Chapter 18 MC - Questions

For reserve calculation purposes, the period that begins on a Thursday and ends on a Wednesday 14 days later is known as A. the reserve maintenance period. B. the reserve adjustment period. C. the reserve computation period. D. the contemporaneous accounting period. E. None of the above.

A

One method that may be employed by banks to lower required reserves is to A. transfer deposits offshore on Friday and to transfer them back on Monday. B. convert demand deposits into MMDA accounts on Friday and reverse the transfer the following Monday. C. rely more heavily on zero explicit interest-rate deposits. D. delay posting deposits made on Friday until the following Monday. E. do nothing, because reserve requirements cannot be avoided.

A

The concept of constrained optimization facing an FI manager involving the minimum amount of liquid reserve assets required by regulators may A. penalize the FI if the minimum amount is less than the amount warranted by the actual withdrawal risk. B. benefit the FI if the minimum amount is more than is warranted by actual withdrawal risk. C. lead to increased withdrawals by depositors that do not meet the minimum requirement. D. assist the FI manager by providing an optimal target amount of reserves that will exactly match withdrawal expectations. E. None of the above.

A

What is the major distinction between NOW accounts and traditional demand deposits? A. Minimum account balance requirement to earn interest for NOW accounts. B. Zero explicit interest on NOW accounts. C. Noncheckable nature of NOW accounts. D. NOW accounts usually involve physical presence at the institution for withdrawal. E. Legal power to delay payment on NOW accounts.

A

Which of the following is a mechanism used by DI managers to reduce demand deposit withdrawal rates? A. Implicit interest payments. B. Minimum balance requirements. C. Explicit interest payments. D. All of the above. E. There is no way to mitigate withdrawal risk.

A

Which of the following liability products does NOT have withdrawal risk? A. Wholesale CDs. B. Money market deposit accounts. C. Retail CDs. D. NOW accounts. E. All of the above have withdrawal risk.

A

Which of the following rankings of liabilities is correct if they are ranked by funding costs from lowest cost to highest cost? A. Retail certificates of deposit; repurchase agreements; federal funds. B. Federal funds; demand deposits; certificates of deposit. C. Repurchase agreements; money market demand accounts; retail certificates of deposit. D. Certificates of deposit; federal funds; demand deposits. E. Demand deposits; federal funds; passbook savings.

A

Another method that may be employed by banks to lower required reserves is to A. transfer deposits to another domestic bank on Friday and transfer them back on the following Monday. B. sweep demand deposits into higher interest-bearing accounts on Friday with a return sweep the following Monday. C. rely more heavily on zero explicit interest-rate deposits. D. delay posting deposits made on Friday until the following Monday. E. do nothing, because reserve requirements cannot be avoided.

B

Buffer reserves at DIs are A. reserves in excess of the minimum required reserves. B. government securities that do not qualify as required reserves, but that can be converted to cash quickly. C. the portion of reserves that are calculated at a rate of ten percent of deposits. D. non-government securities and loans that must be converted into cash. E. the portion of life insurance company assets that require minimum reserves.

B

Requiring minimum reserves to be held at the central bank is the equivalent of A. buffer reserves. B. a reserve requirement tax. C. the target reserve ratio. D. contagious effects of liquidity risk. E. None of the above.

B

Since 1998, interest rate variability in the fed funds market has decreased because A. fewer institutions were allowed to participate in the fed funds market. B. of the introduction of lagged reserve accounting. C. new securities were approved that participants can use instead of fed funds to meet liquidity needs. D. of the introduction of contemporaneous reserve accounting. E. more participants were allowed to enter the fed funds market.

B

The largest dollar volume of money market securities is A. negotiable CDs. B. commercial paper. C. bankers acceptances. D. U.S. T-Bills. E. repurchase agreements.

B

The minimum daily average reserve requirement is computed by A. multiplying the reserve ratio by the daily closing deposit balance. B. multiplying the reserve ratio by the daily average closing deposit balance. C. dividing the reserve ratio by the daily average closing deposit balance. D. dividing the reserve ratio by the daily closing deposit balance. E. adding up daily closing deposit balances and dividing by 14.

B

Under contemporaneous reserve accounting the A. reserve maintenance period is two days longer than the reserve computation period. B. reserve maintenance period starts two days after the start of the reserve computation period. C. reserve computation period starts two days after the start of the reserve maintenance period. D. reserve computation period starts on the same date as the reserve maintenance period. E. reserve computation period is two days longer than the reserve maintenance period.

B

Which of the following rankings of liabilities is correct if they are ranked by withdrawal risk from riskiest to least risky? A. Federal funds; demand deposits; certificates of deposit. B. Demand deposits; money market demand accounts; certificates of deposit. C. Repurchase agreements; money market demand accounts; certificates of deposit. D. Certificates of deposit; federal funds; demand deposits. E. Passbook savings accounts; money market demand accounts; certificates of deposit.

B

Why do FIs face a return or interest earnings penalty by holding large amounts of assets such as cash, T-bills, and T-bonds to reduce liquidity risk? A. These assets carry a reserve requirement tax. B. These assets offer low returns. C. These assets offer higher returns that reflect their risk. D. Inflation increases the purchasing power value of these assets. E. All of the above.

B

Demand deposits A. have the same amount of withdrawal risk as interest-bearing transaction accounts. B. have less withdrawal risk than interest-bearing transaction accounts. C. have more withdrawal risk than money market demand accounts. D. have less withdrawal risk than money market demand accounts. E. have the same amount of withdrawal risk as money market demand accounts.

C

For reserve calculation purposes, the period that begins on a Tuesday and ends on a Monday 14 days later is known as A. the reserve maintenance period. B. the reserve allocation period. C. the reserve computation period. D. the contemporaneous accounting period. E. None of the above.

C

For reserve computation purposes, Friday balances A. are excluded from the calculations. B. are included in the calculations. C. receive triple weights in the calculations. D. receive double weights in the calculations. E. are averaged with Monday balances to get Saturday and Sunday balances.

C

In October 2008, the opportunity cost of holding excess reserves for U.S. DIs A. increased because new reserve requirements imposed by the Federal Reserve as a result of the financial crisis. B. decreased because subsidiary DIs were first allowed to issue commercial paper directly, rather than through the parent holding company. C. decreased because the Federal Reserve began to pay interest to DIs on excess reserves held at the Fed. D. increased because the Federal Reserve no longer accepted government securities as meeting excess reserve requirements. E. None of the above.

C

Many states in the U.S. impose liquid asset ratios on insurance companies which may be met by A. cash and excess reserves. B. cash and municipal bonds from within the state of operation. C. cash and government securities. D. cash and policyholder reserves. E. cash only.

C

The weekend game is A. a strategy to reduce bank interest rate risk exposure. B. a strategy to reduce bank liquidity risk exposure. C. a strategy to reduce the cost of meeting reserve requirements. D. the buying and selling of Fed funds late Friday afternoon. E. the triple witching effect on the third Friday of the month.

C

Under the lagged reserve accounting system, the A. reserve maintenance period is two days longer than the reserve computation period. B. reserve maintenance period starts two days after the start of the reserve computation period. C. reserve maintenance period does not begin until seventeen days after the end of the computation period. D. reserve computation period starts on the same date as the reserve maintenance period. E. reserve computation period is two days longer than the reserve maintenance period.

C

Which of the following is considered to be the most liquid asset? A. T-notes. B. T-bills. C. Cash. D. T-bonds. E. Wholesale CDs.

C

Which of the following is the result of using "sweep accounts" in which high reserve ratio demand deposits are "swept" out of customers' accounts on Friday into higher interest-bearing savings accounts? A. Increased reserve requirements for the bank. B. Higher average balances in a DI's demand deposit. C. Lower required reserve holdings at the Federal Reserve. D. Lower interest burden for the bank. E. None of the above.

C

Which of the following liabilities have a high degree of withdrawal risk? A. Passbook savings. B. NOW Accounts. C. Demand deposits. D. Time deposits. E. Wholesale CDs.

C

Which of the following liability products does NOT include transaction privileges? A. Demand deposit accounts. B. NOW accounts. C. Passbook savings accounts. D. Money market deposit accounts. E. All of the above have transaction privileges.

C

Which of the following observations concerning repurchase agreements is NOT true? A. They can be viewed as collateralized federal funds transactions. B. The RP market is a highly liquid and flexible source of funds for DIs needing to increase their liabilities and to offset deposit withdrawals. C. Unlike fed funds, these transactions cannot be rolled over each day. D. It is difficult to transact an RP borrowing late in the day. E. Negotiations over the collateral package can delay RP transactions.

C

Which of the following observations is true of the contemporaneous reserve accounting system? A. The reserve computation and reserve maintenance periods do not overlap. B. The maintenance period does not begin until seventeen days after the end of the computation period. C. It results in a two-day window during which required reserves are known with certainty. D. It increases the accuracy of information on aggregate required reserve balances. E. It may be used instead of the lagged reserve accounting system.

C

Wholesale certificates of deposit A. are less than $100,000 in denomination. B. cannot be rolled over prior to maturity. C. can be resold on the secondary market. D. are sold only to other financial intermediaries. E. are covered by Federal deposit insurance.

C

Which of the following is a mechanism used by DI managers to impact withdrawal rates of NOW accounts. A. Implicit interest payments. B. Minimum balance requirements. C. Explicit interest payments. D. All of the above. E. There is no way to impact withdrawal rates.

D

Which of the following is an outcome of an increase in the reserve requirement ratio? A. DIs may hold fewer reserves against their transaction accounts. B. DIs are able to lend out a greater percentage of their deposits. C. Increased credit availability in the economy. D. DIs are only able to lend a smaller percentage of their deposits than before. E. A multiplier effect on the supply of DI deposits and thus the money supply.

D

In situations where the required reserve shortfall exceeds 4 percent, the bank may be A. assessed explicit monetary penalties by the Federal Reserve Bank. B. assessed implicit penalties in the form of more frequent monitoring and examinations. C. allowed to carry 4 percent of the required reserves to the next maintenance period. D. declared insolvent. E. Answers A, B, and C only.

E

Managing the reserve position of a U.S. bank requires knowing A. the target reserve ratio. B. the time period over which average deposits are calculated. C. the time period over which average reserves must be maintained. D. the asset and liability methods that may be used to meet required reserves. E. All of the above.

E

Medium term notes issued by a U.S. DI A. generally have a maturity of five to seven years. B. are a stable source of funds with low withdrawal risk. C. are not subject to reserve requirements. D. are not subject to deposit insurance. E. All of the above.

E

Over the past 30 years in the DI industry A. the loan portfolio has become more liquid because of increased securitization. B. lower amounts of very liquid assets need to be held to manage withdrawal risk. C. more opportunities exist for raising funds that are not deposit related. D. DIs have intentionally managed liabilities to reduce withdrawal risk. E. All of the above.

E

Which of the following is an outcome of a decrease in the reserve requirement ratio? A. DIs must hold more reserves against the transaction accounts on their balance sheets. B. DIs are able to lend a smaller percentage of their deposits. C. Decreased credit availability in the economy. D. A multiple contraction in deposits and a decrease in the money supply. E. A multiplier effect on the supply of DI deposits and thus, the money supply.

E

Which of the following observations concerning the federal funds rate is NOT true? A. The cost of fed funds for the purchasing institution is the federal funds rate. B. The federal funds rate is set by DIs that trade in the fed funds market. C. The federal funds rate can vary considerably within the day. D. The federal funds rate can vary considerably across days. E. Rate variability has increased since the introduction of lagged reserve accounting.

E

Which of the following observations is NOT true of a liquid asset? A. It can be turned into cash quickly. B. Conversion to cash entails low transaction costs. C. Conversion to cash happens with little or no loss in principal value. D. It is traded in an active market. E. Large transactions may move its market price substantially.

E

Why are passbook savings generally less liquid than demand deposits and NOW accounts? A. They are noncheckable. B. They usually involve physical presence at the institution for withdrawal. C. The DI has the legal power to delay payment for as long as one month. D. They tend to pay higher interest rates than demand deposits and NOW accounts. E. All of the above.

E