       ► Large exchanges in London

       ► Large exchanges in Tokyo

   

Question No: 4    ( Marks: 1 )    - Please choose one

 A borrower is promised a $100 payment (including interest) one year from today. If  the lender has an 8% opportunity cost of money, he should be willing to accept what amount today?

       ► Rs.100.00

       ► Rs.108.20

       ► Rs.92.59

       ► Rs.96.40

   

Question No: 5    ( Marks: 1 )    - Please choose one

 _________ measures the probability of worst outcome in any investment project.

       ► Variance

       ► Standard deviation

       ► Value at risk

       ► Hedging

   

Question No: 6    ( Marks: 1 )    - Please choose one

 The risk premium for an investment:

       ► Increases with risk

       ► Is a fixed amount added to the risk free return

       ► Is negative for U.S. Treasury Securities

       ► Is negative for risk averse investors

   

Question No: 7    ( Marks: 1 )    - Please choose one

 The current yield on a $10,000, 5% coupon bond selling for $8,000 is:

       ► 6.25%

       ► 7.50%

       ► 8.00%

       ► 5.00%

   

Question No: 8    ( Marks: 1 )    - Please choose one

 In which of the following bonds we may ignore the default risk?

       ► Privately issued bonds

       ► Government issued bonds

       ► Bonds issued by Corporate

       ► All of the given options

   

Question No: 9    ( Marks: 1 )    - Please choose one

 A graph in which time to maturity is along x-axis and yield to maturity is along y-axis is called __________.

       ► Government curve

       ► SWAP curve

       ► Yield curve

       ► LIBOR curve

   

Question No: 10    ( Marks: 1 )    - Please choose one

 According to the liquidity premium theory of the term structure, when the yield curve has its usual slope, the market expects

       ► Short-term interest rates to rise sharply

       ► Short-term interest rates to stay near their current levels

       ► Short-term interest rates to drop sharply

       ► Short-term interest rates does not change

   

Question No: 11    ( Marks: 1 )    - Please choose one

 Other things remaining equal, the liquidity premium theory is based upon the idea that ____________.

       ► Investors prefer long-term bonds

       ► Investors prefer short-term bonds

       ► Investors are indifferent between short-term and long-term bonds

       ► Investors prefer intermediate-term bonds

   

Question No: 12    ( Marks: 1 )    - Please choose one

 A stand by letter of credit is a form of:

       ► Loan

       ► Insurance

       ► Security

       ► Deposits

   

Question No: 13    ( Marks: 1 )    - Please choose one

 Which one of the following is the similiraity between pension funds and insurance companies?

       ► Pooling the savings of many investors

       ► Spreading risk

       ► Accepting deposits

       ► Both pool the savings of many investors and spread risk

   

Question No: 14    ( Marks: 1 )    - Please choose one

 Which one of the following is included in the functions of both Finance company as well as Government Sponsored Enterprise?

       ► Consumer loans

       ► Farm loans

       ► Business loans

       ► Mortgages

   

Question No: 15    ( Marks: 1 )    - Please choose one

 Which one of the following is extended usually overnight to sound institutions on a very short-term basis?

       ► Primary credit

       ► Secondary credit

       ► Seasonal credit

       ► All of the given options

   

Question No: 16    ( Marks: 1 )    - Please choose one

 If Md reflects money demand, then we can write the equation for money demand as:

       ► Md =VY

       ► Md = (1/V) PY

       ► Md = PY

       ► Md = V(Y/P)

   

Question No: 17    ( Marks: 1 )    - Please choose one

 If a central bank sets an explicit inflation target it would require which one of the following?

       ► More emphasis on the interest rate target and less on a money target

       ► To shift their focus entirely to a nominal interest rate target

       ► Willingness to live with more volatility in the interest rate

       ► To give up control of targeting the monetary base

   

Question No: 18    ( Marks: 1 )    - Please choose one

 Banking is risky because __________.

       ► Depository institutions are highly leveraged

       ► Banks do in all the lines of banking trades

       ► Banks pay less for the deposits

       ► All of the given options

   

Question No: 19    ( Marks: 1 )    - Please choose one

 A U.S. institution, United Bank, buys some financial assets denominated in British pounds. Fluctuations in the dollar value of the pound will give rise to:

       ► Credit risk

       ► Operational risk

       ► Foreign exchange risk

       ► Country risk

   

Question No: 20    ( Marks: 1 )    - Please choose one

 In general, if the financial institution's balance sheet displays assets and liabilities that are "mis-matched" to a significant degree, the institution faces:

       ► Operational risk

       ► Sovereign risk

       ► Interest rate risk

       ► Liquidity risk

   

Question No: 21    ( Marks: 1 )    - Please choose one

 Excess reserve-to-deposit ratio is a factor that affects the quantity of money. This factor is controlled by which of the following?

       ► Central bank

       ► Bank regulators

       ► Commercial banks

       ► Non bank public

   

Question No: 22    ( Marks: 1 )    - Please choose one

 Required reserve-to-deposit ratio is a factor that affects the quantity of money. This factor is controlled by which of the following?

       ► Central bank

       ► Bank regulators

       ► Commercial banks

       ► Non bank public

   

Question No: 23    ( Marks: 1 )    - Please choose one

 Monetary Base is a factor that affects the quantity of money. This factor is controlled by which of the following?

       ► Central bank

       ► Bank regulators

       ► Commercial banks

       ► Non bank public

   

Question No: 24    ( Marks: 1 )    - Please choose one

 In the long run, if we ignore changes in velocity then which of the following statement is true?

       ► Inflation will equal money growth less the growth in potential output

       ► Inflation will equal the rate of money growth

       ► Inflation will be zero

       ► Inflation will equal money growth plus the growth in potential output

   

Question No: 25    ( Marks: 1 )    - Please choose one

 Aggregate demand curve slopes down because of many reasons which of the following is NOT the reason of its downward slope?

       ► Higher inflation increases real money balances

       ► Higher inflation induces policymakers to raise the real interest rate

       ► Rising inflation also reduces wealth

       ► Rising inflation lowers consumption

   

Question No: 26    ( Marks: 1 )    - Please choose one

 Which of the following will not shift Aggregate Supply left?

       ► A new cost-reducing production technology

       ► A sudden increase in energy prices

       ► An increase in the expected price

       ► An increase in the wage rate

   

Question No: 27    ( Marks: 1 )    - Please choose one

 Which one of the following statement is true for investment if all other factors are held constant?

       ► An investment with less risk should sell for a lower price and offer a lower return

       ► An investment with more risk should sell for a lower price and offer a higher return

       ► An investment with less risk should sell for a lower price and offer a higher return

       ► An investment with more risk should offer a lower return and sell for a higher price

   

Question No: 28    ( Marks: 1 )    - Please choose one

 Zero-Coupon Bonds are pure discount bonds since they sell at a price __________.

       ► Equal their face value

       ► Below their face value

       ► Above their face value

       ► None of the given options

   

Question No: 29    ( Marks: 1 )    - Please choose one

 __________ pool money from individuals and invest in different portfolio and return is distributed in different share holders.

       ► Mutual funds

       ► Investment banks

       ► Brokers

       ► Finance companies

   

Question No: 30    ( Marks: 1 )    - Please choose one

 

If interest rate on liabilities is 8% and interest rate on deposits is 10% what be interest margin?

       ► 18%

       ► 10%

       ► 8%

       ► 2%

   

Question No: 31    ( Marks: 1 )    - Please choose one

 The two sides of the bank’s balance sheet often do not match up this phenomena creates interest rate risk. How?

       ► There is interest-rate risk because liabilities tend to be long term while assets tend to be short term

       ► There is interest-rate risk because liabilities tend to be short term while assets tend to be long term

       ► There is interest-rate risk because both the liabilities assets tend to be long term

       ► There is interest-rate risk because both the liabilities assets tend to be short term

   

Question No: 32    ( Marks: 1 )    - Please choose one

 What is the impact of growth of international banking?

       ► It increase the competition in the banking market

       ► It increase the efficiency of banking market

       ► Profits are harder to come as borrowers and depositors have more options

       ► All of the given options

   

Question No: 33    ( Marks: 1 )    - Please choose one

 Which of the following is the most important part of a bank examination?

       ► To examine past-due loans

       ► To examine the long term loans

       ► To examine the liquidity of the banks

       ► To examine the management of the bank

   

Question No: 34    ( Marks: 1 )    - Please choose one

 

If inflation were__________, an employer wishing to cut labor costs would need to cut nominal wages, which is difficult to do.

       ► Zero

       ► Low

       ► High

       ► Stable

   

Question No: 35    ( Marks: 1 )    - Please choose one

 Which of the following are functions of a central bank?

       ► Regulating banks

       ► Clearing checks

       ► Acting as lender of last resort

       ► All of the above

   

Question No: 36    ( Marks: 1 )    - Please choose one

 During the period of _______the central bank decreases the interest rate in order to boost the economic activities in the country.

       ► Boom

       ► Recovery

       ► Recession or boom

       ► Recession

   

Question No: 37    ( Marks: 1 )    - Please choose one

 

Which of the following side of a balance sheet represent that central bank is a bankers’ bank?

       ► Asset side of the balance sheet

       ► Liabilities side of the balance sheet

       ► Equity side of the balance sheet

       ► The whole balance sheet

   

Question No: 38    ( Marks: 1 )    - Please choose one

 “Politicians must clearly state their policy goals and the tradeoffs among them” represent which of the following principle of central bank design?

       ► Independence

       ► Decision making by committee

       ► Accountability and transparency

       ► Policy framework

   

Question No: 39    ( Marks: 1 )    - Please choose one

 What is (are) the prerequisite of smooth functioning of central bank?

       ► Transparency

       ► Independence

       ► Accountability

       ► All of the given options

   

Question No: 40    ( Marks: 1 )    - Please choose one

 When the currency that people are holding loses value much rapidly, what will be the behavior of people?

       ► The will spend money as quickly as possible

       ► They will try to save the money for future

       ► They will not bother the value of money

       ► None of the given option

   

Question No: 41    ( Marks: 1 )    - Please choose one

 The quantity of money people hold for transaction purposes does NOT depends upon:

       ► Nominal income

       ► Cost of holding money

       ► Availability of substitutes

       ► Real income

   

Question No: 42    ( Marks: 1 )    - Please choose one

 Higher the level of uncertainty about the future, the higher the demand for money and the _________ the velocity of money.

       ► Incomplete information

       ► Lower

       ► Higher

       ► Stable

   

Question No: 43    ( Marks: 1 )    - Please choose one

 The rate will change if one of the following components of aggregate demand that is not sensitive to the real interest rate goes up (or down) or if potential output changes.

       ► Consumption

       ► Investment

       ► Net exports

       ► Govt. spending

   

Question No: 44    ( Marks: 1 )    - Please choose one

 Policymakers set their short-run nominal interest rate targets in response to economic conditions in general and _____________in particular.

       ► Inflation

       ► Deposits

       ► Exports

       ► Imports

   

Question No: 45    ( Marks: 1 )    - Please choose one

 The monetary policy reaction curve is located so that the central bank’s target inflation is consistent with the long-run ____________, which equates aggregate demand with potential output.

       ► Real interest rate

       ► Nominal interest rate

       ► Effective interest rate

       ► None of the given options

   

Question No: 46    ( Marks: 1 )    - Please choose one

 With a higher inflation target, the central bank will set a lower current __________ at every level of current inflation, shifting the monetary policy reaction curve to the right.

       ► Real interest rate

       ► Nominal interest rate

       ► Effective interest rate

       ► None of the given options

   

Question No: 47    ( Marks: 1 )    - Please choose one

 Which of the following is shown by the aggregate demand curve?

       ► How sensitive current output is to given change in current inflation

       ► Current output is not sensitive to given change in current inflation

       ► Current output and current inflation both move in the same direction

       ► None of the given options

   

Question No: 48    ( Marks: 1 )    - Please choose one

 

If current output is lower than potential output, the resulting recessionary gap places pressure towards ________ on inflation, causing the short-run aggregate supply curve to shift downward.

       ► Right

       ► Left

       ► Upward

       ► Downward

   

Question No: 49    ( Marks: 3 )

 What is the effect of an increase in potential output on inflation and output?

   

Question No: 50    ( Marks: 3 )

 Give an account of different components of aggregate demand?

   

Question No: 51    ( Marks: 5 )

a.       What does the slope of aggregate demand curve show?

b.      In which situations aggregate demand curve will be flat and steep?

   

Question No: 52    ( Marks: 5 )

 “Responsible fiscal policy is essential to the success of monetary policy”. Discuss.

   

Question No: 53    ( Marks: 5 )

 Why monetary base is called as high powered money? What are the factors on which the amount of excess reserves depends that a bank holds ?