Econ 330 Exam 2 Practice Questions
If the required reserve ratio is one-third, currency in circulation is $300 billion, and checkable deposits are $900 billion, then the money supply is ________ billion. A) $3000 B) $2700 C) $1200 D) $1800
$1200
If a bank has $200,000 of checkable deposits, a required reserve ratio of 20 percent, and it holds $80,000 in reserves, then the maximum deposit outflow it can sustain without altering its balance sheet is A) $50,000. B) $40,000. C) $30,000. D) $25,000.
$50,000
If the required reserve ratio is 10%, currency in circulation is $400 billion, checkable deposits are $1000 billion and excess reserves total $1 billion, then the monetary base is: A) $400 billion. B) $401 billion. C) $500 billion. D) $501 billion.
$501 billion
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) $110. C) $10. D) $100.
$90
If RRR is 10%, what is the amount of the checking deposit change when the Fed reduces it's reserve liability by 10 millions? A) + 1 million B) + 100 millions C) - 100 millions D) - 1 million
- 100 millions
Taylor Rule Application: What should be the optimal rate of Fed Fund Rate Target if inflation rate is 1%, inflation target is 2%, equilibrium real fed fund rate is 2%, output is 2% below potential output? A) 1.50% B) 2.50% C) 4.50% D) -1.50%
1.50%
If interest rates increase from 9 percent to 10 percent, a bank with a duration gap of 2 years would experience a decrease in its net worth of A) 0.9 percent of its assets. B) 0.9 percent of its liabilities. C) 1.8 percent of its liabilities. D) 1.8 percent of its assets.
1.8 percent of its assets
If a borrower takes out a $200 million loan in a repo agreement and is asked to post $220 million of mortgage-backed securities as collateral, the "haircut" is: A) 20%. B) 5%. C) 10%. D) 50%
10%
If the required reserve ratio is 15%, currency in circulation is $400 billion, checkable deposits are $800 billion, and excess reserves total $0.8billion, then the M1 money multiplier is: A) 0.651. B) 2.5. C) 1.67. D) 2.3.
2.3
If the required reserve ratio is 5 percent, currency in circulation is $400 billion, checkable deposits are $800 billion, and excess reserves total $0.8 billion, then the M1 money multiplier is A) 2.3. B) 2.72. C) 0.551. D) 2.5.
2.72
In recent years the interest paid on checkable and nontransaction deposits has accounted for around ________ of total bank operating expenses, while the costs involved in servicing accounts have been approximately ________ of operating expenses. A)55 percent; 4 percent B)50 percent; 30 percent C)25 percent; 50 percent D)45 percent; 55 percent
25 Percent; 50 Percent
The discount rate is kept the federal funds rate because the Fed prefers that A) above; banks borrow reserves from the Fed B) below; banks borrow reserves from the Fed C) below; banks borrow reserves from each other D) above; banks borrow reserves from each other
Above; banks borrow reserves from each other
Debt deflation occurs when: A) an economic downturn causes the price level to fall and a deterioration in firms' net worth because of the increased burden of indebtedness. B) corporations pay back their loans before the scheduled maturity date. C) lenders reduce their lending due to declining stock prices (equity deflation) that lowers the value of collateral. D) rising interest rates worsen adverse selection and moral hazard problems.
An economic downturn causes the price level to fall and a deterioration in firms' net worth because of the increased burden of indebtedness.
If uncertainty about banks' health causes depositors to begin to withdraw their funds from banks, the country experiences a(n) A) financial recovery. B) banking crisis. C) increase in information available to investors. D) reduction of the adverse selection and moral hazard problems.
Banking Crisis
f the Fed decides to decrease the interest rate on discount loans, then: A) banks will borrow more from the Fed. B) banks will sell more securities to the Fed. C) banks may decide to borrow more from the Fed. D) banks may decide to sell more securities to the Fed.
Banks may decide to borrow more from the fed
Riskless Arbitrage for banks means that: A) banks borrow from the Fed. B) banks borrow from other banks. C) banks practice a carry-trade strategy. D) banks buy only riskless securities from the Fed and other banks.
Banks practice a carry-trade strategy
The "Vicious Cycle of the Mortgage Crisis" diagram presented the relationship between housing prices and economic activity. Economic activity slows as a direct result of which of the following?: A) Banks restrict lending. B) Rising unemployment rates. C) Rising interest rate. D) Rising oil prices.
Banks restrict lending
___________ may antagonize customers and thus can be a very costly way of acquiring funds to meet an unexpected deposit outflow. A) Selling securities B) Calling in loans C) Selling negotiable CDs D) Selling loans
Calling in loans
Conditions that likely contributed to a credit crunch during the global financial crisis include: A) capital shortfalls caused in part by falling real estate prices. B) increases in reserve requirements. C) regulated hikes in bank capital requirements. D) falling interest rates that raised interest rate risk, causing banks to choose to hold more capital.
Capital shortfalls caused in part by falling real estate prices.
Which of the following is not one of the "3 C's of Lending?" A) capacity B) collateral C) civility D) character
Civility
An important function of the regional Federal Reserve Banks is A) clearing checks. B) setting reserve requirements. C) determining monetary policy. D) setting margin requirements.
Clearing checks
Property promised to the lender as compensation if the borrower defaults is called: A) restrictive covenants. B) collateral. C) deductibles. D) contingencies.
Collateral
When a lender refuses to make a loan, although borrowers are willing to pay the stated interest rate or even a higher rate, the bank is said to engage in: A) strategic holding out. B) collusive behavior. C) credit rationing. D) coercive bargaining.
Credit rationing
Consider MB as only the monetary liabilities. Then, money supply M1 minus Monetary Base gives us: A) D × (1 − r − e) B) (D + C) × (1 − r − e) C) D × (1 + r + e) D) R × 1/1+r+e
D * (1 - r - e)
The formula that links checkable deposits to the money supply is: A) D = (1 + c) × M. B) M = 1/1+c × D. C) M = 1+c/D D) D = 1/1+c × M
D = 1/1+C * M
The economy recovers quickly from most recessions, but the increase in adverse selection and moral hazard problems in the credit markets caused by ________ led to the severe economic contraction known as The Great Depression. A) an improvement in banks' balance sheets B) increases in bond prices C) debt deflation D) illiquidity
Debt deflation
If the First National Bank has a gap equal to a negative $30 million, then a 5% point increase in interest rates will cause profits to: A) increase by $1.5 million. B) decline by $1.5 million. C) decline by $15 million. D) increase by $15 million
Decline by $1.5 million
Assuming initially that the required reserve ratio = 10%, the currency-deposit ratio = 40%, and the excess reserve ratio = 0, an increase in the currency-deposit ratio to 50% causes the M1 money multiplier to _____________ , everything else held constant. A) decrease from 2.8 to 2.33 B) increase from 2.33 to 2.8 C) decrease from 2.8 to 2.5 D) increase from 2.5 to 2.8
Decrease from 2.8 to 2.5
If the Fed injects reserves into the banking system and they are held as excess reserves, then the money supply A) increases by only one-half the initial increase in reserves. B) does not change. C) increases by only the initial increase in reserves. D) increases by a multiple of the initial increase in reserves.
Does not change
Which of the following regions are not currently explicitly conducting QE? A) UK B) Europe C) Japan D) US
Europe
Starting from a situation where i ∗ F F > iER, an open market purchase causes iF F to ________ and an open market sale causes iF F to __________ . A) fall; fall. B) fall; rise. C) rise; rise. D) rise; fall.
Fall; rise
Over the last few years banks have engaged in a riskless profit opportunity whereby they borrow funds in the overnight market and deposit at the Federal Reserve. Which of the following explains why the opportunity exists? A) capital inflows from the eurozone due to negative interest rates B) banks adjusting to the Federal Reserve's higher required reserve ratio C) banker's fears of another liquidity crisis D) Fannie Mae cannot deposit excess liquidity at the Federal Reserve
Fannie Mae cannot deposit excess liquidity at the Federal Reserve
Which rate is the zero lower bound referring to? A) Required Reserve Ratio B) Fed Fund Rate C) Real Interest Rate D) Inflation Rate
Fed Fund Rate
The interest rate charged on overnight loans of reserves between banks is the: A) federal funds rate. B) discount rate. C) prime rate. D) Treasury bill rate
Federal funds rate
The term Asset-Backed Security Loan Facility (TALF) was created by the _________ to restore credit flows to households and firms. A) Federal Reserve B) Federal Housing Finance Corporation C) Fannie Mae D) Treasury
Federal reserve
The difference of rate-sensitive liabilities and rate-sensitive assets is known as the A) gap. B) interest-sensitivity index. C) duration. D) rate-risk index.
Gap
In the "Vicious Cycle of the Mortgage Crisis," the nexus between the asset component of the economy and the income component was the ____________ (or, in other words, what is the nexus between the housing market and the real economy). A) falling values of MBS B) falling bank capital C) home foreclosures D) rising supply of homes
Home foreclosures
On Friday 23 rd October 2015, The People Republic Bank of China (PBoC) said on its website that it was lowering reserve requirement ratio (rr) by 50 basis points. What are the consequences of such policy? A) It shifts the demand of reserves market to the left, lead to lower interbank borrowing/lending rate. B) It shifts the demand of reserves market to the right, lead to lower interbank borrowing/lending rate. C) It shifts the supply of reserves market to the left, lead to higher interbank borrowing/lending rate. D) It shifts the supply of reserves market to the right, lead to higher interbank borrowing/lending rate.
It shifts the demand of reserves market to the left, lead to lower interbank borrowing/lending rate.
The goal for high employment should be a level of unemployment at which the demand for labor equals the supply of labor. Economists call this level of unemployment the: A) frictional level of unemployment. B) structural level of unemployment. C) natural rate level of unemployment. D) Keynesian rate level of unemployment.
Natural rate level of unemployment
The time-inconsistency problem in monetary policy can occur when the central bank conducts policy: A) using a nominal anchor. B) on a discretionary, day-by-day basis. C) using a flexible, discretionary rule. D) using a strict and inflexible rule.
On a discretionary, day-by-day basis
How should the Fed react if it wants to push down the Fed Fund Rate? A) Open Market Sale, higher discount Rate B) Open Market Sale, lower discount Rate C) Open Market Purchase, higher discount rate D) Open Market Purchase, lower discount rate
Open market purchase, lower discount rate
Monetary policy is considered time-inconsistent because A) policymakers are tempted to pursue discretionary policy that is more expansionary in the short run. B) of the lag times associated with the recognition of a potential economic problem and the implementation of monetary policy. C) policymakers are tempted to pursue discretionary policy that is more contractionary in the short run. D) of the lag times associated with the implementation of monetary policy and its effect on the economy.
Policymakers are tempted to pursue discretionary policy that is more expansionary in the short run.
Today banks can engage in a riskless arbitrage by engaging in which of the following? A) purchase fed funds, then deposit at Federal Reserve B) borrow at discount window, lend in fed funds market C) purchase fed funds, then sell fed funds D) purchase fed funds, then buy 1 month T-bills
Purchase fed funds, then deposit at Federal Reserve
High-powered money minus currency in circulation equals: A) the borrowed base. B) reserves. C) the non-borrowed base. D) discount loans.
Reserves
Bruce the Bank Manager can reduce interest rate risk by ________ the duration of the bank's assets to increase their rate sensitivity or, alternatively, ________ the duration of the bank's liabilities. A) lengthening; shortening B) lengthening; lengthening C) shortening; shortening D) shortening; lengthening
Shortening; lengthening
Suppose that from a new checkable deposit, First National Bank holds two million dollars in vault cash, eight million dollars on deposit with the Federal Reserve, and one million dollars in required reserves. Given this information, we can say First National Bank faces a required reserve ratio of _________ percent. A) ten B) twenty C) eighty D) ninety
Ten
In the model of the money supply process, the depositor's role in influencing the money supply is represented by A) the currency holdings. B) the currency holdings and borrowed reserve. C) the currency holdings and excess reserve. D) the market interest rate.
The currency holdings
What will happen if the Fed pushes the reserves supply too far to the right? A) The curves intersect at the horizontal part of demand curve. B) The curves point intersect at the horizontal part of supply curve. C) The equilibrium rate becomes zero, we hit the zero lower bound. D) The equilibrium rate is iD.
The curves intersect at the horizontal part of demand curve
The borrowed reserves (BR) are equal to: A) the monetary base. B) the amount of open market purchases. C) the discount loans. D) the fed funds loans
The discount loans
The rate of inflation increases when: A) the unemployment rate exceeds the NAIRU. B) the unemployment rate is less than the NAIRU. C) the unemployment rate increases faster than the NAIRU increases. D) the unemployment rate equals the NAIRU.
The unemployment rate is less than the NAIRU
When housing prices began to decline after their peak in 2006, many subprime borrowers found that their mortgages were "underwater." This meant that: A) the amount that they owed on their mortgage was less than the value of their house. B) the roof leaked during a rainstorm. C) the basement flooded since they could not afford to fix the leaky plumbing. D) the value of the house fell below the amount of the mortgage.
The value of the house fell below the amount of the mortgage
Everything else held constant, a decrease in holdings of excess reserves will mean A) a decrease in the money supply. B) an increase in discount loans. C) a decrease in checkable deposits. D) an increase in the money supply.
an increase in the money supply
Banks earn profits from off-balance sheet loan sales A) by selling existing loans for more than the original loan amount. B) by calling-in loans before the maturity date. C) by selling the loans at discounted prices. D) by foreclosing on delinquent accounts.
by selling existing loans for more than the original loan amount.
A financial crisis occurs when an increase in asymmetric information from a disruption in the financial system A) causes severe adverse selection and moral hazard problems that make financial markets incapable of channeling funds efficiently. B) reduces uncertainty in the economy and increases market efficiency. C) allows for a more efficient use of funds. D) increases economic activity.
causes severe adverse selection and moral hazard problems that make financial markets incapable of channeling funds efficiently.
Assuming initially that the required reserve ratio = 10%, the currency-deposit ratio = 75%, and the excess reserve ratio = 156%, an increase in the required reserve ratio to 15% causes the M1 money multiplier to ________, everything else held constant. A) decrease from 1.67 to 1.54 B) decrease from 0.73 to 0.71 C) increase from 0.15 to 0.33 D) increase from 0.54 to 0.67
decrease from 0.73 to 0.71
When the value of loans begins to drop, the net worth of financial institutions falls causing them to cut back on lending in a process called A) deleveraging. B) releveraging. C) deflation. D) capitulation.
deleveraging
Which of the following is not an advantage of peer-to-peer lending? A) has significant experience dealing with default risk B) operating expenses are 1/3 of traditional banking C) borrowers pay lower rates D) lenders earn higher rates
has significant experience dealing with default risk
Because of their ________ liquidity, ________ U.S. government securities are called secondary reserves. A) low; long-term B) high; short-term C) low; short-term D) high; long-term
high; short-term
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 ________ for reserves and causes the federal funds interest rate to rise, everything else held constant. A) increases; demand B) decreases; supply C) decreases; demand D) increases; supply
increases; demand
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) liability; asset C) asset; liability D) liability; liability
liability; asset
Everything else held constant, in the market for reserves, when the federal funds rate is 5%, 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.
lowers the federal funds rate.
To reduce moral hazard problems, banks include restrictive covenants in loan contracts. In order for these restrictive covenants to be effective, banks must also A) be prepared to extend the deadline when the borrower needs more time to comply. B) monitor and enforce them. C) be willing to rewrite the contract if the borrower cannot comply with the restrictions. D) trust the borrower to do the right thing.
monitor and enforce them.
Which of the following would a bank NOT hold as insurance against the highest cost of deposit outflow-bank failure? A) excess reserves B) secondary reserves C) bank capital D) mortgages
mortgages
When banks offer borrowers smaller loans than they have requested, banks are said to A) rediscount the loan. B) ration credit. C) raze credit. D) shave credit.
ration credit
Which of the following is not a characteristic of the Repo Market? A) repurchase price is greater than original price B) over collateralized to mitigate credit risk C) repo is an unsecured cash loan D) legal transfer of security to lender
repo is an unsecured cash loan
The Federal Open Market Committee consists of the A) seven members of the Board of Governors and five presidents of the regional Fed banks. B) five senior members of the seven-member Board of Governors. C) seven members of the Board of Governors and seven presidents of the regional Fed banks. D) twelve regional Fed bank presidents and the chairman of the Board of Governors.
seven members of the Board of Governors and five presidents of the regional Fed banks.
When you deposit $50 in your account at First National Bank and a $100 check you have written on this account is cashed at Chemical Bank, then A) the assets of Chemical Bank rise by $50. B) the assets of First National rise by $50. C) the reserves at First National fall by $50. D) the liabilities at Chemical Bank rise by $50.
the reserves at First National fall by $50.
f the Fed decides to decrease the interest rate on discount loans, then: A) this cannot affect i∗F F B) this may decrease i∗F F C) this may increase i∗F F D) this will decrease i∗F F whatever was the original equilibrium. E) this will increase i∗F F whatever was the original equilibrium.
this may decrease i*F F
If a bank has $100,000 of checkable deposits, a required reserve ratio of 20%, and it holds $40,000 in reserves, then the maximum deposit outflow it can sustain without altering its balance sheet is: A) $20,000. B) $10,000. C) $25,000. D) $30,000
$25,000
Which of the following statements are true? A) A bank's balance sheet shows that total assets equal total liabilities plus equity capital. B) A bank's liabilities are its uses of funds. C) A bank's assets are its sources of funds. D) A bank's balance sheet indicates whether or not the bank is profitable
A bank's balance sheet shows that total assets equal total liabilities plus equity capital.
The Gross Revenues (GR) have been falling over the past years for all these reasons except: A) A decrease in interest on Assets. B) A decrease in risk-aversion. C) A reduction in fee revenues. D) An increase in loan delinquency rate.
A decrease in risk-aversion
The demand for reserves is downward sloping because: A) a higher iF F makes banks paying a higher price to the Fed for excess reserves. B) a lower iF F means that other opportunities on Fed Funds market are less attractive with respect to excess reserves. C) a lower iF F means that other opportunities on Fed Funds market are more attractive with respect to excess reserves. D) a higher iF F implies lower opportunity cost on excess reserves for the Fed Funds market.
A lower iF F means that other opportunities on Fed Funds market are less attractive with respect to excess reserves.
Which of the following is not a common monetary tool? A) adjusting RRR. B) OMO. C) adjusting discount rate. D) adjusting fed fund rate.
Adjusting fed fund rate
What will happen if there is lower asset growth but EM stays constant? A) Banks will have higher ROE B) Banks will have higher ROA C) Asset growth will be resumed due to multiplier effect D) Asset growth will further decrease due to multiplier effect
Asset growth will further decrease due to multiplier effect
The relationship between borrowed reserves, the non-borrowed monetary base, and the monetary base is: A) BR = MB − MBn B) MB = MBn − BR C) BR = MBn − MB D) MB = BR − MBn
BR = MB - MBn
A bank failure occurs whenever: A) bank cannot satisfy its obligations to pay its depositors and other creditors. B) a bank has to call in a large volume of loans. C) a bank suffers a large deposit outflow. D) a bank refuses to make new loans.
Bank cannot satisfy its obligations to pay its depositors and other creditors.
Total Reserves minus vault cash equals: A) bank deposits with the Fed. B) excess reserves. C) currency in circulation. D) required reserves.
Bank deposits with the Fed.
If the Fed decides to decrease the interest rate on discount loans, then: A) banks will borrow more from the Fed. B) banks will sell more securities to the Fed. C) banks may decide to borrow more from the Fed. D) banks may decide to sell more securities to the Fed.
Banks may decide to borrow more from the Fed.
Riskless Arbitrage for banks means that: A) banks borrow from the Fed. B) banks borrow from other banks. C) banks practice a carry-trade strategy. D) banks buy only riskless securities from the Fed and other banks
Banks practice a carry-trade strategy
In general, banks would prefer to meet deposit outflows by _________ rather than__________. A) selling loans; selling securities B) selling loans; borrowing from the Fed C) borrowing from the Fed; selling loans D) calling in loans; selling securities
Borrowing from the Fed; selling loans
Asset transformation can be described as: A) borrowing and lending only for the short term. B) borrowing short and lending long. C) borrowing long and lending short. D) borrowing and lending for the long term.
Borrowing short and lending long
Because of an expected rise in interest rates in the future, a banker will likely A) make long-term rather than short-term loans. B) buy short-term rather than long-term bonds. C) buy long-term rather than short-term bonds. D) make either short or long-term loans; expectations of future interest rates are irrelevant.
Buy short-term rather than long-term bonds.
Consider a bank with $40 millions of rate-sensitive assets, $60 millions of fixed-rate assets, $50 millions of rate-sensitive liabilities and $50 millions of fixed-rate liabilities. Assuming that the average duration of its assets is 4 years, while the average duration of its liabilities is 3 years, then a 5% point increase in interest rates will cause the net worth of the bank to _________ by __________ of the total original asset value. A) decline; 5%. B) increase; 20%. C) decline; 10%. D) decline; 15%.
Decline; 5%
If r + e < 1, then an increase in c will: A) decrease the M1 money multiplier B) increase the M1 money multiplier C) have a zero net effect on the M1 money multiplier D) we need more information
Decrease the M1 money multiplier
When the Fed increases the required reserve ratio r, the money supply ________ via ________ A) increases; loans B) decreases; loans C) increases; multiple deposit creation D) decreases; multiple deposit creation
Decreases; multiple deposit creation
Bank loans from the Federal Reserve are called ________ and represent a ______ of funds. A) fed funds; source. B) discount loans; use. C) discount loans; source. D) fed funds; use
Discount loans; source
Subject to the approval of the Board of Governors, the decision of choosing the president of a district Federal Reserve Bank is made by: A) all nine district bank directors. B) class A and class B directors. C) three district bank directors who are professional bankers. D) the six district bank directors elected by the member banks. E) district bank directors who are not professional bankers.
District bank directors who are not professional bankers.
In the virtuous cycle of banking, an increase in asset growth rate directly implies : A) higher ROE B) economies of scale C) no need for deleveraging D) higher ROA
Economies of scale
The kink in the demand for Reserves D(r) is due to the fact that: A) excess reserves cannot pay a higher return than a discount loan B) excess reserves cannot cost less than a discount loan C) excess reserves rate paid by the Fed cannot be lower than the fed fund rate D) excess reserves rate paid by the Fed cannot be higher than the fed fund rate
Excess reserves rate paid by the Fed cannot be higher than the fed fund rate
The Chairman of the Board of Governors is chosen from among the seven governors and serves a _________ term. A) one-year B) two-year C) four-year D) eight-year
Four-year
Why is there a ceiling to the supply for reserves at i(D)? A) If iF F is too high, banks are earning too much on their reserves. B) If iF F is too high, banks would not like to borrow from the Fed. C) If iF F is too high, banks would prefer to get discount loans rather than money from OMO. D) If iF F is too high, the Fed would not be able to lend to the banking system.
If iF F is too high, banks would prefer to get discount loans rather than money from OMO.
If r + e > 1, then an increase in c will: A) decrease the money multiplier B) increase the money multiplier C) have a zero net effect on the money multiplier D) we need more information
Increase the money multiplier
Everything else held constant, a decrease in the required reserve ratio on checkable deposits causes the M1 money multiplier to _________ and the money supply to __________. A) decrease; decrease B) increase; decrease C) decrease; increase D) increase; increase
Increase; increase
When a new depositor opens a checking account at the First National Bank, the bank's assets ________ and its liabilities ___________ . A) decrease; decrease. B) increase; decrease. C) increase; increase. D) decrease; increase.
Increase; increase
Suppose originally the equilibrium is i ∗ F F = iER. Then, an increase in the interest rate paid by the Fed on excess reserves iER will __________ the floor of the demand for reserves, __________ the ceiling of the supply of reserves and __________ the money supply M1. A) increase; not affect; not affect. B) increase; decrease; decrease. C) increase; not affect; decrease. D) decrease; not affect; not affect.
Increase; not affect; decrease.
Suppose we start and finish with iD > i∗ F F > iER. Then, an increase in the required reserve ratio r will _________ the demand for reserves, _________ the supply of reserves and _________ the money supply M1. A) not affect; decrease; decrease. B) increase; decrease; decrease. C) increase; not affect; decrease. D) increase; not affect; increase.
Increase; not affect; decrease.
Suppose we start and finish with iD > i∗ F F > iER. Then, an increase in the interest rate paid by the Fed on excess reserves iER will __________ the floor of the demand for reserves, __________ the ceiling of the supply of reserves and _________ the money supply M1. A) increase; not affect; not affect. B) increase; decrease; decrease. C) increase; not affect; decrease. D) decrease; not affect; not affect.
Increase; not affect; not affect.
Holding large amounts of bank capital helps prevent bank failures because A) it makes it easier to call in loans. B) it makes loans easier to sell. C) it means that the bank has a higher income. D) it can be used to absorb the losses resulting from bad loans.
It can be used to absorb the losses resulting from bad loans
The supply for reserves is vertical because: A) It represents the fixed, arbitrary amount of non-borrowed reserves bought from the Fed. B) It represents the fixed, arbitrary amount of discount loans got from by the Fed. C) It represents the fixed, arbitrary amount of both non-borrowed reserves and discount loans offered by the Fed. D) It represents the fixed amount of non-borrowed reserves traded from banks to other banks.
It represents the fixed amount of non-borrowed reserves traded from banks to other banks.
If the required reserve ratio is equal to 10 percent, a single bank can increase its loans up to a maximum amount equal to A) its excess reserves. B) its total reserves. C) 10 times its excess reserves. D) 10 percent of its excess reserves
Its excess reserves.
A bank that wants to monitor the check payment practices of its commercial borrowers, so that moral hazard can be prevented, will require borrowers to: A) purchase the bank's CDs. B) place a corporate officer on the bank's board of directors. C) place a bank officer on their board of directors. D) keep compensating balances in a checking account at the bank.
Keep compensating balances in a checking account at the bank.
Unanticipated moral hazard contingencies can be reduced by: A) credit rationing. B) specialization in lending. C) long-term customer relationships. D) screening.
Long-term customer relationships.
When Jane Brown writes a $100 check to her nephew (who lives in another state), Ms. Brown's bank ________ assets of $100 and _________ liabilities of $100. A) gains; gains B) gains; loses C) loses; gains D) loses; loses
Loses; loses
Assume C = 0. Which is the relation between Required Reserve (RR), Non-borrowed monetary base (MBn), excess reserves (ER) and borrowed reserves (BR)? A) RR + ER = MBn - BR B) MBn + RR = ER + BR C) MBn + BR = RR + ER D) RR - ER = MBn - BR
MBn + BR = RR + ER
The sum of the Fed's monetary liabilities and the US Treasury's monetary liabilities is called: A) bank reserves B) currency in circulation C) monetary base D) money supply
Monetary Base
As "haircuts"increased during 2007-2009, financial institutions found that to borrow the same loan amount now required _________ collateral. A) default-free B) more C) less D) no
More
All _________ are required to be members of the Fed. A) banks with assets less than $500 million B) nationally chartered banks C) state chartered banks D) banks with assets less than $100 million
Nationally chartered banks
The excess reserve ratio e is __________ related with asset market interest rates i and _________ related to expected deposit outflow. A) positively; positively B) positively; negatively C) negatively; positively D) negatively; negatively
Negatively; positively
The Federal Reserve Bank of __________ plays a special role in the Federal Reserve System because it houses the open market desk. A) Boston. B) Chicago. C) San Francisco. D) New York.
New York
Over the long run, the primary determinant of movements in the money supply is the: A) required reserve ratio B) currency ratio C) excess reserve ratio D) non-borrowed base
Non-borrowed base
Suppose that the equilibrium interest rate on the fed funds market equals the interest rate earned on the excess reserves, that is, i ∗ F F = iER. If the Fed decides to start an open market sale, what is the new relationship between i ∗ F F and iER? A) i ∗ F F = iER B) i ∗ F F > iER C) i ∗ F F < iER D) Not enough information.
Not enough information
Profit Margin Analysis. The Gross Revenues (GR) are given by the sum of: A) operating expenses, provisions for loan losses, interest paid and net income. B) operating expenses, provisions for loan losses and net income. C) provisions for loan losses, interest paid and net income. D) operating expenses, provisions for loan losses, asset utilization, interest paid and net income.
Operating expenses, provisions for loan losses, interest paid and net income.
Which of the following is not one of the ways loan balances can "drain off?" A) sales B) prepayments C) originations D) amortizations
Originations
The money supply is ________ related to the nonborrowed monetary base, and ________ related to the level of borrowed reserves. A) negatively; negatively B) positively; negatively C) negatively; not D) positively; positively
Positively; positively
In the virtuous cycle of banking, __________ implies a higher _________ which, in turn, leads to a higher _________. A) Profit Margin; ROE, ROA B) ROA; ROE; Profit Margin C) ROE; Profit Margin; ROA D) Profit Margin; ROA; ROE
Profit Margin; ROA; ROE
The Federal Reserve System was created to: A) promote financial market stability. C) make it easier to finance budget deficits. B) promote rapid economic growth. D) lower the unemployment rate.
Promote financial market stability
Today banks can engage in a riskless arbitrage by engaging in which of the following? A) purchase fed funds, then deposit at Federal Reserve B) borrow at discount window, lend in fed funds market C) purchase fed funds, then sell fed funds D) purchase fed funds, then buy 1 month T-bills
Purchase fed funds, then deposit at Federal Reserve
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) purchase; call in. B) sell; extend. C) sell; call in. D) purchase; extend.
Purchase; extend
Growth analysis. If the growth rate of capital equals the growth rate of assets, then: A) Profit Margin is constant. B) ROE does not change. C) ROA and ROE grow at the same rate. D) required reserves are increasing.
ROA and ROE grow at the same rate
Growth analysis. The growth rate of capital ∆C/C is another name for: A) ROA. B) ROE. C) The inverse of EM. D) EM.
ROE
The ________ is also defined as the asset growth speed limit. A) ROA. B) EM. C) Profit Margin. D) ROE.
ROE
A $5 million deposit outflow from a bank has the immediate effect of A) reducing deposits and securities by $5 million. B) reducing deposits and capital by $5 million. C) reducing deposits and reserves by $5 million. D) reducing deposits and loans by $5 million.
Reducing deposits and reserves by $5 million
Which of the following is not a function of the Fed? A) Conducts monetary policy. B) Clears check. C) Regulates banks. D) Regulates stock exchange.
Regulates stock exchange
Net profit after taxes per dollar of equity capital is a basic measure of bank profitability called: A) return on capital. B) return on assets. C) return on equity. D) return on investment.
Return on equity
Which of the following is not a factor contributing to the extraordinary rise in the excess reserve ratio? A) failure of Lehman Brothers Investment Bank B) rising opportunity cost of excess reserves C) rising fears of liquidity risk D) fed paying interest on excess reserves
Rising opportunity cost of excess reserves
___________ is a process of bundling together smaller loans (like mortgages) into standard debt securities. A) Origination B) Securitization C) Distribution D) Debt-deflation
Securitization
Which of the following would NOT be a way to increase the return on equity? A) Pay higher dividends. B) Sell more bank stock. C) Buy back bank stock. D) Acquire new funds by selling negotiable CDs and increase assets with them.
Sell more bank stock
After a deposit outflow, a bank has a reserve deficiency of $3 million; it can meet reserve requirements by: A) reducing deposits by $3 million. B) increasing loans by $3 million. C) selling $3 million of securities. D) repaying its discount loans from the Fed.
Selling $3 million of securities.
If a bank needs to raise the amount of capital relative to assets, a bank manager might choose to: A) pay higher dividends. B) sell securities the bank own and put the funds into the reserve account. C) buy back bank stock. D) shrink the size of the bank.
Shrink the size of the bank
In the simple deposit expansion model, a decline in checkable deposits of $1,000 when the required reserve ratio (RRR) is equal to 10% implies that the Fed: A) sold $1,000 in government bonds. B) sold $100 in government bonds. C) purchased $1,000 in government bonds. D) purchased $100 in government bonds.
Sold $100 in government bonds
In the virtuous cycle of banking, economies of scale implies a higher Profit Margin ( R/GR ) because: A) the loss ratio is lower. B) the cost ratio is lower. C) the efficiency ratio is lower. D) the interest paid is lower.
The efficiency ratio is lower
For a given return on assets, the lower is bank capital: A) the lower is the credit risk for the owners of the bank. B) the lower the possibility of bank failure. C) the higher is the return for the owners of the bank. D) the lower is the return for the owners of the bank.
The higher is the return for the owners of the bank.
When $1 million is deposited at a bank, the required reserve ratio is 20%, and the bank chooses not to hold any excess reserves but makes loans instead, then, in the bank's final balance sheet: A) the liabilities of the bank increase by $800,000. B) the assets at the bank increase by $800,000. C) reserves increase by $160,000. D) the liabilities of the bank increase by $1,000,000.
The liabilities of the bank increase by $1,000,000.
If the Fed buys $100 million of Bank A's securities and Bank A uses the entire amount of money to increase its ER, then: A) the monetary base does not change. B) the money supply M1 increases by $100 million. C) the money supply does not change. D) the non-borrowed reserves does not change.
The money supply does not change
Banks hold capital because: A) higher capital increases the return on equity. B) it increases the likelihood of bankruptcy. C) higher capital increases the returns to the owners. D) they are required to by regulatory authorities.
They are required to by regulatory authorities.
If the Fed decides to decrease the interest rate on discount loans, then: A) this cannot affect i ∗ F F . B) this may decrease i ∗ F F . C) this may increase i ∗ F F . D) this will decrease i ∗ F F whatever was the original equilibrium. E) this will increase i ∗ F F whatever was the original equilibrium.
This may decrease i ∗ F F .
If a banker expects interest rates to fall in the future, her best strategy for the present is: A) to increase the duration of the bank's liabilities. B) to sell long-term certificates of deposit. C) to buy short-term bonds. D) to increase the duration of the bank's assets.
To increase the duration of the bank's assets.
Which is best way to deleverage? A) to borrow from the Fed (discount loans) and buy more securities B) to increase dividends C) to make new loans D) to issue more stock
To issue more stock
Will banks keep excess reserve (ER) and why? A) No, banks should lend out all the ER for profit maximization B) No, banks should not keep ER as it is a liability C) Yes, banks should keep ER to prevent sudden deposit withdrawals to lead to not satisfy the RR level. D) Yes, banks should ER reserve to prevent bank runs
Yes, banks should keep ER to prevent sudden deposit withdrawals to lead to not satisfy the RR level
Agency problems in the subprime mortgage market included all of the following except: A) homeowners could refinance their houses with larger loans when their homes appreciated in value. B) underwriters of mortgage-backed securities had weak incentives to make sure that the holders of the securities would be paid back. C) mortgage originators had little incentives to make sure that the mortgage is a good credit risk. D) the evaluators of securities, the credit rating agencies, were subject to conflicts of interest.
homeowners could refinance their houses with larger loans when their homes appreciated in value.
Suppose that the equilibrium interest rate on the fed funds market equals the interest rate earned on the excess reserves, that is, i ∗ F F = iER. If the Fed decides to buy more Government securities from the banking system, what is the new relationship between i ∗ F F and iER? A) i ∗ F F = iER B) i ∗ F F > iER C) i ∗ F F < iER D) Not enough information.
i ∗ F F = iER
Everything else held constant, a decrease in the required reserve ratio on checkable deposits causes the M1 money multiplier to ________ and the money supply to ________. A) increase; increase B) decrease; decrease C) increase; decrease D) decrease; increase
increase; increase
The global financial crisis of 2007-2009 not only led to a worldwide recession, but also a ________ in the European nations that use the euro currency. A) budget surplus B) tax cut C) sovereign debt crisis D) currency devaluation
sovereign debt crisis
Which of the following is not a factor contributing to the extraordinary rise in the excess reserve ratio? A) Fed began paying interest on excess reserves B) record low Fed Funds rate C) rising worries of liquidity risk D) the discount rate falling below the Fed Funds rate
the discount rate falling below the fed funds rate
Because ________ are less liquid for the depositor than ________, they earn higher interest rates. A) money market deposit accounts; time deposits B) savings accounts; time deposits C) money market deposit accounts; savings accounts D) time deposits; savings accounts
time deposits; savings accounts
