Exam 2 ECO3223

10) 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 A) the assets at the bank increase by $1 million. B) the liabilities of the bank decrease by $1 million. C) reserves increase by $200,000. D) liabilities increase by $200,000.

A

12) Net profit after taxes per dollar of assets is a basic measure of bank profitability called A) return on assets. B) return on capital. C) return on equity. D) return on investment.

A

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

A

15) Examples of off-balance-sheet activities include A) trading activities. B) extending loans to depositors. C) borrowing from other banks. D) selling negotiable CDs.

A

22) 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

23) Recent research indicates that inflation performance (low inflation) has been found to be best in countries with A) the most independent central banks. B) political control of monetary policy. C) money financing of budget deficits. D) a policy of always keeping interest rates low.

A

26) Which of the following statements comparing the European System of Central Banks and the Federal Reserve System is TRUE? A) The budgets of the Federal Reserve Banks are controlled by the Board of Governors, while the National Central Banks control their own budgets and the budget of the European Central Bank. B) The European Central Bank has similar power over the National Central Banks when compared to the level of power the Board of Governors has over the Federal Reserve Banks. C) Just like the Federal Reserve System, monetary operations are centralized in the European System of Central Banks with the European Central Bank. D) None of the above.

A

3) If a bank has $200,000 of checkable deposits, a required reserve ratio of 25 percent, and it holds $80,000 in reserves, then the maximum deposit outflow it can sustain without altering its balance sheet is A) $50,000. B) $40,000. C) $30,000. D) $25,000.

A

30) 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 nine million dollars in excess 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

33) When the Federal Reserve purchases a government bond, 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

38) The ratio that relates the change in the money supply to a given change in the monetary base is called the A) money multiplier. B) required reserve ratio. C) deposit ratio. D) discount rate.

A

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

A

47) Since the Great Recession in the United States, reserves have been so abundant that the A) federal funds rate is not easily manipulated with open market operations. B) Fed cannot affect the federal funds rate. C) Fed prefers to target the discount rate. D) IOER (interest rate on excess reserves) is ineffective.

A

50) The discount rate provides a cap for the federal funds rate because A) a bank can always borrow from the Fed, so it should not borrow at a higher rate than the discount rate. B) banks do not like to borrow from the Fed. C) the interest rate on reserve balances is lower than the discount rate. D) none of the above.

A

53) The European equivalent of the U.S. market federal funds rate is called the A) overnight cash rate. B) target refinancing rate. C) European discount rate. D) overnight repurchase rate.

A

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

A

A bank has $40 million in rate-sensitive assets and $10 million in rate-sensitive liabilities. A change in interest rates from 10% to 15% will result in A) an increase in bank profits. B) a decrease in bank profits. C) no change in bank profits. D) an increase in the bank's fixed-rate assets.

A

A bank is insolvent when A) its liabilities exceed its assets. B) its assets exceed its liabilities. C) its capital exceeds its liabilities. D) its assets increase in value.

A

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

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 A) $1.2 million. B) $1.1 million. C) $1 million. D) $900,000.

A

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

A

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

The original role of the Federal Reserve was to A) act as lender of last resort. B) pursue inflation stability. C) pursue economic growth. D) none of the above.

A

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

A

You are provided the following data about a bank: Net Profit After Taxes: $9,260 Total Equity Capital: $272,540 Total Assets: $2,614,379 Total Loans: $1,424,523 Total Deposits: $2,150,558 Assume that a bank is classified as well capitalized if its ratio of capital to total assets exceeds 5%. Does this bank have sufficient capital to be classified as well capitalized? A) Yes B) No C) That cannot be determined from the data given. D) I have no idea.

A

reduces

A

14) ) In order to reduce the ________ problem in loan markets, bankers collect information from prospective borrowers to screen out the bad credit risks from the good ones. A) moral hazard B) adverse selection C) moral suasion D) adverse lending

B

17) There are ________ members of the Board of Governors of the Federal Reserve System. A) 5 B) 7 C) 12 D) 19

B

21) The ability of a central bank to set monetary policy goals is A) political independence. B) goal independence. C) policy independence. D) instrument independence.

B

24) Under the European System of Central Banks, the Governing Council is similar in structure to the ________ of the Federal Reserve System. A) Board of Governors B) Federal Open Market Committee C) Federal Reserve Banks D) Federal Advisory Council

B

29) The percentage of deposits that banks must hold in reserve is the A) excess reserve ratio. B) required reserve ratio. C) total reserve ratio. D) currency ratio.

B

31) 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

44) Assuming initially that the required reserve ratio = 15%, the currency-deposit ratio = 40%, and the excess reserve ratio = 5%, an increase in the excess reserve ratio to 10% causes the M1 money multiplier to ________, everything else held constant. A) increase from 2.15 to 2.33 B) decrease from 2.33 to 2.15 C) increase from 1.54 to 1.67 D) decrease from 1.67 to 1.54

B

52) The effect of an open market purchase in an economy with limited reserves is A) an increase in the federal funds rate. B) a decrease in the federal funds rate. C) an increase in the discount rate. D) a decrease in the discount rate.

B

54) The European Central Bank's equivalent of the Fed's open market operations (OMO) is A) very similar to the Fed's OMO in that they are highly centralized. B) dissimilar to the Fed's OMO in that the operations are conducted at all 19 of the National Central Banks simultaneously. C) similar to the Fed's OMO in that they accept only U.S. Treasury securities in their refinancing operations. D) dissimilar to the Fed's OMO because fewer banks participate in the auctions of the securities.

B

55) For the European Central Bank (ECB), the equivalent of the FOMC's target federal funds rate is the A) target discount rate. B) European target federal funds rate. C) target refinancing rate. D) London Inter-Bank Offer Rate.

B

7) If the First National Bank has a gap equal to a negative $30 million, then a 5 percentage point increase in interest rates will cause profits to A) increase. B) decline. C) remain the same. D) We do not have enough information to determine how the level of profits will change.

B

8) 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

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

Bank trading creates a moral hazard problem because A) Traders share in the profits from good investments, as well as in the losses from bad investments. B) Traders normally share in the profits from good investments, but the bank pays for the losses. C) Traders take the losses from bad investments, while the bank reaps the profits from the good ones. D) Bank trading does not create a moral hazard problem.

B

Bankers' concerns regarding the optimal mix of required reserves, excess reserves, borrowings from the Fed, and borrowings from other banks to deal with deposit outflows is an example of A) liability management. B) liquidity management. C) interest-rate risk management D) credit risk management E) asset management

B

For a given return on assets, the lower is bank capital A) the lower is the return for the owners of the bank. B) the higher is the return for the owners of the bank. C) the lower is the credit risk for the owners of the bank. D) the lower the possibility of bank failure.

B

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

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

If borrowers with the most risky investment projects seek bank loans in higher proportion to those borrowers with the safest investment projects, banks are said to face the problem of A) adverse credit risk. B) adverse selection. C) moral hazard. D) lemon lenders.

B

Risk that is related to the uncertainty about interest rate movements is called A) default risk. B) interest-rate risk. C) the problem of moral hazard. D) security risk.

B

The process of __________________ can be described as the process of acquiring ____________ with one set of characteristics and converting them to ______________ with a different set of characteristics. A) intermediation, securities, deposits B) asset transformation, liabilities, assets C) asset transformation, assets, liabilities D) asset transformation, loans, deposits

B

What makes the Federal Reserve so unique compared to other central banks around the world is its A) centralized structure. B) decentralized structure. C) regulatory functions. D) monetary policy functions.

B

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

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

B

Which of the following bank assets is the most liquid? A) consumer loans B) reserves C) state and local government securities D) U.S. government securities

B

Which of the following is NOT a tool that the Fed uses to achieve its monetary policy goals? A) the discount rate B) the inflation rate C) interest paid on reserves D) reserve requirements

B

Which of the following is NOT an entity of the Federal Reserve System? A) the Federal Reserve Banks B) the Comptroller of the Currency C) the Board of Governors D) the Federal Open Market Committee

B

You are provided with the following data about a bank: Net Profit After Taxes: $9,260 Total Equity Capital: $272,540 Total Assets: $2,614,379 Total Loans: $1,424,523 Total Deposits: $2,150,558 What is this bank's Return on Assets? A) 3.32% B) 0.35% C) 66.34% D) 3.40%

B

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

C

11) ________ 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

18) 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

19) The Federal Open Market Committee consists of the A) five senior members of the seven-member Board of Governors. B) seven members of the Board of Governors and seven presidents of the regional Fed banks. C) seven members of the Board of Governors and five presidents of the regional Fed banks. D) twelve regional Fed bank presidents and the chairman of the Board of Governors.

C

2) Which of the following is NOT a source of borrowings for a bank? A) federal funds B) Eurodollars C) transaction deposits D) discount loans

C

25) Under the European System of Central Banks, the National Central Banks have the same role as the ________ of the Federal Reserve System. A) Board of Governors B) Federal Open Market Committee C) Federal Reserve Banks D) Federal Advisory Council

C

27) The monetary base consists of A) currency in circulation and Federal Reserve notes. B) currency in circulation and the U.S. Treasury's monetary liabilities. C) currency in circulation and reserves. D) reserves and Federal Reserve Notes.

C

28) Both ________ and ________ are Federal Reserve assets. A) currency in circulation, reserves B) currency in circulation, securities C) securities, loans to financial institutions D) securities, reserves

C

32) Purchases and sales of government securities by the Federal Reserve are called A) discount loans. B) federal fund transfers. C) open market operations. D) swap transactions.

C

34) When the Federal Reserve extends a discount loan to a bank, the monetary base ________ and reserves ________. A) remains unchanged, decrease B) remains unchanged, increase C) increases, increase D) increases, remain unchanged

C

35) 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

36) 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

37) A bank has excess reserves of $6,000 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 be A) -$5,000. B) -$1,000. C) $1,000. D) $5,000.

C

39) If the required reserve ratio is 15 percent, currency in circulation is $400 billion, checkable deposits are $800 billion, and excess reserves total $0.8 billion, then the M1 money multiplier is A) 2.5. B) 1.67. C) 2.3. D) 0.651.

C

40) If the required reserve ratio is one-third, currency in circulation is $300 billion, and checkable deposits are $900 billion, then the money supply is ________ billion. A) $2,700 B) $3,000 C) $1,200 D) $1,800

C

41) Everything else held constant, an increase in the required reserve ratio on checkable deposits causes the M1 money multiplier to ________ and the money supply to ________. A) decrease, increase B) increase, increase C) decrease, decrease D) increase, decrease

C

42) Everything else held constant, if the sum of the required reserve ratio and the excess reserve ratio is less than one, an increase in the currency-deposit ratio causes the M1 money multiplier to ________ and the money supply to ________. A) decrease, increase B) increase, decrease C) decrease, decrease D) increase, increase

C

43) Everything else held constant, an increase in the excess reserves ratio causes the M1 money multiplier to ________ and the money supply to ________. A) decrease, increase B) increase, increase C) decrease, decrease D) increase, decrease

C

45) The ECB's Governing Council has price stability as a primary objective and has defined price stability a A) a zero rate of inflation. B) an inflation rate less than 5 percent. C) an inflation rate below, but close to, 2 percent over the medium term. D) an inflation rate in the 3 to 5 percent range.

C

46) The FOMC A) sets the federal funds rate. B) uses the discount rate is its primary policy tool. C) sets the target federal funds rate range. D) sets the dealer's spread as the difference between the target and actual federal funds

C

51) Before the Great Recession, when the economy had limited reserves, the Fed's main tool for conducting monetary policy was A) the discount rate, B) the interest rate on reserve balances. C) open market operations. D) the overnight reverse repurchase agreement rate.

C

9) 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 increase by $10. B) the reserves of the First National Bank increase by $ 10. C) the liabilities of Citibank increase by $10. D) the assets of Citibank fall by $10.

C

Bank reserves include A) deposits at the Fed and short-term treasury securities. B) vault cash and short-term Treasury securities. C) vault cash and deposits at the Fed. D) deposits at other banks and deposits at the Fed.

C

Holding large amounts of bank capital helps prevent bank failures because A) it means that the bank has a higher income. B) it makes loans easier to sell. C) it can be used to absorb the losses resulting from bad loans. D) it makes it easier to call in loans.

C

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 that the bank currently owns. D) repay its discount loans from the Fed.

C

Members of Congress are able to influence monetary policy, albeit indirectly, through their ability to A) withhold appropriations from the Board of Governors. B) withhold appropriations from the Federal Open Market Committee. C) propose legislation that would make the Fed less independent. D) instruct the General Accounting Office to audit the foreign exchange market functions of the Federal Reserve.

C

What types of securities are US commercial banks allowed to own? A) both debt and equity instruments, B) equity instruments, but not debt instruments, C) equity instruments, but not debt instruments, D) none of the above

C

When a check written on the First National Bank of Chicago is deposited in an account at Citibank, A) reserves of the First National Bank increase, reserves of Citibank increase. B) reserves of First National Bank decrease, reserves of Citibank decrease. C) reserves of First National Bank decrease, reserves of Citibank increase. D) if the check is deposited at Citibank on the same day it is written from First National Bank of Chicago, there will be no change in either bank's reserves.

C

16) The president from which Federal Reserve Bank always has a vote in the Federal Open Market Committee? A) Philadelphia B) Boston C) San Francisco D) New York

D

48) In an economy with ample reserves, the principal tool the Fed uses to keep the federal funds rate close to the target is A) the required reserve rate. B) discount lending. C) open market operations. D) the IORB (interest rate on reserve balances).

D

49) In an economy with ample reserves, if the Fed wants to decrease the federal funds rate, it will A) engage in open market sales. B) engage in open market purchases. C) raise the administered rates. D) lower the administered rates.

D

5) 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

A reason why rogue traders have bankrupt their banks is due to A) the separation of trading activities from the bookkeepers. B) stringent supervision of trading activities by bank management. C) accounting errors. D) banks having a hard time monitoring traders, as well as the managers supposed to monitor the traders.

D

Because checking accounts are ________ liquid for the depositor than savings accounts, they earn ________ interest rates. A) less, higher B) less, lower C) more, higher D) more, lower

D

Capital City Bank receives a deposit from the State of Florida in the amount of $35 million. If the reserve requirement is 10%, what amount will be available for lending by Capital City Bank? A) $3,500,000 B) $32,200,000 C) $35,000,000 D) $31,500,000

D

How do non-transaction deposits differ from checkable deposits? A) owners cannot write checks on non-transaction deposits, but they can write checks on checkable deposits. B) interest rates paid on non-transaction deposits are usually higher than those on checkable deposits. C) non-transaction deposits are a more expensive source of funds than checkable deposits. D) all of the above.

D

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 A) gains, gains B) gains, loses C) loses, gains D) loses, loses

D

Which of the following are macroeconomic goals that a central bank must consider in the conduct of monetary policy? A) economic growth B) price stability C) high employment and output stability D) all of the above

D

Which of the following statement(s) is(are) true about off-balance-sheet activities? A) They involve trading instruments and generating income from fees and loan sales. B) They affect bank profits. C) They do not appear on bank balance sheets. D) All of the above.

D

You are provided with the following data about a bank: Net Profit After Taxes: $9,260 Total Equity Capital: $272,540 Total Assets: $2,614,379 Total Loans: $1,424,523 Total Deposits: $2,150,558 What is this bank's Return on Equity? A) 3.32% B) 0.35% C) 66.34% D) 3.40%

D

What is(are) an option(s) for a bank that is unable to meet its reserve requirement at the Federal Reserve? A) borrow reserves from another bank (Fed funds) B) borrow reserves directly from the Federal Reserve (Discount loan) C) liquidate securities, which could involve losses D) ask borrowers to repay loans, which is harmful to the bank's reputation E) all of the above

E

20) Why does the Federal Reserve Bank of New York play a special role within the Federal Reserve System?

The New York district contains the largest banks in the country. The New York Fed supervises and examines these banks to insure their soundness and the safety of the nation's financial system. The New York Fed conducts open market operations and foreign exchange transactions for the Fed and Treasury. The New York Fed belongs to the Bank for International Settlements, so its president and the chairman of the Board of Governors represent the U.S. at the monthly meetings of the world's central banks. The New York Fed president is the only president of a regional Fed who is a permanent voting member of the FOMC.