Chapter 10**

If a bank has $200,000 of checkable deposits, a required reserve ratio of 20%, hold $80,000 in reserves, then the maximum deposit outflow it can sustain without altering its balance sheet is: $50,000 $40,000 $30,000 $25,000

$50,000

With a 10% reserve requirement ratio, a $100 deposit into New Bank means that the maximum amount New Bank could lend is $90 $110 $10 $100

$90

Which of the following statements are true? A bank's assets are its sources of funds. A bank's liabilities are its uses of funds. 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.

A bank's balance sheet shows that total assets equal total liabilities plus equity capital.

Which of the following statements most accurately describes the task of bank asset management? Banks seek to have the highest liquidity possible subject to earning a positive rate of return on their operations. Banks seek to prevent bank failures at all cost, since a failed bank earns no profit, liquidity needs supersede the desire for profits. Banks seek to acquire funds in the least costly way. Banks seek the highest returns possible subject to minimizing risk and making adequate provisions for liquidity.

Banks seek the highest returns possible subject to minimizing risk and making adequate provisions for liquidity.

In general, banks would preer to acquire funds quickly by _____ rather than _____. "calling in" loans; selling securities reducing loans; borrowing from the Fed reducing loans; selling securities borrowing from the Fed; reducing loans

Borrowing from the Fed; reducing loans

Which of the following are reported as liabilities on a bank's balance sheet? Checkable deposits Reserves Deposits with other banks Loans

Checkable deposits

Holding large amounts of bank capital helps prevent bank failures because it means that the bank has a higher income. it makes it easier to call in loans. it can be used to absorb the losses resulting from bad loans. it makes loans easier to sell.

It can be used to absorb the losses resulting from bad loans.

When a $10 check written on the FIrst National Bank of Chicago is deposited in an account at Citibank, then The liabilities of Citibank increase by $10 The reserves of the First National Bank increase by $10 The assets of Citibank fall by $10 The liabilities of the First National Bank increase by $10

The liabilities of Citibank increase by $10

Bank reserves include deposits at other banks and deposits at the Fed. deposits at the Fed and short-term treasury securities. vault cash and short-term Treasury securities. vault cash and deposits at the Fed.

Vault cash and deposits at the Fed.

Banks face the problem of _____ in loan markets because bad credit risks are the ones most likely to seek bank loans. moral suasion adverse selection moral hazard intentional fraud

adverse selection

All else the same, if a bank's liabilities are more sensitive to interest rate fluctuations than are its assets, then _____ in interest rates will _____ bank profits. a decline; reduce a decline; not affect an increase; reduce an increase; increase

an increase; reduce

When a lender refuses to make a loan, although borrowers are willing to pay for stated interest rate or even a higher rate, the bank is said to engage in coercive bargaining strategic holding out credit rationing collusive behavior

credit rationing

Assets Liabilities Rate-sensitive 20mil 50mil Fixed-rate 80mil 50mil If interest rates rise by 5% points, say from 10%-15%, bank profits (measured using gap analysis) will decline by 1.5 million decline by 2.5 million decline by 0.5 million increase by 1.5 million

decline by 1.5 million

Bank loans from the Federal Reserve are called _____ and represent a _____ of funds. fed funds; source discount loans; use fed funds; use discount loans; source

discount loans; source

As the costs associated with deposit outflows _____, the banks willingness to hold excess reserves will _____. increase; increase increase; decrease decrease; increase decrease; not be affected

increase; increase

when a new depositor opens a checking account at the First National Bank, the bank's assets _____ and its liabilities _____. decrease; decrease increase; increase increase; decrease decrease; increase

increase; increase

A bank is insolvent when liabilities > assets assets increase in value capital > liabilities assets > liabilities

liabilities > assets

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. liability; asset asset; liability liability; liability asset; asset

liability; asset

When Jane Brown writes a$100 check to her nephew, and he cashes the check, Ms. Brown's bank _____ assets of $100 and _____ liabilities of $100. gains; gains loses; loses loses; gains gains; loses

loses; loses

Because borrowers, once they have a loan, are more likely to invest in high-risk investment projects, banks face the: adverse selection problem lemon problem adverse credit risk problem moral hazard problem

moral hazard problem

Bank capital has both benefits and costs for the bank owners. Higher bank capital _____ the likelihood of bankruptcy, but higher bank capital _____ the return on equity for a given return on assets. increases; reduces reduces; increases increases; increases reduces; reduces

reduces; reduces

The amount of checkable deposits that banks are required by regulation to hold are the excess reserves total reserves required reserves vault cash

required reserves

Net profit after taxes per dollar of equity capital is a basic measure of bank profitability called return on assets return on investments return on capital return on equity

return on equity

If, after a deposit outflow, a bank needs an additional #3 million to meet its reserve requirements, the bank can reduce deposits by $3 million increase loans by $3million sell $3 million of securities repay its discount loans from the Fed

sell $3 million of securities

In general, banks make profits by selling _____ liabilities and buying _____ assets. short-term; longer-term risky; risk-free long-term; shorter-term illiquid; liquid

short-term; longer-term