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Exam 2 will cover chpater 7, 8 (just the 8 facts!), 10 and 14.

Stockholders are residual claimants, meaning that they:
A) have the first priority claim on all of a company's assets.
B) are liable for all of a company's debts.
C) will never share in a company's profits.
D) receive the remaining cash flow after all other claims are paid.

D) receive the remaining cash flow after all other claims are paid

2) Periodic payments of net earnings to shareholders are known as
A) capital gains.
B) dividends.
C) profits.
D) interest.

B) dividends

Using the one-period valuation model, assuming a year-end dividend of $1.00, an expected sales price of $100, and a required rate of return of 5%, the current price of the stock would be
A) $110.00.
B) $101.00.
C) $100.00.
D) $96.19

D) $96.19

4) Using the Gordon growth model, a stock's current price decreases when
A) the dividend growth rate increases.
B) the required return on equity decreases.
C) the expected dividend payment increases.
D) the growth rate of dividends decreases.

D) the growth rate of dividends decreases

5) A monetary expansion ________ stock prices due to a decrease in the ________ and an increase in the ________, everything else held constant.
A) reduces; future sales price; expected rate of return
B) reduces; current dividend; expected rate of return
C) increases; required rate of return; future sales price
D) increases; required rate of return; dividend growth rate

D) Increases; required rate of return;dividend growth rate

Fed will give a higher dividend to the owners of the stocks. So when the interest rate decreases g increases, ke increases.

If expectations of the future inflation rate are formed solely on the basis of a weighted average of past inflation rates, then economics would say that expectation formation is
A) irrational.
B) rational.
C) adaptive.
D) reasonable.

c) adaptive
Adaptive: will do a forecast based on previous information
Rational: do a forecast based on previous and all of current info of today.

7) Which of the following statements is false?
A) A bank's assets are its uses of funds.
B) A bank issues liabilities to acquire funds.
C) The bank's assets provide the bank with income.
D) Bank capital is recorded as an asset on the bank balance sheet.

D) Bank capital is recorded as an asset on the bank balance sheet.

8) Which of the following are reported as liabilities on a bank's balance sheet?
A) Discount loans
B) Reserves
C) U.S. Treasury securities
D) Loans

A) Discount loans

9) Bank loans from the Federal Reserve are called ________ and represent a ________ of funds.
A) discount loans; use
B) discount loans; source
C) fed funds; use
D) fed funds; source

B) discount loans ; source

10) The amount of checkable deposits that banks are required by regulation to hold are the
A) excess reserves.
B) required reserves.
C) vault cash.
D) total reserves.

B) Required reserves

11) Banks may borrow from or lend to another bank in the Federal Funds market. A loan of excess reserves from one bank to another bank is recorded as a(n) ________ for the borrowing bank and a(n) ________ for the lending bank.
A) asset; asset
B) asset; liability
C) liability; liability
D) liability; asset

D) Liability; asset

12) In general, banks make profits by selling ________ liabilities and buying ________ assets.
A) long-term; shorter-term
B) short-term; longer-term
C) illiquid; liquid
D) risky; risk-free

B) short-term; longer-term

13) When a new depositor opens a checking account at the First National Bank, the bank's assets ________ and its liabilities ________.
A) increase; increase
B) increase; decrease
C) decrease; increase
D) decrease; decrease

A) increase; increase

14) With a 10% reserve requirement ratio, a $100 deposit into New Bank means that the maximum amount New Bank could lend is
A) $90.
B) $100.
C) $10.
D) $110.

A) $90

15) If a bank has excess reserves greater than the amount of a deposit outflow, the outflow will result in equal reductions in
A) deposits and reserves.
B) deposits and loans.
C) capital and reserves.
D) capital and loans.

A) Deposits and reserves.
Decrease in check able deposits, so reserves will also decrease in the same amount

16) Both ________ and ________ are monetary liabilities of the Fed.
A) securities; loans to financial institutions
B) currency in circulation; reserves
C) securities; reserves
D) currency in circulation; loans to financial institutions

B) currency in circulation; reserves

17) The monetary base consists of
A) currency in circulation and Federal Reserve notes.
B) currency in circulation and the U.S. Treasury's monetary liabilities.
C) currency in circulation and reserves.
D) reserves and Federal Reserve Notes.

C) currency in circulation and reserves

18) Total reserves are the sum of ________ and ________.
A) excess reserves; borrowed reserves
B) required reserves; currency in circulation
C) vault cash; excess reserves
D) excess reserves; required reserves

D) excess reserves;required reserves

22) When banks borrow money from the Federal Reserve, these funds are called
A) federal funds.
B) discount loans.
C) federal loans.
D) Treasury funds.

B) discount loans

23) High-powered money minus reserves equals
A) reserves.
B) currency in circulation.
C) the monetary base.
D) the nonborrowed base.

B) Currency in circulation

24) When the Federal Reserve purchases a government bond from a bank, 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

A) Increase; increase

25) When the Federal Reserve sells a government bond to a bank, 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

D) Decrease; decrease

26) When a bank buys a government bond from the Federal Reserve, 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

D) Decrease; decrease

27) If a person selling bonds to the Fed cashes the Fed's check, then reserves ________ and currency in circulation ________, everything else held constant.
A) remain unchanged; declines
B) remain unchanged; increases
C) decline; remains unchanged
D) increase; remains unchanged

B) Remain unchanged; increases

28) There are two ways in which the Fed can provide additional reserves to the banking system: it can ________ government bonds or it can ________ discount loans to commercial banks.
A) sell; extend
B) sell; call in
C) purchase; extend
D) purchase; call in
29) The Fed does not tightly

C) Purchase; extend

29) The Fed does not tightly control the monetary base because it does not completely control
A) open market purchases.
B) open market sales.
C) borrowed reserves.
D) the discount rate.

C) Borrowed reserves

30) In the simple deposit expansion model, if the Fed extends a $100 discount loan to a bank that previously had no excess reserves, the bank can now increase its loans by
A) $10.
B) $100.
C) $100 times the reciprocal of the required reserve ratio.
D) $100 times the required reserve ratio.

B)$100

31) If reserves in the banking system increase by $100, then check able deposits will increase by $500 in the simple model of deposit creation when the required reserve ratio is
A) 0.01.
B) 0.10.
C) 0.05.
D) 0.20

D) 0.20

"The money multiplier is necessarily greater than 1" Is this statement true, false, or unertain?

False, because it can be less than or greater then one.

31) If reserves in the banking system increase by $100, then check able deposits will increase by $500 in the simple model of deposit creation when the required reserve ratio is
A) 0.01.
B) 0.10.
C) 0.05.
D) 0.20

B) M=mXMB

Stockholders

Those who hold stock in a coroporation

Residual Claimant

Cash flows, what the stockholder receives whatever remains after all the claims against the firm's assets have been satisfied.

Dividends

Payments made periodically, usually every quarter, to stockholders

Gordon Growth Model - Assumption 1

Dividends are assume to grow at a constant rate forever.

Gordon Growth Model- Assumption 2

The growth rate is assumed to be less than the required return on equity ke

Rational Expectation Theory- Implication 1

If there is a change in the way a variable moves, the way in which expectations of this variable are formed will change as well.

Rational Expectation Theory- Implication 2

The forecast error of expectations will, on average, be zero and cannot be predicted ahead of time.

Stocks are not the most important source of eternal financing for businesses

CH 8 Facts

Issuing Marketable debt and equity securities is not the primary way in which businesses finance their operations

CH 8 Facts

Indirect finance, which involves the activities of financial intermediaries, is many times more important than direct finance , in which businesses raise funds directly from lenders in financial markets.

CH 8 Facts

Financial Intermediaries, particularly banks, are the most important source of external funds used to finance businesses.

CH 8 Facts

The financial system is among the most heavily regulated sectors of the economy

CH 8 Facts

Collateral is a prevalent feature of debt contracts for both households n businesses

CH 8 Facts
Collateral: Property that is pledged to a lender to guarantee payment in the event that the borrower is unable to make debt payments.

Collateralize debt

CH 8 Facts
Secured debt: collaterialized loans
Unsecured debt: credit card debt

Debt contracts typically are extremely complicated legal documents

CH 8 Facts

Economies of scale

The reduction in transaction cost per dollar of investment costs per dollar of investment as the size of transactions increases

free-rider problem

People who do not pay for information take advantage of the information that other people have paid for.

emerging market economies

Economies in an early stage of market development that have recently opened up to the flow of goods, services, and capital from the rest of the world.

Liabilities

Check able Deposits
Non-transaction Deposits
Borrowings (Discount Loans)
Bank Capital

Assets

Reserves
Cash Items in process of collection
Deposits at other banks
Securities
Loans
Physical Capital

An __ in the banks reserves equal to the __ in checkable deposits

increase;increase

When a bank receives additional deposits it gains an equal amount of reserves; when it loses deposits, it loses an equal amount of reserves.

CH 10

Deposit outflows

Deposits are lost because depositors make withdrawals and demand payment

Liquidity management

The acquisition of sufficiently liquid assets to meet the banks obligations to depositors

Asset management

Diversifying asset holdings

Liability management

Acquire funds at low cost

Capital adequacy management

Maintaining and aqcquiring the needed capital

Credit risk

Risk arising because borrowers may default

Interest-rate risk

Riskiness of earnings and returns on bank assets that results from interest changes.

If a bank has ample reserves, a deposit outflow does not necessitate changes in other parts of its balance sheet.

CH 10

When a deposit outflow occurs, holding excess reserves allows the bank to escape the costs of:

1) Borrowing from other banks or corporations
2) Selling securities
3) Borrowing from the Fed
4) Calling in or selling off loans

Excess reserves are insurance against the costs associated with deposit outflows. The higher the costs associated with deposit outflows, the more excess reserves banks will want to hold.

CH 10

Return on Assets (ROA)

A basic measure of bank profitability ROA= (Net profit after taxes)/(profit)
Measures how efficiently the bank is run

Return on Equity (ROE)

A basic measure of bank profitability ROE= (Net profit after taxes)/(equity capital)
Measures how well the owners are doing on their investment)

Equity Multiplier (EM)

Direct relationship between ROA and ROE
EM= Assets/Equity Capital

Monetary Base

The sum of the Feds monetary liabilities and the US treasury's monetary liabilities.

Currency in circulation

Monetary base

Reserves

Monetary base

Required Reserves

Reserves the FED requires banks to hold

Excess Reserves

Any additional reserves the bank choose to hold

Required Reserve Ratio

The fraction of reserves for every dollar.

Monetary Base Formula

MB=C+R

Open Market Purchase

A purchase of bonds by the Fed

Open Market Sale

A sale of bonds by the Fed

34) The primary indicator of the Fed's stance on monetary policy is
A) the discount rate.
B) the federal funds rate.
C) the growth rate of the monetary base.
D) the growth rate of M2.

B) the federal funds rate

35) Everything else held constant, in the market for reserves, when the federal funds rate is 3%, lowering the discount rate from 5% to 4%
A) lowers the federal funds rate.
B) raises the federal funds rate.
C) has no effect on the federal funds rate.
D) has an indeterminate effect on the federal funds rate.

C) has no effect on the federal funds rate.

38) Everything else held constant, in the market for reserves, when the demand for federal funds intersects the reserve supply curve along the horizontal section, increasing the discount rate
A) increases the federal funds rate.
B) lowers the federal funds rate.
C) has no effect on the federal funds rate.
D) has an indeterminate effect on the federal funds rate.

B) lowers the federal funds rate.

39) In the market for reserves, if the federal funds rate is between the discount rate and the interest rate paid on excess reserves, an increase in the reserve requirement ________ the demand for reserves, ________ the federal funds rate, everything else held constant.
A) decreases; lowering
B) increases; lowering
C) increases; raising
D) decreases; raising

C) increases; raising

48) Describe how each of the following can affect the money supply: (a) the central bank; (b) banks; and (c) depositors.

a) central bank: supplies money, changes the non borrowed money base.
b) banks: money supply will increase because of less excess reserves and more loans
c) depositors: a lower money supply for a given monetary base because of the lower money multiplier.

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