Exam 2
10) When a $10 check written on the First National Bank of Chicago is deposited in an account at Citibank, then A) the liabilities of the First National Bank decrease by $10. B) the reserves of the First National Bank increase by $10. C) the liabilities of Citibank decrease by $10. D) the assets of Citibank decrease by $10.
A
12) 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) $100. C) $10. D) $110.
A
15) Of the following, which would be the last choice for a bank facing a reserve deficiency? A) Call in loans. B) Borrow from the Fed. C) Sell securities. D) Borrow from other banks.
A
19) 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) regulated hikes in bank capital requirements. C) falling interest rates that raised interest rate risk, causing banks to choose to hold more capital. D) increases in reserve requirements.
A
2) Which of the following are reported as liabilities on a bank's balance sheet? A) discount loans B) reserves C) U.S. Treasury securities D) real estate loans
A
28) When one party to a transaction has incentives to engage in activities detrimental to the other party, there exists a problem of A) moral hazard. B) split incentives. C) ex ante shirking. D) pre-contractual opportunism.
A
29) The government safety net creates ________ problem because risk-loving entrepreneurs might find banking an attractive industry. A) an adverse selection B) a moral hazard C) a lemons D) a revenue
A
30) Acquiring information on a bank's activities in order to determine a bank's risk is difficult for depositors and is another argument for government A) regulation. B) ownership. C) recall. D) forbearance.
A
34) Banks are required to file ________ usually quarterly that list information on the bank's assets and liabilities, income and dividends, and so forth. A) call reports B) balance reports C) regulatory sheets D) examiner updates
A
36) The S&L Crisis can be analyzed as a principal-agent problem. The agents in this case, the ________, did not have the same incentive to minimize cost to the economy as the principals, the ________. A) politicians/regulators; taxpayers B) taxpayers; politician/regulators C) taxpayers; bank managers D) bank managers; politicians/regulators
A
41) ________ is the process of researching and developing profitable new products and services by financial institutions. A) Financial engineering B) Financial manipulation C) Customer manipulation D) Customer engineering
A
45) The process of transforming otherwise illiquid financial assets into marketable capital market instruments is known as A) securitization. B) internationalization. C) arbitrage. D) program trading.
A
47) Which of the following is NOT part of the shadow banking system? A) the transformer B) the servicer C) the bundler D) the distributor
A
49) Prior to 2008, bank managers looked on reserve requirements A) as a tax on deposits. B) as a subsidy on deposits. C) as a subsidy on loans. D) as a tax on loans.
A
5) Bank capital is equal to ________ minus ________. A) total assets; total liabilities B) total liabilities; total assets C) total assets; total reserves D) total liabilities; total borrowings
A
51) Money market mutual funds A) function as interest-earning checking accounts. B) are legally deposits. C) are subject to reserve requirements. D) have an interest-rate ceiling.
A
54) One factor contributing to the decline in cost advantages that banks once had is the A) decline in the importance of checkable deposits from over 60 percent of banks' liabilities to 2 percent today. B) decline in the importance of savings deposits from over 60 percent of banks' liabilities to under 15 percent today. C) decline in the importance of checkable deposits from over 40 percent of banks' liabilities to 15 percent today. D) decline in the importance of savings deposits from over 40 percent of banks' liabilities to under 20 percent today.
A
56) The McFadden Act of 1927 A) effectively prohibited banks from branching across state lines. B) required that banks maintain bank capital equal to at least 6 percent of their assets. C) effectively required that banks maintain a correspondent relationship with large money center banks. D) separated the commercial banks and investment banks.
A
59) As a result of the global financial crisis several of the large, free-standing investment banking firms chose to become bank holding companies. This means that they will now be regulated by A) the Federal Reserve. B) the FDIC. C) the state banking authorities. D) the Treasury.
A
61) The main center of the Eurodollar market is A) London. B) Basel. C) Paris. D) New York.
A
74) Critics of the current system of Fed independence contend that A) the current system is undemocratic. B) voters have too much say about monetary policy. C) the president has too much control over monetary policy on a day-to-day basis. D) the Board of Governors is held responsible for policy missteps.
A
78) Total reserves minus bank deposits with the Fed equals A) vault cash. B) excess reserves. C) required reserves. D) currency in circulation.
A
79) 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
A
82) High-powered money minus currency in circulation equals A) reserves. B) the borrowed base. C) the nonborrowed base. D) discount loans.
A
83) When the Federal Reserve purchases a government bond from a primary dealer, reserves in the banking system ________ and the monetary base ________, everything else held constant. A) increase; increases B) increase; decreases C) decrease; increases D) decrease; decreases
A
89) A simple deposit multiplier equal to one implies a required reserve ratio equal to A) 100 percent. B) 50 percent. C) 25 percent. D) 0 percent.
A
95) A bank has no excess reserves and demand deposit liabilities of $100,000 when the required reserve ratio is 20 percent. If the reserve ratio is raised to 25 percent, the bank's excess reserves will now be A) -$5,000. B) -$1,000. C) $1,000. D) $5,000.
A
98) The Fed can exert more precise control over ________ than it can over ________. A) high-powered money; reserves B) high-powered money; the monetary base C) the monetary base; high-powered money D) reserves; high-powered money
A
100) If the required reserve ratio is 10 percent, currency in circulation is $400 billion, checkable deposits are $800 billion, and excess reserves total $0.8 billion, then the money supply is ________ billion. A) $8000 B) $1200 C) $1200.8 D) $8400
B
11) When $1 million is deposited at a bank, the required reserve ratio is 20 percent, and the bank chooses not to hold any excess reserves but makes loans instead, then, in the bank's final balance sheet A) the assets at the bank increase by $800,000. B) the liabilities of the bank increase by $1,000,000. C) the liabilities of the bank increase by $800,000. D) reserves increase by $160,000.
B
13) 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 A) $30,000. B) $25,000. C) $20,000. D) $10,000.
B
18) Banks that actively manage liabilities will most likely meet a reserve shortfall by A) calling in loans. B) borrowing federal funds. C) selling municipal bonds. D) seeking new deposits.
B
22) Credit risk management tools include A) deductibles. B) collateral. C) interest rate swaps. D) duration analysis.
B
23) 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) an increase; increase B) an increase; reduce C) a decline; reduce D) a decline; not affect
B
24) If a bank has ________ rate-sensitive assets than liabilities, a ________ in interest rates will reduce bank profits, while a ________ in interest rates will raise bank profits. A) more; rise; decline B) more; decline; rise C) fewer; decline; decline D) fewer; rise; rise
B
25) If a bank has $50 million in rate-sensitive assets and $20 million in rate-sensitive liabilities then A) an increase in interest rates will reduce bank profits. B) a decrease in interest rates will reduce bank profits. C) interest rate changes will not impact bank profits. D) a decrease in interest rates will increase bank profits.
B
26) 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.
B
31) A well-capitalized financial institution has ________ to lose if it fails and thus is ________ likely to pursue risky activities. A) more; more B) more; less C) less; more D) less; less
B
33) Banks will be examined at least once a year and given a CAMELS rating by examiners. The L stands for A) liabilities. B) liquidity. C) loans. D) leverage.
B
35) Moral hazard and adverse selection problems increased in prominence in the 1980s A) as deregulation required savings and loans and mutual savings banks to be more cautious. B) following a burst of financial innovation in the 1970s and early 1980s that produced new financial instruments and markets, thereby widening the scope for risk taking. C) following a decrease in federal deposit insurance from $100,000 to $40,000. D) as interest rates were sharply decreased to bring down inflation.
B
38) A major controversy involving the banking industry in its early years was A) whether banks should both accept deposits and make loans or whether these functions should be separated into different institutions. B) whether the federal government or the states should charter banks. C) what percent of deposits banks should hold as fractional reserves. D) whether banks should be allowed to issue their own bank notes.
B
39) Currency circulated by banks that could be redeemed for gold was called A) junk bonds. B) banknotes. C) gold bills. D) state money.
B
4) Bank loans from the Federal Reserve are called ________ and represent a ________ of funds. A) discount loans; use B) discount loans; source C) fed funds; use D) fed funds; source
B
40) The Glass-Steagall Act, before its repeal in 1999, prohibited commercial banks from A) issuing equity to finance bank expansion. B) engaging in underwriting and dealing of corporate securities. C) selling new issues of government securities. D) purchasing any debt securities.
B
42) Rising interest-rate risk A) increased the cost of financial innovation. B) increased the demand for financial innovation. C) reduced the cost of financial innovation. D) reduced the demand for financial innovation.
B
44) One factor contributing to the rapid growth of the commercial paper market since 1970 is A) the fact that commercial paper has no default risk. B) improved information technology making it easier to screen credit risks. C) government regulation. D) FDIC insurance for commercial paper.
B
50) Prior to 1980, the Fed set an interest rate ________, a maximum limit, on the interest rate that could be paid on time deposits. A) floor B) ceiling C) wall D) window
B
52) Financial innovation has caused A) banks to suffer declines in their cost advantages in acquiring funds, although it has not caused a decline in income advantages. B) banks to suffer a simultaneous decline of cost and income advantages. C) banks to suffer declines in their income advantages in acquiring funds, although it has not caused a decline in cost advantages. D) banks to achieve competitive advantages in both costs and income.
B
55) The most important developments that reduced banks' income advantages include A) the increase in off-balance sheet activities. B) the growth of securitization. C) the elimination of Regulation Q ceilings. D) the competition from money market mutual funds.
B
57) The ability to use one resource to provide different products and services is A) economies of scale. B) economies of scope. C) diversification. D) vertical integration.
B
62) Reasons for holding Eurodollars include A) the fact that Eurodollar deposits are insured by the FDIC. B) the fact that dollars are widely used to conduct international transactions. C) the fact that minimum transaction sizes are very low, making Eurodollars an attractive savings instrument for consumers. D) the fact that Eurodollar deposits are heavily regulated.
B
63) Which of the following is an entity of the Federal Reserve System? A) the U.S. Treasury Secretary B) the FOMC C) the Comptroller of the Currency D) the FDIC
B
65) The Federal Reserve Bank of ________ houses the open market desk. A) Boston B) New York C) Chicago D) San Francisco
B
66) An important function of the regional Federal Reserve Banks is A) setting reserve requirements. B) clearing checks. C) determining monetary policy. D) setting margin requirements.
B
67) There are ________ members of the Board of Governors of the Federal Reserve System. A) 5 B) 7 C) 12 D) 19
B
69) Which of the followings is NOT a current duty of the Board of Governors of the Federal Reserve System? A) setting margin requirements, the fraction of the purchase price of the securities that has to be paid for with cash B) setting the maximum interest rates payable on certain types of time deposits under Regulation Q C) approving the discount rate "established" by the Federal Reserve banks D) voting on the conduct of open market operations
B
73) The political business cycle refers to the phenomenon that just before elections, politicians enact ________ policies. After the elections, the bad effects of these policies (for example, ________ ) have to be counteracted with ________ policies. A) expansionary; higher unemployment; contractionary B) expansionary; a higher inflation rate; contractionary C) contractionary; higher unemployment; expansionary D) contractionary; a higher inflation rate; expansionary
B
75) Of the three players in the money supply process, most observers agree that the most important player is A) the United States Treasury. B) the Federal Reserve System. C) the FDIC. D) the Office of Thrift Supervision.
B
76) The monetary liabilities of the Federal Reserve include A) securities and loans to financial institutions. B) currency in circulation and reserves. C) securities and reserves. D) currency in circulation and loans to financial institutions.
B
8) In general, banks make profits by selling ________ liabilities and buying ________ assets. A) long-term; shorter-term B) short-term; longer-term C) illiquid; liquid D) risky; risk-free
B
81) When banks borrow money from the Federal Reserve, these funds are called A) federal funds. B) discount loans. C) federal loans. D) Treasury funds.
B
85) A decrease in ________ leads to an equal ________ in the monetary base in the short run. A) float; increase B) float; decrease C) Treasury deposits at the Fed; decrease D) discount loans; increase
B
87) In the simple deposit expansion model, if the Fed purchases $100 worth of bonds from a bank that previously had no excess reserves, the bank can now increase its loans by A) $10. B) $100. C) $100 times the reciprocal of the required reserve ratio. D) $100 times the required reserve ratio.
B
88) If reserves in the banking system increase by $100, then checkable deposits will increase by $1000 in the simple model of deposit creation when the required reserve ratio is A) 0.01. B) 0.10. C) 0.05. D) 0.20.
B
9) When you deposit a $50 bill in the Security Pacific National Bank A) its liabilities decrease by $50. B) its assets increase by $50. C) its reserves decrease by $50. D) its cash items in the process of collection increase by $50.
B
94) If a bank has excess reserves of $7,000 and demand deposit liabilities of $100,000, and if the reserve requirement is 10 percent, then the bank has actual reserves of A) $14,000. B) $17,000. C) $22,000. D) $27,000.
B
97) Everything else held constant, a decrease in holdings of excess reserves will mean A) a decrease in the money supply. B) an increase in the money supply. C) a decrease in checkable deposits. D) an increase in discount loans.
B
14) If, after a deposit outflow, a bank needs an additional $3 million to meet its reserve requirements, the bank can A) reduce deposits by $3 million. B) increase loans by $3 million. C) sell $3 million of securities. D) repay its discount loans from the Fed.
C
16) ________ may antagonize customers and thus can be a very costly way of acquiring funds to meet an unexpected deposit outflow. A) Selling securities B) Selling loans C) Calling in loans D) Selling negotiable CDs
C
20) If a bank needs to raise the amount of capital relative to assets, a bank manager might choose to A) buy back bank stock. B) pay higher dividends. C) shrink the size of the bank. D) sell securities the bank owns and put the funds into the reserve account.
C
27) The fact that banks operate on a "sequential service constraint" means that A) all depositors share equally in the bank's funds during a crisis. B) depositors arriving last are just as likely to receive their funds as those arriving first. C) depositors arriving first have the best chance of withdrawing their funds. D) banks randomly select the depositors who will receive all of their funds.
C
3) Which of the following are transaction deposits? A) savings accounts B) small-denomination time deposits C) checkable deposits D) certificates of deposit
C
32) The leverage ratio is the ratio of a bank's A) assets divided by its liabilities. B) income divided by its assets. C) capital divided by its total assets. D) capital divided by its total liabilities.
C
43) A debit card differs from a credit card in that A) a debit card is a loan while for a credit card purchase, payment is made immediately. B) a debit card is a long-term loan while a credit card is a short-term loan. C) a credit card is a loan while for a debit card purchase, payment is made immediately. D) a credit card is a long-term loan while a debit card is a short-term loan.
C
46) The driving force behind the securitization of mortgages and automobile loans has been A) the rising regulatory constraints on substitute financial instruments. B) the desire of mortgage and auto lenders to exit this field of lending. C) the improvement in information technology. D) the relaxation of regulatory restrictions on credit card operations.
C
48) According to Edward Kane, because the banking industry is one of the most ________ industries in America, it is an industry in which ________ is especially likely to occur. A) competitive; loophole mining B) competitive; innovation C) regulated; loophole mining D) regulated; innovation
C
58) Nationwide banking might reduce bank failures due to A) reduced competition. B) reduced lending to small businesses. C) diversification of loan portfolios across state lines. D) elimination of community banks.
C
6) Because of their ________ liquidity, ________ U.S. government securities are called secondary reserves. A) low; short-term B) low; long-term C) high; short-term D) high; long-term
C
60) What country is given credit for the birth of the Eurodollar market? A) the United States B) England C) the Soviet Union D) Japan
C
7) The most important category of assets on a bank's balance sheet is A) other assets. B) securities. C) loans. D) cash items in the process of collection.
C
70) The Federal Reserve entity that makes decisions regarding the conduct of open market operations is the A) Board of Governors. B) chairman of the Board of Governors. C) Federal Open Market Committee. D) Open Market Advisory Council
C
72) Although reserve requirements and the discount rate are not actually set by the ________, decisions concerning these policy tools are effectively made there. A) Federal Reserve Bank of New York B) Board of Governors C) Federal Open Market Committee D) Federal Reserve Banks
C
80) Suppose that from a new checkable deposit, First National Bank holds two million dollars in vault cash, nine million dollars in excess reserves, and faces a required reserve ratio of ten percent. Given this information, we can say First National Bank has ________ million dollars on deposit with the Federal Reserve. A) one B) two C) eight D) ten
C
84) If the Fed decides to reduce bank reserves, it can A) purchase government bonds. B) extend discount loans to banks. C) sell government bonds. D) print more currency.
C
86) Subtracting borrowed reserves from the monetary base obtains A) reserves. B) high-powered money. C) the nonborrowed monetary base. D) the borrowed monetary base.
C
90) In the simple deposit expansion model, if the required reserve ratio is 20 percent and the Fed increases reserves by $100, checkable deposits can potentially expand by A) $100. B) $250. C) $500. D) $1,000.
C
93) If a bank has excess reserves of $15,000 and demand deposit liabilities of $80,000, and if the reserve requirement is 20 percent, then the bank has total reserves of A) $11,000. B) $21,000. C) $31,000. D) $41,000.
C
96) A ________ in market interest rates relative to the discount rate will cause discount borrowing to_______. A) fall; increase B) rise; decrease C) rise; increase D) fall; remain unchanged
C
1) Which of the following statements is FALSE? A) A bank's assets are its uses of funds. B) A bank issues liabilities to acquire funds. C) The bank's assets provide the bank with income. D) Bank capital is recorded as an asset on the bank balance sheet..
D
17) The goals of bank asset management include A) maximizing risk. B) minimizing liquidity. C) lending at high interest rates regardless of risk. D) purchasing securities with high returns and low risk.
D
21) From the standpoint of ________, specialization in lending is surprising but makes perfect sense when one considers the ________ problem. A) moral hazard; diversification B) diversification; moral hazard C) adverse selection; diversification D) diversification; adverse selection
D
37) All of the following are common to banking crises in different countries EXCEPT A) financial liberalization or innovation. B) weak bank regulatory systems. C) a government safety net. D) a dual banking system.
D
53) The experience of disintermediation in the banking industry illustrates that A) more regulation of financial markets may avoid such problems in the future. B) banks are unable to remain competitive with other financial intermediaries. C) consumers no longer desire the services that banks provide. D) markets invent alternatives to costly regulations.
D
64) The nine directors of the Federal Reserve Banks are split into three categories: ________ are professional bankers, ________ are leaders from industry, and ________ are to represent the public interest and are not allowed to be officers, employees, or stockholders of banks. A) 5; 2; 2 B) 2; 5; 2 C) 4; 2; 3 D) 3; 3; 3
D
68) While the discount rate is "established" by the regional Federal Reserve Banks, in truth, the rate is determined by A) Congress. B) the president of the United States. C) the Senate. D) the Board of Governors.
D
71) The majority of members of the Federal Open Market Committee are A) Federal Reserve Bank presidents. B) members of the Federal Advisory Council. C) presidents of member banks. D) the seven members of the Board of Governors.
D
77) The sum of the Fed's monetary liabilities and the U.S. Treasury's monetary liabilities is called A) the money supply. B) currency in circulation. C) bank reserves. D) the monetary base.
D
91) If reserves in the banking system increase by $100, then checkable deposits will increase by $400 in the simple model of deposit creation when the required reserve ratio is A) 0.01. B) 0.10. C) 0.20. D) 0.25.
D
92) If a bank has excess reserves of $20,000 and demand deposit liabilities of $80,000, and if the reserve requirement is 20 percent, then the bank has total reserves of A) $16,000. B) $20,000. C) $26,000. D) $36,000.
D
99) If the Fed injects reserves into the banking system and they are held as excess reserves, then the money supply A) increases by only the initial increase in reserves. B) increases by only one-half the initial increase in reserves. C) increases by a multiple of the initial increase in reserves. D) does not change.
D
