Economics of Money and Banking Coursera Answer

Economics of Money and Banking Answer. In this post you will get Economics of Money and Banking Quiz Answer | 100% Correct Answer

Economics of Money and Banking Quiz Answer

N.B. We attempted our best to keep this site refreshed for our clients for nothing. You can likewise contribute by refreshing new inquiries or existing inquiry answer(s). There are numerous inquiries on our site, it is difficult for us to check them consistently. It will be extraordinary on the off chance that you can assist us with updating the site. Just let us know if you find any new questions through mail or comment . We will attempt to refresh the inquiry/answer ASAP.

Use “Ctrl+F” To Find Any Questions Answer. & For Mobile User You Just Need To Click On Three dots In Your Browser & You Will Get A “Find” Option There. Use These Option to Get Any Random Questions Answer.

Week- 4

Banking as a Clearing System, continued

1.
Question 1
All of the following are correct statements about the Fed Funds market, as compared to the repo market, except one. Which one is FALSE?

1 point

Repo dealers make markets in securities as well as markets for money

Dealers are more important than brokers because their balance sheets are monitored by the Fed
Repo markets can function as a channel for inter-corporate borrowing and lending, but the Fed Funds market cannot
Repo markets are accessible to a wider class of economic agents

Both Fed Funds and repo provide mechanisms for flow of funds between banks

2.
Question 2
After the global financial crisis, the overnight repo rate was for a while persistently higher than the overnight Fed Funds rate, whereas previously it had been lower. Which of the following is NOT a possible explanation?

1 point

Before the crisis, the Fed was trying to encourage borrowing at the Fed Funds rate to expand short term credit
After the crisis, the Fed was generally trying to foster elasticity by keeping the better money at a discount
Before the crisis, the Fed was generally trying to impose discipline by keeping the better money at a premium

After the crisis, default risk was no longer priced positively
Eurodollars sold at a premium

3.
Question 3
Why would a bank seek financing on the Eurodollar market instead of the Fed Funds market?

1 point

Interest rates are higher in Eurodollar markets
Eurodollars are secured whereas Fed Funds are not

Greater liquidity in Eurodollar markets due to greater presence of dealers
Eurodollar loans are available for terms longer than one day
The Fed Funds market is not available to banks outside the US

4.
Question 4
Which of the following statements is correct regarding the expectations hypothesis of the term structure of interest rates?

1 point

Foreign interest rates are always higher than domestic interest rates

The hypothesis provides a scientific explanation for the liquidity premium in the term structure
Empirically, the forward rate tends to be greater than the expected (or realized) spot rate, which contradicts the expectations hypothesis
The expected future spot rate should be greater than the forward rate in order to compensate for risk

Arbitrage ensures that the hypothesis holds at all times, except during crisis

5.
Question 5
Which of these statements are FALSE regarding uncovered interest parity (UIP)?

1 point

Studies find that high yielding currencies tend to appreciate, which is just the opposite of UIP prediction
Arbitrage ensures covered interest parity holds, but not uncovered interest parity
Empirical studies find that high yielding currencies tend to depreciate relative to low yielding currencies

It fails to hold empirically, while covered interest parity holds
Forward exchange rates tend to be biased estimators of future spot exchange rates

6.
Question 6
Suppose the Royal Bank of Scotland commits to making a 4-month dollar-denominated loan to one of its customers 2 months from now. Which of the following is least likely to be a part of RBS preparation for funding the loan?

1 point

Borrow six-month Euroyen to lock in Yen funding cost
Accept a six-month dollar deposit today

Borrow in the Eurodollar market two months from now
Accept a six-month pound deposit today, and hedge foreign exchange risk in forward exchange market
Purchase a forward rate agreement to lock in funding cost

Week- 5

Banking as Market Making

1.
Question 1
All of the following EXCEPT one is a property of an illiquid market. Which one does not belong?

1 point

Attempts to buy or sell tend to move prices around a lot

Prices tend to be inefficient, i.e. different from fundamental value
Agents cannot buy or sell quickly
Agents cannot buy or sell large quantities easily

Dealers in illiquid markets are well capitalized

2.
Question 2
Which of the following statements about the banking system of Bagehot’s day is INCORRECT?

1 point

The Bank of England could not lend freely in the face of external drain because of its very limited gold reserves
The central bank could supply an internal drain because it was at a higher level in the money-credit hierarchy than other banks
The Bank of England could lend freely to meet an external drain because of its massive gold reserves

A bank with too many discounts and too few notes could borrow from other banks using rediscount
The division of the Bank of England into separate Banking and Issue departments served to keep notes scarce, and so acted as a mechanism of discipline

3.
Question 3
Which of the following BEST describes the Bagehot Principle?

1 point

In times of crisis, insist on market valuation of all collateral, and for safety lend only a fraction of that value
In times of crisis, lend freely at a high rate against good security

Raise interest rates in booms, and lower them in recessions, to stabilize aggregate income
In times of crisis, lend selectively at market rates, but only to those who you think will survive
In times of crisis, lend freely at a low rate to prevent insolvent borrowers from failing

4.
Question 4
Which of the following is NOT true about the discount mechanism in the “world that Bagehot knew”?

1 point

The discounting bank raises its quoted discount rate to discourage demand for discount, and lowers to encourage

The market rate of interest depends on the marketwide balance between cash inflow from maturing bills and cash outflow from new discounts
The discounting bank can avoid liquidity risk by creating deposits rather than lending its note reserve
Discounting banks change their quoted discount rates in order to balance their own cash inflow and outflow

Banks ensure their own future liquidity by arranging a portfolio of bills maturing at different dates

5.
Question 5
According to our model of dealer behavior, if the demand for a particular security exhausts the dealer’s inventory, which of the following is the dealer’s MOST likely response?

1 point

Go short by using reverse repo to acquire additional securities to sell, but raise the selling price
Lower the ask (selling) price
Lower the bid (buying) price

Stop quoting that security and lower the price on other securities to attract the demand
Borrow money from the clearing bank in order to buy more securities to replenish the inventory

6.
Question 6
Which of the following MOST accurately characterizes the economics of the dealer function?

1 point

Dealer position limits are an artificial imposition of regulation
A fall in the bid-ask spread encourages more dealers to enter the market

Dealers serve a social function by keeping prices at their fundamental value
Dealers make money by keeping prices constant even as demand fluctuates
Value based traders establish the outside spread within which price fluctuates

Week- 6

Banking as Market Making, continued

1.
Question 1
When the Treynor model is adapted to the money market, all of the following are true, EXCEPT…?

1 point

Quotes are in yields, not prices, so the bid is higher than the offer
The dealer is primarily concerned about exposure to price risk

The dealer is willing to take on more liquidity risk if he is compensated by higher expected profit
The dealer quote curve slopes up
The dealer is primarily concerned about liquidity risk

2.
Question 2
Which of the following BEST characterizes the economics of a security dealer who funds his long and short security positions in the repo and reverse money markets?

1 point

The dealer increases and decreases exposure to price risk in proportion to liquidity risk

The dealer changes yield quotes to control exposure to liquidity risk
The dealer changes price quotes to control exposure to price risk
The dealer is price taking in competitive markets

The dealer uses both price and yield quotes in order to control exposure to both price and liquidity risk

3.
Question 3
Considering the relationship between traditional banking and shadow banking, which of the following statements is INCORRECT?

1 point

In modern banking, the key prices are determined in competitive dealer markets, both capital markets and money markets
Both traditional banking and shadow banking involve creation of private money of various types
The traditional picture of banking emphasizes allocation of saving from household depositors to business investors

Both systems face solvency risk, but there is no liquidity risk for shadow banking since it can always raise funds in liquid wholesale money markets
The shadow banking system involves a shift from loan based credit to market based credit

4.
Question 4
Consider monetary transmission during tight monetary policy. Which of the following is NOT a link in the transmission mechanism?

1 point

The Fed raises the Fed Funds target rate
Economic impact depends on the effect on dealer behavior

Higher profit expectations bid up the long term bond yields
The rise in Fed Funds lowers the profitability of the liquidity spread for dealers unless the term rate rises proportionately
A rise in the term rate raises funding cost for bond dealers, so lowering expected profit on existing bond inventories

5.
Question 5
Which of the following statements about monetary policy is/are INCORRECT?

1 point

Monetary policy is all about expanding and contracting the overall size of the Fed’s balance sheet

According to the Taylor Rule, the Fed should raise interest rates when inflation exceeds the target
Monetary policy is all about shifting portfolio allocation on the asset side of the Fed’s balance sheet
Monetary policy is all about shifting portfolio allocation on the liability side of the Fed’s balance sheet

The appropriate stance of monetary policy depends on the balance of elasticity and discipline in the system as a whole
Control of short term rates gives the Fed some measure of control over both the quantity of credit and the price of credit

6.
Question 6
Which of the following is the most important reason for a central bank NOT TO INTERVENE during a liquidity crisis?

1 point

Liquidity problems in any market can lead to liquidity problems in the government securities markets
A fall in security security values means collateral value goes down, making refinance more difficult

Uncontrolled liquidation can sweep away good firms as well as bad firms
A fall in consumption spending can lead to a multiplier effect that aggravates the crisis
Relaxing the survival constraint prevents liquidation of bad investments

Week- 7

Midterm

1.
Question 1
Which of the following items best captures the concept of liquidity reserves for the Fed (the central bank of the United States)?

1 point

Dollars
Gold + SDRs + foreign currency

Gold
Federal Reserve Notes

2.
Question 2
Which of the following IS a property of Fed Funds?

1 point

Intraday credit
Interbank credit

Asset of the Fed
Liability of the Fed

3.
Question 3
Which of the following statements about the payment system is FALSE?

1 point

In an ideal credit system, surplus banks lend to deficit banks
When a bank runs a daylight overdraft, the balance sheet of the Fed contracts

When a bank borrows in the Fed Funds market, the balance sheet of the Fed neither expands nor contracts
Elasticity in the wholesale money market is the source of elasticity in the retail payments system

4.
Question 4
Which of the following statements about the term structure of interest rates is TRUE?

1 point

According to the expectations hypothesis, long rates should be higher than short rates to compensate for risk
Empirically, the forward rate seems to be an upwardly biased estimate of the future spot rate
The expectations hypothesis explains the persistent liquidity premium in long term interest rates
Arbitrage ensures that the expectations hypothesis holds at all times

5.
Question 5
Which statement is TRUE regarding uncovered interest parity (UIP)?

1 point

UIP is a generalization of covered interest parity
Arbitrage ensures that UIP holds, except in crisis
Forward exchange rates tend to be biased estimates of future spot exchange rates
Empirical studies find that low interest rate currencies tend to appreciate relative to high interest rate currencies

6.
Question 6
Each of the following is a property of an illiquid markets, EXCEPT…?

1 point

It is difficult to buy or sell large quantities
Dealers in illiquid markets are well-capitalized
Agents cannot buy or sell quickly
Attempts to buy or sell tend to move prices a lot

7.
Question 7
Which of the following BEST characterizes the economics of a security dealer who funds his long and short security positions in the repo and reverse markets?

1 point

The dealer is a price taker
Such a dealer is limited to matched book
The dealer changes price quotes to control exposure to price risk
The dealer is able to control exposure to price and liquidity risk independently

8.
Question 8
Which of the following BEST describes the Bagehot Principle?

1 point

In times of crisis, lend freely at a high interest rate
In times of crisis, lend freely at a low rate to help banks rebuild profitability
Intervene to stabilize the economy by raising rates in good times and lowering them in bad times
Safeguard liquidity by carefully scrutinizing potential borrowers

9.
Question 9
Each of the following is true about the economics of the dealer function, EXCEPT…?

1 point

Dealers seek profit by supplying market liquidity
Value based traders establish the outside spread within which price fluctuates
Dealers absorb fluctuations in net demand and supply by taking the imbalance onto their own balance sheet
A tight bid-ask spread attracts dealers to make markets

10.
Question 10
What is the MOST salient difference between traditional banking and so-called shadow banking?

1 point

Traditional banking involves creation of money substitutes
In shadow banking, key prices are determined in competitive dealer markets
Shadow banking involves solvency risk, whereas traditional banking involves liquidity risk
Shadow banking involves liquidity risk, whereas traditional banking involves solvency risk

Week- 8

International Money and Banking

1.
Question 1
Under a gold standard, all of the following are true, EXCEPT…?

1 point

All convertible currencies are at the same level in the hierarchy of money and credit
Gold is the ultimate international money
The exchange rate between two currencies can deviate from the mint par ratio because of the cost of shipping gold
Gold is an asset that is no one’s liability
Each currency has its own mint par

2.
Question 2
All of the following statements about the FX market are true, EXCEPT…?

1 point

Most derivative transactions have the dollar as one leg, and involve other majors, not minors
The dollar serves the function of an international currency, similar to the pound sterling prior to World War I
Empirically, market-determined forward exchange rates are biased estimates of future spot exchange rates
Only private agents, not central banks, can act as FX dealers
The FX market is fundamentally a money market, not a capital market

3.
Question 3
All of the following statements about FX theories are correct, EXCEPT….?

1 point

The survival constraint is the requirement that deficit countries find a way to settle with surplus countries
Legal tender laws establish the foreign exchange value of each currency relative to all the others
Covered Interest Parity conceives of the exchange rate as the relative price of tradeable assets
Chartalists link the origins of money to sovereign power, and view money as a creation of the state
Purchasing Power Parity conceives of the exchange rate as the relative price of tradeable goods

4.
Question 4
What was the significant difference between the US and UK proposals for the international monetary framework at Bretton Woods?

1 point

Banking school (US) versus Currency School (UK)
Private credit (US) versus public credit (UK)
Public credit (US) versus private credit (UK)
The US proposal would allow for flexible exchange rates, consistent with market principles
The UK proposal sought to make the survival constraint bind symmetrically on surplus countries as well as deficit countries

5.
Question 5
Which of the following BEST characterizes Mundell’s views on international money?

1 point

The international gold standard was a mistake and led to the Great Depression
Inconvertible national currencies can never serve effectively the functions of international money
Maintaining a constant value of gold is more important than maintaining stable prices
Economic and political instability in the 20th century were exacerbated by the lack of a genuine international currency
We should work towards a goal of fully flexible exchange rates, as this is consistent with free market principles

6.
Question 6
Which of the following MOST accurately characterizes some aspect of the international monetary system?

1 point

Global reach by huge hedge funds has effectively privatized the central banking role
The quantity of Special Drawing Rights outstanding today is unchanged since the establishment of the IMF at Bretton Woods
Price stability within countries, meaning low and stable inflation, leads to stable exchange rates between countries
The Eurodollar is the effective international reserve credit currency, a promise to pay US domestic reserve balances
Central banks failed to coordinate their actions during the recent financial crisis

Week- 8

International Money and Banking, continued

1.
Question 1
All of the following statements about foreign exchange dealers are true EXCEPT..?

1 point

In the least liquid FX markets, central banks set the inside spread, not just the outside spread
Dealers, both matched book and speculative, are willing to take on more risk only if they are compensated for it
A dealer buying FX spot and selling FX forward is hedged against price risk
A matched book dealer is exposed to liquidity risk, not price risk
The matched-book dealer profits from deviations from covered interest parity

2.
Question 2
Which of the following is NOT one of the mechanisms by a central bank may defend its currency against speculative attack?

1 point

Sell liquid assets, such as public debt, to put upward pressure on domestic interest rates
Borrow international reserves to buy domestic currency
Raise domestic interest rates to bribe foreigners to hold money balances rather than cashing them
Use international reserve holdings to buy domestic currency
Flood the market with liquidity by expanding balance sheet, buying foreign assets with domestic currency

3.
Question 3
Under a gold standard, all of the following statements are correct EXCEPT…?

1 point

The exchange rate can move away from mint par because of the cost of transporting gold
Profit-seeking dealers make markets inside the gold points
The survival constraint is more of problem for deficit dealers than for surplus dealers
When the price of foreign currency falls to the gold point, foreign exchange will be sold to central banks rather than price dealers
Balance sheet expansion can satisfy external drains, but not internal drains

4.
Question 4
Consider a dealer who is being asked to purchase FX and pay out dollars. Which of the following would provide incentive for the dealer to do that trade?

1 point

Positive report about US economic growth
Counterparties reduce their willingness to roll over the dealer’s funding liabilities
Spot rate and forward rate rise in tandem
Forward rate moves closer to expected spot rate
A positive differential between the FX forward rate and the expected spot rate

5.
Question 5
All of the following statements regarding (potential) arbitrage conditions are true, EXCEPT…?

1 point

The failure of uncovered interest parity provides an incentive for foreign exchange dealers to make markets
Uncovered interest parity is not a true riskless arbitrage condition because the future spot rate is unknown at the moment that the corresponding forward rate is determined.
According to covered interest parity, any change in the differential between forward and spot exchange rates must be accompanied by similar change in the overnight interest rate differential
Forward interest parity is a true arbitrage condition because all of the relevant interest rates, including term rate and forward rate, are known.

6.
Question 6
Consider a matched book FX dealer that is borrowing short and lending long in dollars. All of the following are true, EXCEPT…?

1 point

A matched book dealer relies on covered interest parity being true
He makes money by speculating on the difference between forward rates and expected spot rates
The dealer will be willing to take more risk if he is compensated for it
The dealer is exposed to liquidity risk, not price risk
The dealer will be willing to increase risk exposure only if he can buy spot relatively more cheaply than forward

Week-9

Banking as Advance Clearing

1.
Question 1
What was the central function of “shiftability” in the American system?

1 point

Shiftability allowed banks to raise funds by using the real bills discount mechanism
Shiftability made monetary policy, and hence markets, more transparent
Shiftability allowed banks to use their assets to raise cash as needed to meet short term liquidity calls
Shiftability allowed banks to open branches in other states
Shiftability prevented instability in financial markets

2.
Question 2
Which of the following is NOT correct about the role of banking for development finance?

1 point

A development bank mobilizes deposits for long-term capital loans to finance new development projects.
The ability of banks to create purchasing power simply by swapping IOUs means that development is not held back by prior available savings.
As Schumpeter emphasized, banks lend by creating new purchasing power for entrepreneurs who do not have it
The role of banking for development finance is very limited because safety requires banks to limit lending to short term real bills
Development finance involves mobilizing unused resources, thereby creating new economic activity.

3.
Question 3
All of the following statements about futures and forwards are true EXCEPT… ?

1 point

It is generally more expensive for a firm to lock in a forward rate of interest than to wait and pay the spot rate.
Forward interest parity means that the pricing of futures depends on the time structure of current spot interest rates.
A forward loan is generally more profitable for a bank than a spot loan. .
Banks and firms both use forwards and futures in order to hedge against price risk.
Futures and forwards are much the same in terms of cash flow, but not in terms of value since futures are marked to market whereas forwards are not.

4.
Question 4
Which of the following BEST characterizes the distinction between direct and indirect finance?

1 point

Direct finance involves more intermediation.
Indirect finance reduces risk, whereas direct finance simply transfers it
Direct finance is more efficient because there are fewer middlemen
Banking provides direct finance, whereas capital markets provide indirect finance
Direct finance involves the ultimate lender holding the promises to pay of the ultimate borrower

5.
Question 5
Which of the following statements about shadow banking is NOT true?

1 point

Regulations on traditional banking create incentives for shadow banking.
Shadow banking in the US is a recent phenomenon.
Shadow banking is illegal
Market liquidity is critically important for shadow banking, in order to price capital market collateral
Shadow banking involves money market funding of capital market lending.

6.
Question 6
Which of the following statements about banking during Bagehot’s time is NOT accurate?

1 point

The money market and capital market were more separated in Britain compared to the US.
The quasi-public Bank of England discount facility backstopped the British system, but in the US there was only the quasi-private New York Clearinghouse
Banks in Britain generally held shorter-term assets than banks in the US.
British banks relied more heavily on the timing of cash flows to provide liquidity, while US banks relied more heavily on money market funding and liquidity in the bond markets.
US banks safeguarded their liquidity by refusing to lend long term

Week- 11

Banking as Advance Clearing, continued

1.
Question 1
The following statements about interest rate swaps are all correct, EXCEPT…?

1 point

A bank that borrows short and lends long is, in effect, engaged in a swap, and so can hedge with an equal and opposite swap.
A long swap is more risky than a short swap
Something like a swap can be constructed with parallel loans, but it absorbs more balance sheet space
A long swap position pays fixed rate and receives flexible rate
In a swap that is constructed as a parallel loan, both parties still pay their original creditor the agreed rate over the life of the loan

2.
Question 2
All of the following statements about market making in swaps are correct, EXCEPT…?

1 point

Credit market imperfection creates incentive for swaps when it causes distortion of lending rates
Matched book dealing is not possible in swaps
Matched book swap dealing may net price risk, but still involves exposure to liquidity risk
Swap dealers make money by selling swaps at a different price than they buy swaps
Counterparty risk creates incentive for swaps because swaps have less such risk than the analogous parallel loan construction

3.
Question 3
In lecture we discussed how a corporate bond could be divided into three parts. What are they?

1 point

Risk-free asset, credit default swap, interest rate swap
Risky asset, credit risk, interest rate risk
Collateral, liquidity risk, credit risk
Counterparty risk, liquidity risk, price risk
Liquidity risk, interest rate risk, credit risk

4.
Question 4
Which of the following statements accurately characterizes the cash flow of a buyer of a CDS without mark-to-market features?

1 point

He makes or receives payments depending on fluctuation of the market price of the CDS
He pays a certain amount up front for the CDS, and receives another amount if the bond defaults
There is no net cash flow, because by construction CDS is zero net present value at inception
He pays a small amount in each time period, and receives a large amount in the case of default
He makes or receives payments depending on fluctuation of the price of the reference risky bond

5.
Question 5
All of the following statements about the CDS market are true, EXCEPT..?

1 point

Dealers sell CDS on individual bonds and hedge by purchasing CDS on an index
Holding a risky CDO plus CDS as insurance on that CDO entails more liquidity risk than simply holding a riskfree Treasury bond
The value of CDS fluctuates over time
The CDS market is more liquid than the market in the risky bonds referenced by CDS
CDS on sovereign debt makes no sense because sovereigns do not default

6.
Question 6
Which of the following statements about swaps is CORRECT?

1 point

Swap markets increase aggregate risk by expanding risk exposure to a multiple of the underlying referenced risky assets
Swaps are inherently in zero net supply
Swap markets replace traditional banking by replacing actual swap of IOUs with only notional swap of IOUs
Sovereigns who issue their own currency can never default, so credit default swaps make no sense in this case
The quantity of swap contracts is limited by the quantity of the underlying referenced risky assets

Week- 12

Money in the Real World

1.
Question 1
Which of the following is NOT a characteristic of shadow banking?

1 point

Money market funding
Capital market lending
Prices determined in dealer markets
Sharp separation of capital market and money market
Global funding of local lending

2.
Question 2
The following statements about traditional and shadow banking are all correct EXCEPT…?

1 point

The Fed provides the ultimate liquidity backstop for the shadow banking system
The traditional banking system provided the immediate liquidity backstop for the shadow banking system
The Fed provides liquidity backstop for the traditional banking system
The FDIC provides capital backstop for the traditional banking system
Funding liquidity implies market liquidity

3.
Question 3
For smooth operation of the new market-based credit system, fluctuation in the value of RMBS requires all of the following EXCEPT…?

1 point

Liquidity backstop for both money dealers and risk dealers
Efficient collateral flow through the dealer system
Elimination of counterparty risk through “too-big-to-fail”
Ability of ultimate risk holder to absorb losses
Both funding and market liquidity backstops

4.
Question 4
All of the following are central aspects of the “money view” EXCEPT…?

1 point

Explains current asset prices as a consequence of expected future values
Emphasizes the relationship between funding liquidity and market liquidity
Recognizes the important role of the central bank as ultimate provider of funding liquidity
Emphasizes liquidity and the survival constraint

Focuses on the problem of meeting cash commitments in a timely manner

5.
Question 5
Which of the following statements is MOST accurate?

1 point

Over the last thirty years, the central debate in economic discourse has been mostly between the finance view and the money view
The defining characteristic of the money view is that past promises are no constraint to current spending
The defining characteristic of the money view is that current spending is limited only by future income expectation
The economics view is characterized by the notion that income today results from capital investments in the past
The finance view and the economic view are quite similar, while the money view presents a stark contrast

6.
Question 6
Which of the following statements is MOST consistent with the views of Fischer Black?

1 point

The Fed should increase the money supply at a constant rate of growth
Business fluctuations can and should be smoothed by a combination of countercyclical fiscal and monetary policy
The operations of the Fed have little effect on the broader economy, or are counterproductive
The Fed should cut interest rates during business recessions in order to move the economy toward full employment
The Fed should target inflation by adjusting the interest rate

Final Exam

1.
Question 1
Under a gold standard, all of the following are true, EXCEPT…?

1 point

All currencies are at the same level in the hierarchy of money and credit
Exchange rates can differ from mint par because of the cost of shipping gold
Gold is the ultimate international money
Gold is an asset that is no one’s liability

2.
Question 2
What was the significant difference between the US and UK proposals at Bretton Woods?

1 point

Private credit (US) versus public credit (UK)
Keynes’ bancor proposal sought to shift the balance toward elasticity, while White’s IMF proposal sought to shift the balance toward discipline
The US proposal promoted flexible exchange rates, consistent with market principles
Banking School (US) versus Currency School (UK)

3.
Question 3
Which of the following MOST accurately characterizes current international monetary arrangements?

1 point

Foreign banks rely in the first instance on Eurodollars, mere promises to pay actual dollars, as the international reserve
The quantity of Special Drawing Rights issued by the IMF is unchanged since Bretton Woods
Low and stable inflation in each country independently is the best guarantor of stable exchange rates between countries
Global reach by huge hedge funds has effectively eliminated the need for government controlled central banks

4.
Question 4
Under a gold standard, all of the following statements are correct EXCEPT..?

1 point

The survival constraint is more of problem for deficit countries than for surplus countries
Central banks establish the outside spread in foreign exchange markets
Balance sheet expansion by the central bank can satisfy external drains, but not internal drains
Profit-seeking dealers establish the inside spread in foreign exchange markets

5.
Question 5
All of the following statements about (potential) arbitrage conditions are correct EXCEPT….?

1 point

According to covered interest parity, any change in the differential between domestic and foreign term interest rates must be accompanied by a similar change in the overnight interest differential
Uncovered interest parity is not a true riskless arbitrage condition because the future spot rate is unknown at the time that the corresponding forward rate is determined
Covered interest parity is a true arbitrage condition because all of the relevant prices are observable today
The failure of uncovered interest parity provides an incentive for foreign exchange dealers to make markets

6.
Question 6
What was the central function of “shiftability” in the American system?

1 point

Shiftability made monetary policy more transparent
Shiftability allowed banks to use their assets to raise cash as needed to meet short term liquidity calls
Shiftability allowed banks to raise funds by using the real bills discount mechanism
Shiftability prevented instability in financial markets

7.
Question 7
All of the following statements about banking in Bagehot’s time are correct EXCEPT…?

1 point

Funding liquidity was more important in Britain, and market liquidity was more important in the US
US banks were more willing than British banks to lend long term because they had access to the discount window as a liquidity backstop
British banks safeguarded their liquidity by refusing to lend long term
The money market and the capital market were more distinct in Britain than in the US

8.
Question 8
All of the following statements about interest rate swaps are correct EXCEPT….?

1 point

Interest rate swaps involve exactly the same counterparty risk as the analogous parallel loan construction
In a swap constructed as a parallel loan, both parties pay their original creditor as well as their new swap counterparty
Something like a swap can be constructed as a parallel loan, but it absorbs more balance sheet space
A long swap position pays a fixed rate and receives a flexible rate.

9.
Question 9
Only one of the following statements about swaps is correct. Which one?

1 point

A swap contract moves risk from one counterparty to another
Sovereigns can never default on debt issued in their own currency, so credit default swaps on sovereign debt make no sense
The quantity of swap contracts is limited by the quantity of the underlying referenced risky assets
Swap markets increase aggregate risk by expanding side bets on fundamentals

10.
Question 10
All of the following are central aspects of the “money view” EXCEPT…?

1 point

Focuses on the problem of meeting cash commitments as they come due
Emphasizes the relationship between funding liquidity and market liquidity
Explains current asset prices as a consequence of expected future cash flows
Emphasizes the importance of the central bank as ultimate provider of funding liquidity