Econ 423: Questions from Previous Versions of Quiz 10 [Fall 2000-present]

1. The LEAST likely consequence of privatizing Social Security as proposed by President Bush would be: (a) relative gains for astute and lucky investors who converted their Social Security accounts into private accounts. (b) relatively increased disparities in the distribution of after-tax income in the United States. (c) some relatively small gains in the rate of capital accumulation and economic growth because families with higher incomes save relatively larger proportions of their incomes. (d) reductions in the US Treasurys interest costs of national debt. (e) moral hazard inducing excessively risky investments by individuals who reason that even if they lose because they convert their Social Security funds into government-approved private financial investments, political pressures will force the federal government to bail them out. 2. The increased use of TV ads for GEICO and Progressive aimed at selling automobile insurance via the internet or by a simple phone call and buyers increased use of the internet to search for possible housing and to find bargains on cars are a symptom that real estate, automobile, and insurance industries are all, to some degree, experiencing: (a) consolidation through mergers and acquisitions. (b) disintermediation. (c) globalization. (d) the effects of the creative reconstruction described by Joseph Schumpeter. (e) the effects of weakened federal antitrust policies. 3. Detailed historical data are used to create estimates of the probabilities of events for insurance companies by: (a) actuaries. (b) underwriters. (c) agents. (d) claims representatives. (e) adjusters. 4. By obtaining reinsurance, an insurance company shifts some of its risk to another insurer, which accepts the risk in exchange for: (a) common stock. (b) a portion of the premium. (c) some of the receiving companys risk, creating diversification. (d) restrictive provisions. (e) a corporate bond of equal present value. 5. One financial intermediary in our financial structure that helps reduce moral hazards from arising from the principal-agent problem is the: (a) venture capital firm. (b) money market mutual fund. (c) pawn broker. (d) savings and loan association.
6. The investment decisions of pension fund administrators would be least comprehensible and most clearly inconsistent with the objectives of those whose funds they manage if they invested heavily in: (a) investment grade tax free municipal bonds. (b) a highly diversified portfolio of junk bonds. (c) blue chip corporate stocks. (d) U.S. Treasury bonds. (e) a seasoned issue of bonds being marketed by a reputable investment banker. 7. Administrators of private pension plans know, in an actuarial sense, when payouts will occur and how much payments are likely to be, so they invest in illiquid assets. Consequently, they often buy big blocks of new issues of: (a) municipal bonds. (b) US Treasury bonds. (c) junk bonds. (d) convertible bonds. (e) corporate stocks and bonds.

8. All of the following are fundamental principles of insurance except: (a) all losses must be quantifiable. (b) the probability of a loss occurring must be calculable. (c) there must be some relationship between the insured and the beneficiary. (d) the beneficiary is responsible for furnishing full and accurate information to the insurance company at the outset. (e) on average, the insured must not have an expectation of profit from coverage. 9. Policies intended to reduce moral hazard for insurance companies do not include: (a) offering insurance to groups. (b) deductibles. (c) restrictive provisions. (d) coinsurance. (e) limiting the amount of insurance coverage. 10. Major parts of the current health insurance system in the United States most closely parallel: (a) a compulsory national savings plan. (b) a benefit tax to pay for national defense. (c) an automobile insurance policy that covers such standard maintenance as lube, oil and filter changes. (d) Social Security taxes and benefits. (e) mergers and acquisitions during the Age of the Robber Barons. 11. Of the following financial intermediaries, the least liquid asset portfolios tend to be those held by: (a) semi-governmental organizations that hold indexed mortgages. (b) commercial banks. (c) investment bankers. (d) life insurance companies, and property and casualty insurance companies. (e) money market mutual funds. 12. After adjusting for marketing and administrative costs and then an allowance for normal expected returns on their investments, insurance companies tend to set their premiums so that the probability of an event occurring multiplied by the expected pay-out equals the premium charged because: (a) federal regulations require actuarial bases for insurance policies. (b) state regulators limit insurance company profits to normal rates of return. (c) the insurance industry is extremely competitive. (d) most insurance companies are organized as mutual funds owned by the insured individuals. 13. Compared to the premium an insurance company charges, the actuarial probability of an event occurring multiplied by the expected payoff is: (a) equal to the premium. (b) less than the premium. (c) greater than the premium. (d) unrelated to the premium. 14. The dominant predictable economic problem posed by the expected wave of retirements by baby-boomers is that: (a) Social Security assets are projected to decrease below its income by 2034. (b) the government will be unable to generate funds to pay for Social Security. (c) the ratio of population to labor force is projected to increase dramatically as baby boomers start to retire. (d) the surplus funds in Social Security from past years have evaporated. (e) Social Security assets generate very low rates of return. 15. Property pledged to the lender in the event that a borrower cannot make his or her debt payment is called: (a) points. (b) interest. (c) collateral. (d) good faith money. 16. The major reason to use a secondary mortgage loan to finance a large purchase such as a new automobile is that: (a) a higher line of credit is achieved by using a home for collateral. (b) mortgage interest is tax deductible. (c) interest rates on cars are significantly lower than any other loans. (d) mortgages have more flexible terms and longer monthly payment options.

17. The financial institutions that have increased their relative holdings of private wealth the most since roughly 1975 are: (a) savings-and-loan associations. (b) commercial banks. (c) credit unions. (d) mutual savings banks. (e) mutual funds. 18. If interest rates fall and this lowers mortgage payments so that homebuyers can afford to buy more expensive houses, the predictable increase in housing prices is most directly a symptom of: (a) capitalization. (b) a speculative bubble in the housing market. (c) national economic prosperity. (d) securitization. (e) rational expectations and efficient markets. 19. Instructing your broker to buy or sell a security on your behalf at the current market price, which will not be known until after the broker acts, is known as placing: (a) an execution order. (b) an authorization. (c) a short order. (d) a concrete order. (e) a market order. 20. Interest rate risk is born most heavily by the homebuyer if the loan is: (a) a longer (30-year) conventional mortgage. (b) an adjustable rate mortgage. (c) a shorter (15year) conventional mortgage. (d) ballooned so that full repayment is required at the end of eight years. 21. During the early years of an amortizing mortgage loan, the lender applies: (a) most of the monthly payment to the outstanding principal balance. (b) all of the monthly payment to the outstanding principal balance. (c) most of the monthly payment to interest on the loan. (d) all of the monthly payment to interest on the loan. (e) the monthly payment equally to interest on the loan and the outstanding principal balance. 22. The term random walk is most frequently applied to a theory of changes in the: (a) direction of the Feds policies. (b) savings patterns of households. (c) level of economic investment by corporations. (d) relative prices of stocks. 23. Since roughly 1980, American corporations have been: (a) repurchasing such large numbers of shares that stock issues have been a negative sources of corporate finance. (b) taking advantage of an especially strong stock market to issue record numbers of new shares. (c) generally abandoning corporate bond and commercial paper markets to concentrate on new stock issues. (d) decreasingly important in the global economy. 24. The tax deductibility of mortgage interest tends to cause: (a) heavier reliance on debt to finance purchases of family homes. (b) overinvestment in family homes, from the perspective of the overall economy, relative to other forms of economic investment. (c) significant reliance on second mortgages to finance non-home expenditures. (d) tax structures to be slightly relatively less progressive than they otherwise would be. (e) all of the above.

25. Not among tools that help financial intermediaries manage default risk would be: (a) compensating balances. (b) secured loans. (c) loan commitments. (d) credit rationing. (e) margin credit.

26. One puzzle about lending patterns is that most financial institutions: (a) are very risk adverse even though riskier behavior generates higher returns. (b) attempt to generate rates of returns that exceed those preferred by investors. (c) adjust very slowly to regulatory changes. (d) specialize in lending to local firms or firms in particular industries. (e) spend excessively on monitoring and screening possible borrowers, often outweighing the expected cost of adverse selection. 27. A bank owned by its own depositors in proportion to their deposits is called a/an: (a) investment bank. (b) mutual bank. (c) corporate bank. (d) commercial bank. (e) nonprofit bank. 28. Insurance companies reduce moral hazard by their policyholders by: (a) having co-pays and deductibles. (b) rejecting clients who are not creditworthy. (c) making clients take a polygraph (d) charging high premiums. (e) not covering diseases their policyholders had before becoming policyholders. 29. Creative response is illustrated by: (a) the Feds discovery of open market operations during the 1920s. (b) President Franklin Roosevelts New Deal policies to combat the Great Depression. (c) loan sharking as a way for borrowers to avoid the credit rationing caused by usury laws. (d) expansionary monetary policies during economic downturns. (e) regulatory gambling for social benefit and leisure. 30. The rising rates of inflation of the 1970s did not cause: (a) increases in the natural rate of unemployment. (b) disintermediation, when consumers moved money out of banks and S&Ls and into money market mutual funds offered by brokerage houses. (c) political pressure that resulted in the elimination of prohibitions on interest payments for checkable deposits. (d) instability in the savings-and-loan industry. (e) significant changes in the ways consumers finance home mortgages. 31. Repossession is easier for a leased economic asset than for an asset that has a lien because of a loan to the buyer of the economic asset because: (a) the asset is worth more under a loan. (b) lessees are more cooperative. (c) no transfer of ownership is required to repossess leased assets. (d) under a lease the requirements for repossessing are not as regulated. 32. Financial leverage tends to increase: (a) the problem for savers posed by moral hazard on the parts of intermediaries who make specific decisions about potential investments. (b) the extent of diversity in a financial portfolio. (b) the willingness of ultimate savers to bear risk. (d) the overall stability of the financial system. (e) peoples internal rates of time discount.

33. In the long run, adoption of the proposal to at least partially privatize Social Security is least likely to: (a) increase the size of a federal bureaucracy because some agency will screen investments to identify those suitable for potential retirees. (b) boost the income shares of people at the top of the pyramid, while reducing the shares of low-income people. (c) boost the relative incomes of mutual firm managers and stock brokerage firms. (d) raise interest rates paid on very short-term U.S. Treasury bonds and other federal debt. (e) intensify moral hazard problems because if prospective retirees are confident that a senior citizen voting bloc will bail out their failed investments, they are more likely to engage in excessively risky investment strategies. (f) increase the level of national debt because of higher interest rates. (g) increase the level of the stock market and drive down the rate of return for financial investors. (h) significantly increase post-retirement real incomes for most senior citizens. 34. Whole-life and universal-life policies are really combinations of: (a) casualty insurance and term life insurance. (b) long-term term insurance policies and low-interest rate saving plans. (c) disability insurance and life insurance. (d) comprehensive liability insurance and casualty insurance. 35. The types of life insurance policies that tend to have the lowest cost per dollar of coverage are: (a) whole life policies. (b) universal life policies. (c) term life policies sold to employees or members of organizations that offer group insurance. (d) the policies that yield the highest cash-surrender value at maturity. (e) term policies sold to you by your best friend. 36. The proceeds from insurance policies are tax-free, which provides incentives for firms to: (a) provide health insurance for executives, but not employees. (b) self-insure because premium surcharges compensate for the moral hazards to firms. (c) buy life insurance on employees if premiums are tax-deductible as business expenses. (d) pool their assets to take advantage of lower premiums for group rates as the group gets larger. (e) protect this unreliable revenue source by adopting stringent occupational safety and health standards. 37. Some recent proposals for privatization of Social Security would allow workers to personally manage parts of their Social Security savings. Advocates of these proposals assert that retirees would gain because of the higher average rates of return from private sector investments relative to the current Social Security funds portfolio of Treasury securities. NOT among the possible drawbacks of such a proposal is that such privatization would tend to: (a) increase the interest rate on national debt. (b) reduce the rate of return on non-Treasury financial assets in which private savers would be allowed to invest. (c) decrease the actual rate of saving in the United States relative to GDP. (d) increase the riskiness of the average retirees income. 38. Insurance company employees who uses historical data in attempts to predict the probabilities of events so that profitable policies can be sold are: (a) claims representatives. (b) actuaries. (c) agents. (d) underwriters. (e) adjusters. 39. NOT among reasons why most life insurance is purchased through employer or other group plans is: (a) the relative ease of the process. (b) decreased cost, because of economies of scale in marketing for insurance companies. (c) the relative scarcity of independent insurance agents. (d) screening by trusted committees (of, e.g., employees), thereby reducing the research costs for the individual buyer.

40. Of the following sources of external finance for American nonfinancial businesses, the most important is: (a) loans from banks. (b) stocks. (c) bonds and commercial paper. (d) loans from other financial intermediaries. 41. Borrowers who unexpectedly take on big risks after obtaining a huge loan impose a problem on lenders known as: (a) contractual inconsistency. (b) free-riding. (c) adverse selection. (d) costly state verification. (e) moral hazard. 42. Liabilities on a banks balance sheet include: (a) vault cash. (b) discount loans. (c) cash items in the process of collection. (d) government securities. (e) reserves at the Fed. (f) consumer loans. (g) deposits with other banks. (h) federal funds provided to other banks. 43. Transaction deposits in commercial banks include: (a) passbook savings accounts. (b) regular savings accounts. (c) small-denomination time deposits. (d) money market deposit accounts. (e) certificates of deposit [CDs]. 44. The least liquid of the following bank assets would be: (a) vault cash. (b) reserves. (c) cash items in process of collection. (d) deposits with other banks. (e) secondary reserves. 45. A banks loan loss reserve account is: (a) an asset. (b) understated if the bank fails to accurately acknowledge that some of its defaulted loans are unlikely to be paid. (c) a liability. (d) a summary of loans upon which it has been unable to collect. (e) negatively related to the banks capital account [its net worth]. 46. A banks least preferred way to accommodate an unexpectedly large outflow of deposits would be by: (a) borrowing through the federal funds market. (b) taking a discount loan from the Fed. (c) selling some of its securities. (d) calling in loans from its borrowers. 47. Interest rates volatility increased in the 1970s and 1980s, creating a perception of increased interest-rate risk and. (a) causing banks to shift their portfolios from an emphasis on loans to a greater emphasis on stocks. (b) increasing the cost of financial innovation. (c) reducing the range of the different types of business and consumer deposits and funding offered by financial intermediaries. (d) increasing the demand for financial innovation. 48. The National Bank Act of 1863 was intended to eliminate state-chartered banks by imposing a prohibitive tax on banknotes, but state banks survived by: (a) issuing credit cards. (b) ignoring federal regulations. (c) issuing saving and checking accounts. (d) branching into other states. 49. The Federal Reserve Act of 1913 required: (a) the Fed to rely primarily on open market operations as a way to regulate the money supply. (b) all national banks to establish branches in cities where Federal Reserve District Banks are headquartered. (c) all national banks to join the Federal Reserve System. (d) all states and private banks to quit printing currency. (e) all state banks to comply with all federal regulations imposed on national banks.
50. A mortgage lenders right to sell property if the underlying loan defaults is protected by a: (a) lien. (b) down payment, (c) policy for private mortgage insurance. (d) borrower pre-qualification (e) amortization.

51. A borrower who qualifies for an FHA or VA loan enjoys the advantage that: (a) the mortgage payment spread across a much longer period. (b) only a very low or zero down payment is required. (c) the cost of private mortgage insurance is lower. (d) the government holds the lien on the property. 52. Which of the following is a disadvantage of a second mortgage compared to credit card debt? (a) The loans are secured by the borrowers home. (b) The borrower gives up the tax deduction on the primary mortgage. (c) The borrower must pay points to get a second mortgage loan. (d) The borrower will find it more difficult to qualify for a second mortgage loan.

53. Among the advantages associated with taking out a second mortgage and using the funds to buy a car instead of borrowing the money, at an identical interest rate, from a finance company associated with the car dealer, is that: (a) transaction costs are lower if you borrow from your home lender. (b) mortgage interest is tax deductible for income tax purposes, while most other interest payments are not. (c) dealers are more likely to give you discounts on a new car purchase if you pay cash. (d) dealers increase their markups when dealing with individuals who dont use the dealers financial services. 54. Richard Thalers behavioral economics continues to irritate neoclassical theorists because parts of it imply that: (a) innovation is the key to economic growth. (b) people are seldom self-interested. (c) successful individuals are not always rational decision makers. (d) marginal utility analysis is bunk. 55. Nobel Prize winner Daniel Kahneman developed a peak/end rule indicating that the absolute values of outcomes may be somewhat less important for individuals assessments of their own welfare than are the: (a) most recent changes in direction of the path of the outcome for the individual. (b) subjective marginal values of the goods considered. (c) objective real values of the relevant goods. (d) most recent changes in the overall status of the economy. 56. According to the work of 2002 Nobel Prize winner Daniel Kahneman, the average investor is more likely to hold onto a stock: (a) after a huge rise and a slight decline. (b) after a slight rise and then a slight decline. (c) after a slight fall and then a huge rise. (d) after a huge fall. 57. Traditional economic theory concludes that a person who loses basketball tickets should not forego the game, but should instead purchase the tickets once again. However, many people fail to purchase more tickets, even though the cost of going to the game has not increased, and the loss of the first set of basketball tickets is a sunk cost. This and other economic anomalies have been explained by the cutting-edge behavioral economist: (a) Gordon Tullock. (b) Paul Samuelson. (c) Richard Thaler. (d) James Buchanan. (e) Kenneth Arrow. 58. A term now commonly used to describe John Maynard Keynes notion of animal spirits as the reason why stocks may vary so far above reasonable market value (true present value) after favorable news is: (a) irrational exuberance. (b) stock influx. (c) stock outflux. (d) corporate malfeasance. (e) unwarranted exhilaration. (f) peak/end explosiveness. 59. The Yale economist who examined irrational exuberance as an explanation for the recent boom and then bust of technology stocks is: (a) Gary Becker. (b) Robert Shiller. (c) Frank Knight. (d) John Bates Clark. (e) Robert Frank.

60. Speculative bubbles are least consistent with the concepts underpinning. (a) a Keynesian beauty contest. (b) Daniel Kahnemans peak/end rule. (c) classical fundamental analysis. (d) Richard Thalers economic anomalies. 61. A speculative bubble may occur if an increase in the demand for a given stock initially increases the market price, and this quickly results in: (a) an increase in the quantity supplied. (b) expectations of further price increases, thereby reducing the short-run supply and triggering a further increase in demand. (c) an increase in the quantity demanded. (d) a decrease in the quantity demanded. 62. Adverse selection occurs when those _____ likely to get _____ insurance payoffs are the parties who most aggressively try to purchase insurance policies. (a) least; large. (b) least; small. (c) most; large. (d) most; small. 63. Insurance management tools that give policyholders incentives to avoid the types of accidents covered by policies do not include: (a) deductibles. (b) risk-based premiums. (c) coinsurance. (d) reinsurance. 64. NOT a characteristic feature of most venture capital firms would be: (a) funding a relatively small number of firms. (b) holding equity in the firms that are funded. (c) having a very longterm investment horizon. (d) providing advice and assistance to the firms that are funded. 65. Most automobile financing is provided by: (a) commercial banks. (b) thrifts. (c) finance companies owned by carmakers. (d) finance companies owned by real estate brokers. 66. Finance companies are far less regulated than banks and thrifts because: (a) its depositors are exclusively large institutional investors. (b) there are no regulations on subsidiaries of a bank holding company. (c) there are no depositors to protect. (d) there are few cases of finance companies failing. (e) the capital-to-total-assets ratio of finance companies is relatively strong compared to that of banks and thrifts. 67. One goal of creating a financial conglomerate is to achieve economies of scope, which reflect: (a) savings achieved through increased size. (b) savings that come from cutting jobs. (c) savings that come from larger issues of bonds and stocks to finance operations. (d) revenues that come from offering a product in many locations. (e) revenues that come from offering many products in one location. 68. The 20-year average return of venture capital firms has been about: (a) 8 percent. (b) 20 percent. (c) 50 percent. (d) 70 percent. (e) 100 percent. 69. Which of the following are reported as liabilities on a banks balance sheet? (a) reserves. (b) checkable deposits. (c) loans. (d) deposits with other banks. 70. 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. 71. Net profit after taxes per dollar of equity capital is a basic measure of bank profitability called (a) return on assets. (b) return on capital. (c) return on equity. (d) return on investment. 72. Which of the following are not reported as assets on a banks balance sheet? (a) cash items in the process of collection. (b) borrowings. (c) U.S. Treasury securities. (d) Reserves.

73. Which of the following bank assets is the most liquid? (a) consumer loans. (b) reserves. (c) cash items in process of collection. (d) U. S. government securities. 74. Banks typically (usually) 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. 75. When a $10 dollar check written on the First National Bank of Chicago is deposited in an account at Citibank and the check clears, then (a) the liabilities of the First National Bank decrease by $10. (b) the reserves of the First National Bank increase by $10. (c) the liabilities of Citibank decrease by $10. (d )the assets of Citibank decrease by $10. 76. A bank failure is less likely to occur when a bank: (a) holds less U. S. government securities. (b) suffers large deposit outflows. (c) holds more excess reserves. (d) has less bank capital. 77. Venture capital firms are usually organized as: (a) open-end mutual funds. (b) limited partnerships or (somewhat less often) closed-end mutual funds. (c) corporations. (d) nonprofit businesses. (e) municipal REITs or as state agencies for local economic development. 78. Business finance companies provide specialized forms of credit to businesses by making loans and purchasing accounts receivable at a discount; this provision of credit is called: (a) discounting. (b) factoring. (c) refinancing. (d) sparking. 79. In a _____ arrangement, a captive finance company pays for a dealerships inventory of cars received from the car maker and puts a lien on each car financed: (a) factoring. (b) floor plan. (c) roll over leasing. (d) convolution. (e) reciprocity. 80. GMAC is an example of a: (a) captive finance company. (b) corporate finance company. (c) floor plan finance company. (d) business finance company. (e) holder in due course. [NOTE: This is no longer true. General Motors spun off GMAC in 2006, when GM desperately needed funding.] 81. The federal regulatory agency overseeing the activities of life insurance companies is: (a) the Federal Deposit Insurance Corporation. (b) the Social Security Administration. (c) the Federal Life Insurance and Casualty Agency. (d) the Financial Security Administration. (e) none of the above; there is no such federal regulatory agency. 82. Some automobile owners will drive faster knowing that they are covered by health and automobile insurance. This behavior creates the problem of: (a) fraudulent claims. (b) moral hazard. (c) adverse selection. (d) pecuniary purchases. 83. In an effort to return to profitability, insurance companies have campaigned for limits on insurance payments, particularly for: (a) medical malpractice. (b) earthquakes, floods, and other natural disasters. (c) automobile liability. (d) environmental hazards. 84. When those most likely to produce the outcome insured against are the ones who purchased insurance, insurance companies are said to face the problem of (a) fraudulent claims. (b) moral hazard. (c) adverse selection. (d) pecuniary purchases. 85. Clauses in life insurance policies that eliminate death benefits if the insured person commits suicide are examples of: (a) restrictive provisions. (b) restrictive covenants. (c) anti-fraud exclusions. (d) risk-based deductibles. 9

86. The fact that insurance companies charge young males higher automobile insurance premiums than young females is an example of : (a) risk-based premiums. (b) risk rationing. (c) an attempt to minimize moral hazard. (d) reinsurance. (e) coinsurance. 87. Policyholders are not provided with payouts during their retirement if they purchase: (a) term life insurance. (b) annuities. (c) whole life insurance. (d) universal life insurance. 88. Social Security is a: (a) fully funded pension plan. (b) federally insured private pension plan. (c) government sponsored private pension plan. (d) pay-as-you-go system. (e) actuarially based system for determining the need of an individual for a pension. 89. The bulk of most private pension plan assets are invested in: (a) government securities.(b) corporate bonds. (c) certificates of deposit. (d) stock. 90. Fraudulent practices and other abuses of private pension funds led Congress to enact the (a) FDIC Act. (b) Federal Reserve Act. (c) FHLBS. (d) Employee Retirement Income Security Act [ERISA]. 91. Keogh plans and IRAs are: (a) individual pension plans. (b) government pension plans. (c) corporate pension plans. (d) public pension plans.

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