Question 1

Rising interest rates can create profit problems for banks because

Accepted Answer

The answer of Rising interest rates can create profit problems...

Question 2

The purpose of deregulating banks during the 1980s was to

Accepted Answer

Deregulation allowed banks to compete with other financial institutions, such as savings and loans, and to offer a wider range of products and services.

Question 3

A money market mutual fund account is a(n)

Accepted Answer

A money market mutual fund account is a type of investment vehicle that pools together the money of multiple investors to invest in short-term, low-risk securities such as Treasury bills, commercial paper, and certificates of deposit. While these funds are often used as a cash equivalent, they are not insured by the Federal Deposit Insurance Corporation (FDIC), making them a riskier investment option than a typical savings or checking account.

Question 4

One purpose of interest-rate ceilings was to

Accepted Answer

Interest-rate ceilings were put in place to reduce the chance of bank failures by limiting the amount of interest that banks could charge on loans. This was meant to prevent borrowers from being burdened with high-interest rates and defaulting on their loans, which could lead to bank failures. By reducing the risk of bank failures, interest-rate ceilings were seen as a way to promote stability in the banking system.

Question 5

Falling interest rates usually increase bank profits because

Accepted Answer

When interest rates fall, banks can reduce the interest rate they pay on deposits more quickly than they reduce the interest rate they charge on loans. This means that the cost of funds for banks decreases faster than the yield on assets, resulting in an increase in their net interest margin and thus profitability.

Question 6

Eileen puts $10,000 in a federally insured checking account at the First National Bank.Norma borrows $10,000 from the First National Bank,flies to a South Pacific island,and is never heard from again.Which of the following is true?

Accepted Answer

Eileen's deposit is federally insured, which means that even if the First National Bank goes bankrupt or Norma defaults on her loan, Eileen will still receive her $10,000 back from the Federal Deposit Insurance Corporation (FDIC), up to the insured limit of $250,000.

Question 7

In the 1970s,U.S.consumers transferred their deposits from accounts in banks and thrifts to money market mutual funds because money market mutual funds

Accepted Answer

Money market mutual funds paid higher interest rates, which attracted U.S. consumers and led to a shift of deposits from banks and thrifts to these funds.

Question 8

In the 1970s,as they lost deposits to money market mutual funds,U.S.banks and thrifts

Accepted Answer

As banks and thrifts lost deposits to money market mutual funds, they had to borrow at high interest rates to support outstanding loans because their primary source of funding was diminishing. This led to increased costs for the banks and thrifts and potentially higher interest rates for borrowers.

Question 9

Prior to the 1970s,bankers were happy with interest-rate ceilings because those ceilings

Accepted Answer

Interest-rate ceilings eliminated interest-rate competition among banks, allowing them to maintain stable profits without having to compete aggressively on interest rates.

Question 10

Eileen puts $10,000 in an uninsured savings account at the First National Bank.Norma borrows $10,000 from the First National Bank,flies to a South Pacific island,and is never heard from again.Which of the following is true?

Accepted Answer

If the bank makes all its loans to people who default, it may become insolvent, risking Eileen's uninsured deposit.

Question 11

The most effective mechanism for reducing runs on banks is

Accepted Answer

Deposit insurance provides a guarantee to depositors that their deposits will be protected up to a certain amount, even if the bank fails. This assurance helps to prevent panic and potential runs on banks, as depositors are less likely to withdraw their money en masse if they know that it is insured.

Question 12

A major reason for the development of money market mutual funds in the 1970s was that

Accepted Answer

Bank deposit rates were capped by Regulation Q during the 1970s, which meant that banks could not offer interest rates higher than a certain level. This led to the development of money market mutual funds, which offered higher interest rates than the capped bank rates.

Question 13

All of the following occurred under the restructuring of the Fed in the 1930s,except one.Which is the exception?

Accepted Answer

The inclusion of all depository institutions as members did not occur under the 1930s restructuring of the Fed. This change was made in 1980 with the passage of the Depository Institutions Deregulation and Monetary Control Act. The creation of the FOMC, the power for the Board of Governors to change reserve requirements, the centralization of the Fed's power, and the ability for the Fed to conduct open market operations and buy/sell securities were all key changes made during the 1930s restructuring.

Question 14

The U.S.has more banks per capita than most other countries primarily because it

Accepted Answer

The U.S. had restricted branch banking, which meant that banks were not allowed to have branches in multiple states, leading to a higher number of independent banks in each state. This resulted in a greater number of banks per capita than most other countries.

Question 15

Interest rate ceilings resulted in great profitability for banks in the 1970s.

Accepted Answer

Interest rate ceilings limited the amount of interest banks could charge on loans, reducing their profitability in the 1970s.

Question 16

The deregulation of U.S.banking in the 1980s led to

Accepted Answer

The deregulation of U.S. banking in the 1980s led to many bank failures as banks began to hold riskier assets. Deregulation allowed banks to take on more risk by investing in riskier assets such as high-yield bonds and commercial real estate. This led to a wave of bank failures in the late 1980s and early 1990s, costing taxpayers billions of dollars in bailout money.

Question 17

One advantage of a money market mutual fund account is that

Accepted Answer

Money market mutual funds typically have higher interest rates than regular bank accounts, so shareholders can earn more interest. However, they do have some risk associated with them, so they are not completely riskless. Additionally, they are not guaranteed for a larger amount than FDIC-insured deposits and may not be completely liquid depending on the terms of the specific fund.

Question 18

Interest-rate ceilings on deposits

Accepted Answer

Interest-rate ceilings on deposits limit the maximum rate that banks can offer to depositors, often leading to the banks losing deposits to other financial institutions when market rates go above the ceiling rates. This was a common phenomenon in the 1970s when interest-rate ceilings were in place.

Question 19

The Banking Act of 1933

Accepted Answer

The Banking Act of 1933, also known as the Glass-Steagall Act, was designed to minimize bank risk by prohibiting banks from engaging in the business of buying and selling corporate stocks and bonds, among other restrictions.

Question 20

All of the following have contributed to the problems of U.S.depository institutions during the last 20 years except one.Which is the exception?

Accepted Answer

Thrift institutions typically made long-term loans, such as mortgages, rather than short-term loans. This mismatch between the long-term nature of their assets and the short-term nature of their liabilities contributed to their problems, not the other way around.

Quiz 14: Money and the Financial System