Homework #4 (Econ)
If a bank has $1000 in deposits and the required reserve ratio is 10%, then the amount required as the bank's reserves is $____.
$100 1000 X .10 = 100
A bank has $50,000 of checkable deposits and a required reserve ratio of 10 percent. The bank currently holds $45,000 in reserves. How much of these reserves are excess reserves?
$40,000 Excess Reserves= reserves currently held- required reserves 50,000 (.10)= 5,000 45,000-5,000= $40,000
Suppose that a bank's balance sheet consists of the following: On the liability side it has $93 of deposits and $7 of capital, while on the asset side it has $10 of reserves and $90 of loans. This bank can then sustain $___ of bad loans before it becomes solvent.
$7
Suppose $10,000 is deposited at a bank. The required reserve ratio is 25 percent, and the bank chooses not to hold any excess reserves but makes loans instead. What are the bank's total reserves?
10,000 (.25) = $2,500
Why does a financial crisis ultimately cause a substantial reduction in economic activity? A. The resulting credit crash severely reduces investment for productive activities. B. The financial crisis causes a fiscal deficit. C. The government responds to the crisis with excessive regulation. D. Only corrupt bankers survive the crisis.
A.
Defaults: A. occur when a borrower cannot make his loan payments. B. arise when banks borrow money from the Federal Reserve. C. are loans made to credit-worthy borrowers. D. are prevented by government insurance available to all banks.
A.
How does an unanticipated decline in the price level cause a drop in lending? A. A decline in the price level raises the real value of borrowing firms' liabilities while lowering the firms' real net worth B. A decline in the price level lowers the nominal value of loan contracts that have already been made C. A decline in the price level reduces the moral hazard associated with borrowing firms D. A decline in the price level does not affect lending
A. An unanticipated decline in the price level raises the value of borrowing firms' liabilities in real terms, which causes a decrease in the firms' net worth. This increases the adverse selection and moral hazard problems facing lenders, which causes a drop in lending.
Required Reserves are a fixed percentage of a bank's
A. Assets B. Liabilties C. Checkable Deposits D. Capital E. Loans Answer: C
Transformation of assets can be accomplished by:
A. Borrowing and lending only for the short term B. Borrowing and lending only for the long term C. Borrowing long and lending short D. Borrowing short and lending long D.
The sum of a bank's valut cash plus its deposits at the Fed is the bank's
A. Cash Items in the process of collection B. Reserves C. Federal Funds D. Capital E. Excess Reserves Answer: B
If a bank experiences a deposit outflow of $50 million with a required reserve ratio on deposits of 10%, which balance sheet LOADING... would the bank rather have initially: Balance Sheet A or Balance Sheet B? Why? Sheet A Assets: Reserves $75 million Loans: $525 million Liabilities: Deposits $500 million Bank Capital $100 million Sheet B Assets: Reserves $100 million Loans $500 million Liabilities: Deposits $500 million Bank Capital $100 million A. Since acquiring reserves is nearly costless, Balance Sheet A is more desirable because it can take advantage of holding more income-producing assets until the deposit outflow. B. Balance Sheet B because the excess reserves are adequate to cover the deposit outflow without the bank needing to alter its balance sheet. C. Balance Sheet A because the excess reserves are adequate to cover the deposit outflow without the bank needing to alter its balance sheet. Moreover, this balance sheet has more income-producing assets. D. Since acquiring reserves is nearly costless, Balance Sheet B is more desirable because it can take advantage of holding more income-producing assets until the deposit outflow.
Answer: B
Which of the following is not true regarding how banks manage their assets? Banks seek assets that A. Provide diversification B. have no default risk C. are liquid D. generate high returns
Answer: B
Why is being nosy a desirable trait for a banker? A. A banker has to screen out good credit risks from bad credit risks B. A banker determines credit risk by learning as much as possible about potential borrowers C. To reduce moral hazard, a banker must continually monitor borrowers to ensure that they are complying with restrictive loan coveants D. All of the above are correct
Answer: D
Using the T-accounts of the First National Bank and the Second National Bank, describe what happens when Jane Brown writes a check for $100100 on her account at the First National Bank to pay her friend Joe Green, who in turn deposits the check in his account at the Second National Bank. T-account for the First National Bank:
Assets Reserves $-100 Liabilities Checkable Deposits $-100
Using the T-accounts of the First National Bank and the Second National Bank, describe what happens when Jane Brown writes a check for $100100 on her account at the First National Bank to pay her friend Joe Green, who in turn deposits the check in his account at the Second National Bank. T-account for the Second National Bank:
Assets Reserves $100 Liabilities Checkable Deposits $100
What happens to reserves at the First National Bank if one person withdraws $900900 of cash and another person deposits $200200 of cash? Use a T-account to explain your answer. The T-account for First National Bank is:
Assets Reserves -$700 Liabilities Checkable Deposits -$700
A financial crisis occurs when: A. there are predictable market disruptions. B. a particularly large disruption to information flows occurs in financial markets. C. capital is allocated to its most productive uses. D. financial frictions decrease sharply.
B
A well-functioning financial system: A. acts as a barrier to efficient allocation of capital. B. solves asymmetric information problems. C. creates unpredictable market disruptions. D. causes financial frictions to increase in an economy
B
Which of the following is not a factor that commonly initiates financial crises? A. The mismanagement of financial liberalization and innovation. B. Increases in government regulations that make it harder to manage the risks of financial assets. C. The increased uncertainty that occurs when a major financial institution fails. D. Asset-price booms and busts.
B
Why do credit spreads rise during financial crises? A. Credit spreads rise because the government becomes the only institution that is able to lend money to borrowers. B. Credit spreads rise because asymmetric information problems increase, making it more difficult to judge the risk of potential borrowers. C. Credit spreads rise because depositors with productive investment opportunities withdraw their funds from banks, which creates an incentive to lend to borrowers with riskier investment opportunities. D. None of the above are correct.
B
Collateral requirements lessen the consequences of ________ because the collateral reduces the lender's losses in the case of a loan default and it reduces ________ because the borrower has more to lose from a default. A. Moral Hazard; Adverse Selection B. Adverse Selection; Moral Hazard C. Adverse Selection; Diversification D. Diversification; Moral Hazard
B.
Rising defaults from subprime mortgages led to a weakening of balance sheets of banks and other financial institutions. With less capital available, these financial institutions sold off assets and limited the availability of credit to households and businesses. This process is referred to as: A. a credit boom. B. deleveraging. C. financial engineering. D. securitization.
B.
When financial intermediaries deleverage, firms cannot fund investment opportunities resulting in A. an economic boom. B. a contraction of economic activity. C. a call for government regulation. D. an increased opportunity for growth.
B.
In order to reduce the ________ problem in loan markets, banks often insist on collateral from potential borrowers. A. Principal- agent B. Asymmetric Information C. Moral Hazard D. Adverse lending
C
Regardless of the original source of the financial crisis, all credit booms end in a credit crash because of A. massive government deficits. B. collateralized debt obligations. C. an increase in adverse selection and moral hazard in the loan market. D. corruption in the mortgage industry.
C
What is a credit spread? A. The difference between the interest rate on corporate bonds with different maturities. B. The difference between a borrower's credit score and the score of the most credit-worthy borrower. C. The difference between interest rates on loans to households and businesses and interest rates on completely safe assets such as U.S. Treasury bonds. D. The difference between the net worth of a borrower and the amount of the loan the borrower would like to secure
C
When asset prices rise above their fundamental economic values, a(n) ________ occurs. A. decrease in moral hazard B. decline in lending C. asset−price bubble D. liability war
C
Assets of value promised to the lender as compensation if the borrower defaults are called: A. Deductibles B. Contingencies C. Collateral D. Restrictive Covenants
C.
The bank you own has the following balance sheet: Assets: Reserves $ 75 million Loans $ 525 million Liabilities: Deposits $500 million Bank capital $100 million If the bank suffers a deposit outflow of $50 million with a required reserve ratio on deposits of 10%, what actions can you take to keep your bank from failing? A. You can call in or sell off loans B. You can borrow reserves in the federal funds market C. You can go to the discount window D. All the above
D
How can a bursting of an asset-price bubble in the stock market trigger a financial crisis? A. A reduction in asset prices causes a serious deterioration in borrowing firms' balance sheets B. A reduction in asset prices causes lenders to become more cautious and reduce the amount of loans they make C. A reduction in asset prices causes borrowing firms to have less to lose so they are willing to take on additional risk D. All of the above are correct
D.