Econ130 Assignment 3

A serious consequence of a financial crisis is a contraction in economic activity. financial engineering. an increase in asset prices. financial globalization.

A

All of the following are nontransaction deposits EXCEPT checkable deposits. small-denomination time deposits. savings accounts. certificates of deposit.

A

Asset transformation can be described as a) borrowing and lending for the long term. b) borrowing long and lending short. c) borrowing short and lending long. d) borrowing and lending only for the short term

A

If a bank has $10 million of checkable deposits, a required reserve ratio of 10 percent, and it holds $2 million in reserves, then it will not have enough reserves to support a deposit outflow of $1.2 million. $1.1 million. $1 million. $900,000.

A

________ are asymmetric information problems that act as a barrier to efficient allocation of capital. Financial frictions Credit imbalances Asset prices Financial derivative

A

A $100 deposit into my checking account at My Bank increases my checkable deposits by $100, and the bank's ________ by $100. securities reserves loans capital

B

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. reduces; increases reduces; reduces increases; increases increases; reduces

B

Bank capital is equal to ________ minus ________. total liabilities; total assets total assets; total liabilities total liabilities; total borrowings total assets; total reserves

B

Securitization is a process of asset transformation that involves a number of different financial institutions working together. These financial institutions are known collectively as the amalgamation. shadow banking system. transformers. movers and shakers.

B

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

B

A $5 million deposit outflow from a bank has the immediate effect of reducing deposits and loans by $5 million. reducing deposits and securities by $5 million. reducing deposits and reserves by $5 million. reducing deposits and capital by $5 million.

C

If a bank needs to acquire funds quickly to meet an unexpected deposit outflow, the bank could buy corporate bonds. increase loans. borrow from another bank in the federal funds market. buy U.S. Treasury bill

C

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

C

Which of the following are reported as liabilities on a bank's balance sheet? reserves deposits with other banks checkable deposits consumer loans

C

________ is a process of bundling together smaller loans (like mortgages) into standard debt securities. Debt deflation Distribution Securitization Origination

C

A financial crisis occurs when an increase in asymmetric information from a disruption in the financial system a) reduces uncertainty in the economy and increases market efficiency. b) allows for a more efficient use of funds. c) increases economic activity. d) causes severe adverse selection and moral hazard problems that make financial markets incapable of channeling funds efficiently.

D

A substantial decrease in the aggregate price level that reduces firms' net worth may stall a recovery from a recession. This process is called insolvency. illiquidity. moral hazard. debt deflation.

D

Banks hold excess and secondary reserves to satisfy margin requirements. achieve higher earnings than they can with loans. reduce the interest-rate risk problem. provide for unexpected deposit outflows

D

The amount of assets per dollar of equity capital is called the asset ratio. equity ratio. asset multiplier. equity multiplier.

D

A bank with insufficient reserves can increase its reserves by calling in loans. lending federal funds. buying municipal bonds. buying short-term Treasury securities

a

A deposit outflow results in equal reductions in a) assets and liabilities. b) reserves and capital. c) loans and reserves. d) assets and capital.

a

When you deposit a $50 bill in the Security Pacific National Bank a) its assets increase by $50. b) its liabilities decrease by $50. c) its reserves decrease by $50. d) its cash items in the process of collection increase by $50.

a

Adjustable rate mortgages a) allow borrowers to avoid paying interest on portions of their mortgage loans. b) generally have higher initial interest rates than conventional fixed-rate mortgages. c) benefit homeowners when interest rates rise. d) reduce the interest-rate risk for financial institutions.

b

Banks hold capital because it increases the likelihood of bankruptcy. they are required to by regulatory authorities. higher capital increases the return on equity. higher capital increases the returns to the owners.

b

A bank failure occurs whenever a) bank suffers a large deposit outflow. b) a bank refuses to make new loans. c) a bank cannot satisfy its obligations to pay its depositors and other creditors. d)a bank has to call in a large volume of loans.

c

Both ________ and ________ were financial innovations that occurred because of interest rate volatility. a) sweep accounts; financial derivatives b) adjustable-rate mortgages; commercial paper c) adjustable-rate mortgages; financial derivatives d) sweep accounts; commercial pape

c

Financial crises in advanced economies might start from a debt deflation. currency mismatch. mismanagement of financial innovations. currency crisis.

c

________ is creating a marketable capital market instrument by bundling a portfolio of mortgage or auto loans. Computerization Arbitrage Securitization Diversification

c

________ is the process of researching and developing profitable new products and services by financial institutions. Customer manipulation Customer engineering Financial engineering Financial manipulation

c

A firm issuing credit cards earns income from a)sales of the card in foreign countries. b)payments made to it by manufacturers of the products sold in stores on credit card purchases. c)subsidies from the local governments. d) loans it makes to credit card holders

d

An instrument developed to help investors and institutions hedge interest-rate risk is a)a credit card. b)a junk bond. c)a debit card. d)a financial derivative.

d

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; liability asset; liability asset; asset liability; asset

d

The goals of bank asset management include a) minimizing liquidity. b) lending at high interest rates regardless of risk. c) maximizing risk. d) purchasing securities with high returns and low risk.

d

The growth of the subprime mortgage market led to a) decreased demand for houses as the less credit-worthy borrowers could not obtain residential mortgages. b) a decrease in home ownership as investors chose other assets over housing. c) a decline in the housing industry because of higher default risk. d) increased demand for houses and helped fuel the boom in housing prices.

d

Which of the following are reported as assets on a bank's balance sheet? borrowings savings deposits bank capital reserves

d