Money, banking, and the Fed

If banks decide to hold some of their excess reserves instead of lending them out, A) the money multiplier becomes 1 divided by the excess reserves. B) the money multiplier will be less than 1 divided by the required reserve ratio. C) depositors will have to borrow more to increase the money supply. D) a loan of $1 will lead to a change in the money supply by a multiple amount equal to 1 divided by the required reserve ratio.

B

If the Fed conducts an open-market sale, bank reserves _____, and the money supply is likely to _____. A) increase; decrease B) decrease; decrease C) decrease; increase D) increase; increase

B

Prior to the Civil War A) all private money issued by banks was of equal value. B) the U.S. government did not issue paper money. C) the U.S. government did not allow banks to issue private money. D) the U.S. government issued paper money but only in small quantities.

B

Shadow banking A) doesn't look like traditional banking but serves similar purposes while not posing any additional risk. B) doesn't look like traditional banking but serves similar purposes while posing significantly more risk. C) is another name for traditional banking. D) looks like traditional banking but serves different purposes and imposes significantly more risk.

B

Subprime loans are made A) with very short maturities. B) to buyers who don't meet the standard criteria for obtaining a mortgage. C) with interest rates that are below the prime rate. D) on houses that are below average value.

B

Suppose a bank has excess reserves of $50 and that the reserve ratio is 20%. If Roderick deposits $5,000 of cash in his checking account, and the bank lends $2,500 to Nia, the money supply A) is increased by $7,500. B) is increased by $2,500. C) remains unchanged. D) is decreased by $5,000.

B

The Panic of 1907, the savings and loan crisis, and the financial crisis of 2008 were similar in that they all A) were caused by large budget deficits. B) involved financial institutions that were not as strictly regulated as deposit-taking banks. C) were caused by restrictive monetary policy. D) were caused by excessive regulation by the Federal Reserve.

B

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

B

The principal-agent problem manifests itself in bank management in the form of A) prices on longer-term bonds fluctuating more than on shorter-term bonds. B) the bank making risky loans and thus putting the bank's capital, owned by shareholders, in jeopardy. C) rising interest rates putting the bank's capital at risk. D) interest rates on assets resulting in insolvency.

B

The purpose of the local clearinghouses established by banks in the early 1900s was to A) merge failing banks with healthy ones. B) pool resources of several local banks so that the clearinghouse could guarantee a member's deposits in case of a bank run. C) facilitate the transfer of electronic funds between member banks. D) help people who were unemployed find jobs.

B

The required reserve ratio is 5%. The money multiplier is A) 5. B) 20. C) 0.5. D) 15.

B

Which of the statements is not true about a bank run? A) There was a wave of bank runs during the Great Depression. B) Bank runs are bad for the bank affected and usually good for the bank's competitors. C) Deposit insurance is designed to reduce the risk of bank runs for depository banks. D) Fears leading to bank runs can be self-fulfilling.

B

"Tuition at State University this year is $20,000." Which function of money does this statement best illustrate? A) medium of exchange B) store of value C) unit of account D) means of deferred payment

C

Banks can lend money because A) they have so much to lend. B) they don't know how much cash they have in their vault. C) they know not everyone wants their deposits back at the same time. D) there is a high demand for commodity money.

C

Maximizing bank profits while minimizing the risk that some loans might default is the goal of A) capital management. B) gap management. C) risk management. D) liquidity management.

C

Mine Street Savings and Loan has variable-rate assets totaling $2,000,000 and variable-rate liabilities of $1,600,000. Suppose interest rates increase by 3%. Mine Street S&L's profit will change by A) -$48,000. B) -$12,000. C) +$12,000. D) +$60,000.

C

The country of Watopia requires all banks maintain capital (i.e. assets less liabilities) equal to at least 20% of assets. The First Bank of Makuri Islands has assets totaling W$ 5,000,000 (where W$ is the local currency) and liabilities totaling W$ 4,500,000. This bank A) is compliant with Watopia's bank regulations. B) should borrow in the Federal Funds market. C) is insolvent. D) should raise capital by W$ 500,000.

C

The responsibilities of the Federal Reserve do not include A) controlling the monetary base. B) setting the discount rate. C) printing bills and minting coins. D) overseeing and regulating the banking system

C

The statements regarding savings and loans (S&Ls) are all true except A) During the real estate boom in the 1970s and 1980s, S&Ls took on more risky loans. B) Because of the troubles that S&Ls experienced in the 1970s, Congress loosened regulations on S&Ls. C) S&Ls are not covered by federal deposit insurance. D) During the 1970s, inflation made savers less willing to deposit their money in S&Ls.

C

Which of the following is NOT an example of sound loan quality management at a bank? A) require collateral of borrowers B) screen potential borrowers for credit worthiness C) specialize in one specific geographic market D) ration credit

C

A bank will face a greater risk of loss of capital and thus insolvency if it rations credit by lending less than what borrowers seek. A) yields on bonds and long-term loans fall. B) maintains excess reserves. C) it lends to high-default-risk customers who pay a relatively high rate of D) interest on those loans.

D

As commercial banks keep fewer excess reserves, money creation A) decreases. B) remains the same, as long as banks hold no excess reserves. C) could either increase or decrease. D) increases.

D

Deposit insurance A) is essentially the same as a bank's required reserves. B) can be used only if depositors lose deposits in excess of $250,000. C) encourages banks to carefully consider to whom they lend funds. D) provides depositors with assurance that they will retain deposits of up to $250,000, even if there are questions about a bank's soundness.

D

Fiat money is A) money backed by gold or silver. B) the same as commodity money. C) used in barter exchanges. D) money backed by a government's decree that it be accepted as a means of payment.

D

In _____, a pool of loans is assembled, and shares of that pool are sold to investors. A) deleveraging B) a money market mutual fund C) asset-backed paper D) securitization

D

Suppose a bank has $2,000,000 in checkable deposits. The bank seeks to maintain liquidity, in the form of vault cash and Federal Reserve account balances, in the amount of at least 15% of those deposit liabilities. At the start of business today, the bank has $400,000 in reserves. Depositors make withdrawals and write checks against their accounts at this bank totaling $150,000. In response to this, the bank would like do what? A) Do nothing. B) Write loans or buy bonds totaling $122,500. C) Sell $50,000 of marketable securities. D) Borrow $27,500 from other banks on the Federal Funds market.

D

The _____, composed of the Board of Governors and five of the regional bank presidents, makes the decisions about monetary policy. A) Treasury Committee B) Monetary Policy Committee C) Executive Branch D) Federal Open Market Committee

D

The purpose of _____, which prevented banks from paying interest on checking accounts, was to prevent unhealthy competition between banks. A) the Federal Open Market Committee B) Dodd-Bush C) Federal Deposit Insurance D) Regulation Q

D

When the Federal Reserve was established in _____, it was given the authority to require all banks to hold adequate reserves for their deposits and to inspect their accounts. A) 1933 B) 1890 C) 1964 D) 1913

D

Which of the following represents an action by the Federal Reserve that is designed to increase the money supply? A) selling government securities in the open market B) an increase in the discount rate C) a decrease in federal tax rates D) a decrease in the required reserve ratio

D

A decrease in ________ increases the money supply since it causes the ________ to rise. A) reserve requirements; money multiplier B) margin requirements; monetary base C) reserve requirements; monetary base D) margin requirements; money multiplier

A

A double coincidence of wants is necessary A) for barter exchange. B) to use money. C) any time credit cards or debit cards are used. D) to increase the number of exchanges taking place.

A

Deposit insurance A) leads depositors to be less inclined to monitor bank operations. B) can increase the possibility of bank runs. C) essentially serves the same function as a fractional reserve system. D) often makes banks more accountable for their actions and less likely to engage in risky behavior.

A

Suppose that a bank has loaned money to two businesses: a well-managed plumbing repair company and a new-established software development company. Unfortunately, the software company fails and goes bankrupt. The bank's loan to this company was so large that it now finds itself with more assets than liabilities, clearly a case of A) insolvency. B) illiquidity. C) a bank run. D) a fire sale.

A

The problem with the paper money issued by private banks in the nineteenth century was that if the issuing bank _____, the money was _____. A) failed; worthless B) failed; only convertible into foreign currencies C) made loans; worthless D) made loans; hard to exchange

A

Under the Glass-Steagall Act, commercial banks, which accept deposits and are covered by _____ insurance, were not allowed to trade in _____. A) deposit; financial assets such as stocks and bonds B) withdrawal; financial assets such as stocks and bonds C) withdrawal; Treasury Bills D) deposit; Treasury Bills

A

When countries replaced gold and silver coins with paper money exchangeable for certain amounts of precious metals, the monetary system evolved from using _____ money to using _____ money. A) commodity; commodity-backed B) commodity-backed; fiat C) commodity; fiat D) fiat; commodity-backed

A

Which asset is the most liquid? A) a $50 bill B) a $50 gift certificate C) 100 shares of stock D) an economics textbook

A

Banks are financial intermediaries that use the deposits of their customers, which are _____ assets, to finance the _____ investments of borrowers. A) high risk; low risk B) liquid; illiquid C) highly leveraged; low risk D) illiquid; liquid

B

Currency held in bank vaults and bank deposits held at the Federal Reserve are A) part of M1. B) not part of the money supply. C) part of M3. D) part of M2.

B

If a bank has deposits of $100,000, loans of $80,000, cash on hand of $10,000, and $10,000 on deposit at the Federal Reserve, then its reserve ratio is A) 25%. B) 20%. C) 5%. D) 10%.

B

A loan made by a bank is considered ________ of that bank. A) a liability B) an asset C) capital D) net worth

B

A bank will review loan applications before approving them in an effort to prevent A) moral hazard B) adverse selection. C) diversification. D) the Fisher effect.

B

A bank run occurs when A) many bank customers try to borrow at one time. B) many bank customers try to withdraw their funds at one time. C) interest rates start to rise. D) interest rates exceed the inflation rate.

B