Question 1

Which of the following statements is NOT true of credit cards?

Accepted Answer

A) The rate of return to banks from credit card lending is lower than for other bank assets. 
B) Credit cards represent a preauthorized line of credit to borrowers. 
C) The first credit cards to be widely accepted were nonbank travel and entertainment cards. 
D) If bank cardholders don't pay the balance in full every month, they pay a finance charge on the unpaid balance. 
A) The rate of return to banks from credit card lending is lower than for other bank assets. 
B) Credit cards represent a preauthorized line of credit to borrowers. 
C) The first credit cards to be widely accepted were nonbank travel and entertainment cards. 
D) If bank cardholders don't pay the balance in full every month, they pay a finance charge on the unpaid balance.

Question 2

Loans by the Federal Reserve to banks are known as

Accepted Answer

A) repurchase agreements. 
B) Federal funds. 
C) discount loans. 
D) cash items in the process of collection. 
A) repurchase agreements. 
B) Federal funds. 
C) discount loans. 
D) cash items in the process of collection.

Question 3

If you have a checking account at First National Bank, the account is

Accepted Answer

A) an asset to both you and First National. 
B) a liability to both you and First National. 
C) an asset to First National and a liability to you. 
D) an asset to you and a liability to First National. 
A) an asset to both you and First National. 
B) a liability to both you and First National. 
C) an asset to First National and a liability to you. 
D) an asset to you and a liability to First National.

Question 4

Which of the following is NOT a nontransaction deposit?

Accepted Answer

A) A money market deposit account 
B) A certificate of deposit 
C) A savings account 
D) A super-NOW account 
A) A money market deposit account 
B) A certificate of deposit 
C) A savings account 
D) A super-NOW account

Question 5

A cash item in the process of collection is

Accepted Answer

A) a U.S. Treasury bill that has matured, but for which the bank has not yet received payment. 
B) a car loan payment that is due but not yet received by the bank. 
C) a check drawn against another bank, from whom the funds have not yet been collected. 
D) currency that has been deposited in the bank, but not yet formally counted and entered into the bank's balance sheet. 
A) a U.S. Treasury bill that has matured, but for which the bank has not yet received payment. 
B) a car loan payment that is due but not yet received by the bank. 
C) a check drawn against another bank, from whom the funds have not yet been collected. 
D) currency that has been deposited in the bank, but not yet formally counted and entered into the bank's balance sheet.

Question 6

What percentage of bank assets were in loans in 2006?

Accepted Answer

A) 2% 
B) 22% 
C) 37% 
D) 66% 
A) 2% 
B) 22% 
C) 37% 
D) 66%

Question 7

Collateral is

Accepted Answer

A) the interest rate that banks charge high-quality borrowers. 
B) assets pledged to the bank in the event the borrower defaults. 
C) the difference between the value of a bank's assets and the value of a bank's liabilities. 
D) required reserves minus excess reserves. 
A) the interest rate that banks charge high-quality borrowers. 
B) assets pledged to the bank in the event the borrower defaults. 
C) the difference between the value of a bank's assets and the value of a bank's liabilities. 
D) required reserves minus excess reserves.

Question 8

If the Federal Reserve did not require them to do so, would banks still hold reserves?

Accepted Answer

Even if the Fed did not require them to

Question 9

How do banks generate fee income in off-balance-sheet activities?

Accepted Answer

Banks generate fee income in off-balance

Question 10

Why might the Community Reinvestment Act of 1977 backfire in its long-run effects on credit supply?

Accepted Answer

A) Its limits on credit card interest rates may lead to banks offering fewer credit cards. 
B) Its requirements for local lending raise the cost of operating banks in urban areas and may lead to fewer banks entering these communities over time. 
C) Its requirement that banks buy large amounts of local municipal bonds may lead to reckless spending by local governments. 
D) Its requirement that banks make loans only for investment purposes may reduce the loans available for consumption purposes. 
A) Its limits on credit card interest rates may lead to banks offering fewer credit cards. 
B) Its requirements for local lending raise the cost of operating banks in urban areas and may lead to fewer banks entering these communities over time. 
C) Its requirement that banks buy large amounts of local municipal bonds may lead to reckless spending by local governments. 
D) Its requirement that banks make loans only for investment purposes may reduce the loans available for consumption purposes.

Question 11

The difference between a savings deposit and a time deposit is

Accepted Answer

A) time deposits pay no interest. 
B) savings deposits pay no interest. 
C) time deposits have specified maturities. 
D) savings deposits have specified maturities. 
A) time deposits pay no interest. 
B) savings deposits pay no interest. 
C) time deposits have specified maturities. 
D) savings deposits have specified maturities.

Question 12

A bank's equity capital is

Accepted Answer

A) the current market value of the bank's physical assets. 
B) the historical or original value of the bank's physical assets. 
C) the capital contributed by the bank's shareholders plus accumulated retained profits. 
D) the sum of the value of the bank's assets plus the value of the bank's liabilities. 
A) the current market value of the bank's physical assets. 
B) the historical or original value of the bank's physical assets. 
C) the capital contributed by the bank's shareholders plus accumulated retained profits. 
D) the sum of the value of the bank's assets plus the value of the bank's liabilities.

Question 13

A bank that expects interest rates to fall will

Accepted Answer

A) want the duration of its assets to be greater than the duration of its liabilitiesa positive duration gap. 
B) want the duration of its assets to be less than the duration of its liabilitiesa positive duration gap. 
C) want the duration of its assets to be greater than the duration of its liabilitiesa negative duration gap. 
D) want the duration of its assets to be less than the duration of its liabilitiesa negative duration gap. 
A) want the duration of its assets to be greater than the duration of its liabilitiesa positive duration gap. 
B) want the duration of its assets to be less than the duration of its liabilitiesa positive duration gap. 
C) want the duration of its assets to be greater than the duration of its liabilitiesa negative duration gap. 
D) want the duration of its assets to be less than the duration of its liabilitiesa negative duration gap.

Question 14

In what sense can a reserve requirement be said to be a tax on bank intermediation?

Accepted Answer

A) Banks must pay tax on any funds deposited in a reserve account at a rate equal to the applicable corporate income tax rate. 
B) Banks must pay tax on any funds removed from a reserve account at a rate equal to the applicable corporate income tax rate. 
C) Banks must pay taxes on the amount by which they fail to meet their reserve requirements. 
D) Banks are unable to lend out all their deposits. 
A) Banks must pay tax on any funds deposited in a reserve account at a rate equal to the applicable corporate income tax rate. 
B) Banks must pay tax on any funds removed from a reserve account at a rate equal to the applicable corporate income tax rate. 
C) Banks must pay taxes on the amount by which they fail to meet their reserve requirements. 
D) Banks are unable to lend out all their deposits.

Question 15

The use of floating-rate debt will not entirely eliminate a bank's exposure to interest rate risk because

Accepted Answer

A) the value of the bank's assets will still be affected more than the value of the bank's liabilities by changes in interest rates. 
B) the value of the bank's liabilities will still be affected more than the value of the bank's assets by changes in interest rates. 
C) a rise in interest rates might increase the default risk of borrowers. 
D) Federal Reserve regulations limit the amount of floating-rate debt a bank may have. 
A) the value of the bank's assets will still be affected more than the value of the bank's liabilities by changes in interest rates. 
B) the value of the bank's liabilities will still be affected more than the value of the bank's assets by changes in interest rates. 
C) a rise in interest rates might increase the default risk of borrowers. 
D) Federal Reserve regulations limit the amount of floating-rate debt a bank may have.

Question 16

Required reserves are

Accepted Answer

A) a tax on bank intermediation. 
B) zero on demand deposits. 
C) zero on NOW accounts. 
D) imposed on all deposits at commercial banks. 
A) a tax on bank intermediation. 
B) zero on demand deposits. 
C) zero on NOW accounts. 
D) imposed on all deposits at commercial banks.

Question 17

Banks make use of the federal funds market in part to

Accepted Answer

A) pay their tax liabilities. 
B) manage liquidity risk. 
C) deal with moral hazard. 
D) deal with adverse selection. 
A) pay their tax liabilities. 
B) manage liquidity risk. 
C) deal with moral hazard. 
D) deal with adverse selection.

Question 18

All of the following are examples of borrowings by a bank EXCEPT

Accepted Answer

A) federal funds. 
B) repurchase agreements. 
C) discount loans. 
D) commercial loans. 
A) federal funds. 
B) repurchase agreements. 
C) discount loans. 
D) commercial loans.

Question 19

What is the current limit on balances that are covered by federal deposit insurance?

Accepted Answer

A) $10,000 
B) $100,000 
C) $500,000 
D) $1,000,000 
A) $10,000 
B) $100,000 
C) $500,000 
D) $1,000,000

Question 20

Banks use credit rationing rather than simply raising the interest rate charged borrowers with higher default risks because

Accepted Answer

A) of fear of adverse selection problems. 
B) of interest rate ceilings in many states. 
C) of fear of offending the loan applicants. 
D) use of credit rationing is encouraged by the Federal Reserve. 
A) of fear of adverse selection problems. 
B) of interest rate ceilings in many states. 
C) of fear of offending the loan applicants. 
D) use of credit rationing is encouraged by the Federal Reserve.

Exam 13: The Business of Banking

Which of the following statements is NOT true of credit cards?

Loans by the Federal Reserve to banks are known as

If you have a checking account at First National Bank, the account is

Which of the following is NOT a nontransaction deposit?

A cash item in the process of collection is

What percentage of bank assets were in loans in 2006?

Collateral is

If the Federal Reserve did not require them to do so, would banks still hold reserves?

How do banks generate fee income in off-balance-sheet activities?

Why might the Community Reinvestment Act of 1977 backfire in its long-run effects on credit supply?

The difference between a savings deposit and a time deposit is

A bank's equity capital is

A bank that expects interest rates to fall will

In what sense can a reserve requirement be said to be a tax on bank intermediation?

The use of floating-rate debt will not entirely eliminate a bank's exposure to interest rate risk because

Required reserves are

Banks make use of the federal funds market in part to

All of the following are examples of borrowings by a bank EXCEPT

What is the current limit on balances that are covered by federal deposit insurance?

Banks use credit rationing rather than simply raising the interest rate charged borrowers with higher default risks because

Introducing Money and the Financial System

Money and the Payments System

Overview of the Financial System

Interest Rates and Rates of Return

The Theory of Portfolio Allocation

Determining Market Interest Rates

Risk Structure and Term Structure of Interest Rates

The Foreign-Exchange Market and Exchange Rates

Derivative Securities and Derivative Markets

Information and Financial Market Efficiency

Reducing Transactions Costs and Information Costs

What Financial Institutions Do

The Banking Industry

Banking Regulation: Crisis and Response

Banking in the International Economy

The Money Supply Process

Changes in the Monetary Base

Organization of Central Banks

Monetary Policy Tools

The Conduct of Monetary Policy

The International Financial System and Monetary Policy

The Demand for Money

Linking the Financial System and the Economy: the Is-Lm-Fe Model

Aggregate Demand and Aggregate Supply

Money and Output in the Short Run

Information Problems and Channels for Monetary Policy

Inflation: Causes and Consequences

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