MEcon Master of Economics Master of Economics: Money, Banks, and Interest Rates 4

Question 1

A commercial bank's capital adequacy ratio under Basel III requires common equity tier-1 (CET1) capital of at least what percentage of risk-weighted assets?

Accepted Answer

4.5%

Answer

Basel III mandates a minimum CET1 ratio of 4.5% of risk-weighted assets, plus an additional 2.5% capital conservation buffer for a combined minimum of 7%.

Question 2

The term structure of interest rates according to the expectations hypothesis implies that:

Accepted Answer

Long-term rates are geometric averages of expected future short-term rates

Answer

The pure expectations hypothesis holds that the long rate is determined by the compound average of current and expected future short rates, with no term premium.

Question 3

Quantitative easing (QE) differs from conventional open market operations primarily because QE:

Accepted Answer

Involves large-scale purchases of longer-term or riskier assets beyond short-term government securities

Answer

QE involves central bank purchases of long-duration Treasuries, mortgage-backed securities, or other assets to compress long-term yields when short rates are near zero.

Question 4

Which concept explains why a dollar received today is worth more than a dollar received in the future?

Accepted Answer

Time value of money

Answer

The time value of money reflects that a current dollar can be invested to earn returns, making it more valuable than the same nominal amount received later.

Question 5

In deposit insurance systems, 'moral hazard' refers to the risk that:

Accepted Answer

Insured banks will take on excessive risk because depositors have no incentive to monitor them

Answer

Deposit insurance removes depositors' incentive to discipline bank risk-taking, encouraging banks to pursue riskier strategies, which is the classic moral hazard problem.

MEcon Master of Economics Practice Test

MEcon Master of Economics Practice Test

MEcon Master of Economics Master of Economics: Money, Banks, and Interest Rates 4