Exam 3

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

$90

Which of the following would not be a way to increase the return on equity?

-pay higher dividends -buy back bank stock -SELL MORE BANK STOCK

Which of the following are reported as assets on a bank's balance sheet?

-savings capital -borrowings -bank capital -RESERVES

Which of the following statements are true?

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

______ in the domestic interest rate causes the demand for domestic assets to shift to the right and the domestic currency to _______ everything else held constant.

An increase; appreciate

Of the following, which would be the first choice for a bank facing a reserve deficiency?

BORROW FROM OTHER BANKS -Borrow from the Fed -Call in loans -Sell securities

Which of the following are reported as liabilities on a banks balance sheet?

CHECKABLE DEPOSITS -reserves -loans -deposits with other banks

As the costs associated with deposit outflows ______, the banks willingness to hold excess reserves will ________.

Increase, increase

In the United States, the government agency requiring that firms that sell securities in public markets adhere to standard accounting principles and disclose information about their sales, assets, and earnings is the

Securities and Exchange Commission

A bank failure occurs whenever

a bank cannot satisfy its obligations to pay its depositors and have enough reserves to meet its reserve requirements

If bad credit risks are the ones who most actively seek loans then financial intermediaries face the problem of

adverse selection

The problem created by asymmetric information before the transaction occurs is called _______, while the problem created after the transaction occurs is called ______.

adverse selection; moral hazard

Managers _____ may act in their own interest rather than in the interest of the stockholder-owners ______ because the managers have less incentive to maximize profits than the stockholder- owners do.

agents;principals

When the value of the British pound changes from $1.25 to $1.50, the pound has _________ and the US dollar has _________.

appreciated; depreciated

A borrower who takes out a loan usually has better information about the potential returns and risk of the investment projects he plans to undertake than does the lender. This inequality of information is called

asymmetric information

The "lemons problem" exists because of

asymmetric information

Holding all else constant, when a bank receives the funds for a deposited check,

cash items in the process of collection fall by the amount of the check.

If you default on your auto loan, your car will be repossessed because it has been pledged as ______ for the loan

collateral

A decrease in the domestic interest rate causes the demand for domestic assets to ______ and the domestic currency to ________, everything else held constant.

decrease; depreciate

As the relative expected return on dollar assets increases, foreigners will want to hold more ____ assets and less _____ assets, everything else held constant.

dollar; foreign

When Americans or foreigners expect the return on dollar assets to be high relative to the return on foreign assets, there is a ______ demand for dollar assets and correspondingly ______ demand for foreign assets.

higher;lower

Suppose that the Federal Reserve conducts an open market sale. Everything else held constant, this will cause the demand for U.S assets to _______ and the US dollar will_______.

increase; appreciate

An increase in the foreign interest rate causes the demand for domestic assets to shift to the _____ and the domestic currency to _______ , everything else held constant.

left; depreciate

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 ______ for the borrowing bank and a _______ for the lending bank.

liability; asset

Bankers' concerns regarding the optimal mix of excess reserves, secondary reserves, borrowings from the Fed, and borrowings from other banks to deal with deposit outcomes is an example of

liquidity management

Bank's make their profits primarily by issuing

loans

The most important category of assets on a bank's balance sheet is

loans

American businesses get their external funds primarily from

loans from nonbank financial intermediaries

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.

loses; loses

The problem faced by the lender that the borrower may take on additional risk after receiving the loan is called

moral hazard

The current structure of financial markets can be best understood as the result of attempts by financial market participants to

reduce transaction costs

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.

securities; deposits

If, after a deposit outflow, a bank needs an additional $3 million to meet its reserve requirements, the bank can

sell $3 million of securities

When $1 million is deposited at a bank, the required reserve ratio is 20 percent, and the bank chooses not to make any loans but to hold excess reserves instead, then, in the bank's final balance sheet,

the assets at the bank increase by $1 million.

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

When a $10 check written on the First National Bank of Chicago is deposited in an account at Citibank, then

the liabilities of the First National Bank decrease by $10.

Bank capital is equal to _______ minus _____.

total assets; total liabilities