Ch. 9 Money and Banking

If, after a deposit outflow, a bank has a reserve deficiency of $ 3 million, it can meet its reserve requirements by 1) selling $3 million of securities. 2) repaying its discount loans from the Fed. 3) increasing loans by $3 million. 4) reducing deposits by $3 million.

1) selling $3 million of securities.

Because of an expected rise in interest rates in the future, a banker will likely 1) buy short-term rather than long-term bonds. 2) make either short or long-term loans; expectations of future interest rates are irrelevant. 3) make long-term rather than short-term loans. 4) buy long-term rather than short-term bonds.

1) buy short-term rather than long-term bonds.

The share of checkable deposits in total bank liabilities has 1) shrunk over time. 2) expanded dramatically over time. 3) remained virtually unchanged since 1960. 4) expanded moderately over time.

1) shrunk over time.

In the absence of regulation, banks would probably hold 1) too little capital. 2) too much capital, reducing the profitability of banks. 3) too much capital, making it more difficult to obtain loans. 4) too much capital, reducing the efficiency of the payments system.

1) too little capital.

Which of the following statements are true? 1) A bank's liabilities are its uses of funds. 2) A bank's balance sheet shows that total assets equal total liabilities plus equity capital. 3) A bank's assets are its sources of funds. 4) A bank's balance sheet indicates whether or not the bank is profitable.

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

Which of the following statements is false? 1) A bank's assets are its uses of funds. 2) Bank capital is recorded as an asset on the bank balance sheet. 3) The bank's assets provide the bank with income. 4) A bank issues liabilities to acquire funds.

2) Bank capital is recorded as an asset on the bank balance sheet.

Which of the following statements most accurately describes the task of bank asset management? 1) Banks seek to have the highest liquidity possible subject to earning a positive rate of return on their operations. 2) Banks seek the highest returns possible subject to minimizing risk and making adequate provisions for liquidity. 3) Banks seek to acquire funds in the least costly way. 4) Banks seek to prevent bank failure at all cost; since a failed bank earns no profit, liquidity needs supersede the desire for profits.

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

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 1) coercive bargaining. 2) credit rationing. 3) strategic holding out. 4) collusive behavior.

2) credit rationing.

The difference of rate-sensitive liabilities and rate-sensitive assets is known as the 1) interest-sensitivity index. 2) gap. 3) rate-risk index. 4) duration.

2) gap.

As the costs associated with deposit outflows ________, the banks willingness to hold excess reserves will ________. 1) decrease; increase 2) increase; increase 3) increase; decrease 4) decrease; not be affected

2) increase; increase

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 1) purchase the bank's CDs. 2) keep compensating balances in a checking account at the bank. 3) place a bank officer on their board of directors. 4) place a corporate officer on the bank's board of directors.

2) keep compensating balances in a checking account at the bank.

If a banker expects interest rates to fall in the future, her best strategy for the present is 1) to increase the duration of the bank's liabilities. 2) to increase the duration of the bank's assets. 3) to sell long-term certificates of deposit. 4) to buy short-term bonds.

2) to increase the duration of the bank's assets.

If a bank has $100,000 of checkable deposits, a required reserve ratio of 20 percent, and it holds $40,000 in reserves, then the maximum deposit outflow it can sustain without altering its balance sheet is 1) $30,000. 2) $10,000. 3) $25,000. 4) $20,000.

3) $25,000.

Because of their ________ liquidity, ________ U.S. government securities are called secondary reserves. 1) low; long-term 2) low; short-term 3) high; short-term 4) high; long-term

3) high; short-term

Net profit after taxes per dollar of equity capital is a basic measure of bank profitability called 1) return on investment. 2) return on assets. 3) return on equity. 4) return on capital.

3) return on equity.

When a $10 check written on the First National Bank of Chicago is deposited in an account at Citibank, then 1) the liabilities of the First National Bank increase by $10. 2) the assets of Citibank fall by $10. 3) the liabilities of Citibank increase by $10. 4) the reserves of the First National Bank increase by $ 10.

3) the liabilities of Citibank increase by $10.

Bank reserves include 1) deposits at other banks and deposits at the Fed. 2) deposits at the Fed and short-term treasury securities. 3) vault cash and deposits at the Fed. 4) vault cash and short-term Treasury securities.

3) vault cash and deposits at the Fed.

Which of the following are reported as liabilities on a bank's balance sheet? 1) Reserves 2) Deposits with other banks 3) Loans 4) Checkable deposits

4) Checkable deposits

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. 1) a decline; not affect 2) an increase; increase 3) a decline; reduce 4) an increase; reduce

4) an increase; reduce

Holding large amounts of bank capital helps prevent bank failures because 1) it makes loans easier to sell. 2) it means that the bank has a higher income. 3) it makes it easier to call in loans. 4) it can be used to absorb the losses resulting from a deposit outflow.

4) it can be used to absorb the losses resulting from a deposit outflow.

Banks earn profits by selling ________ with attractive combinations of liquidity, risk, and return, and using the proceeds to buy ________ with a different set of characteristics. 1) securities; deposits 2) loans; deposits 3) assets; liabilities 4) liabilities; assets

4) liabilities; assets

Long-term customer relationships ________ the cost of information collection and make it easier to ________ credit risks. 1) reduce; increase 2) increase; increase 3) increase; screen 4) reduce; screen

4) reduce; screen