Question 1

Banks hold excess and secondary reserves to

Accepted Answer

A) reduce the interest-rate risk problem. 
B) provide for deposit outflows. 
C) satisfy margin requirements. 
D) achieve higher earnings than they can with loans. 
A) reduce the interest-rate risk problem. 
B) provide for deposit outflows. 
C) satisfy margin requirements. 
D) achieve higher earnings than they can with loans.

Question 2

Because borrowers,once they have a loan,are more likely to invest in high-risk investment projects,banks face the

Accepted Answer

A) adverse selection problem. 
B) lemon problem. 
C) adverse credit risk problem. 
D) moral hazard problem. 
A) adverse selection problem. 
B) lemon problem. 
C) adverse credit risk problem. 
D) moral hazard problem.

Question 3

Your bank has the following balance sheet:
Assets Liabilities
Reserves $ 50 million Checkable deposits $200 million
Securities 50 million
Loans 150 million Bank capital 50 million
If the required reserve ratio is 10%,what actions should the bank manager take if there is an unexpected deposit outflow of $50 million?

Accepted Answer

After the deposit outflow,the bank will

Question 4

A bank's commitment to provide a firm with loans up to pre-specified limit at an interest rate that is tied to a market interest rate is called

Accepted Answer

A) an adjustable gap loan. 
B) an adjustable portfolio loan. 
C) loan commitment. 
D) pre-credit loan line. 
A) an adjustable gap loan. 
B) an adjustable portfolio loan. 
C) loan commitment. 
D) pre-credit loan line.

Question 5

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.

Accepted Answer

A) adverse selection; moral hazard 
B) moral hazard; adverse selection 
C) adverse selection; diversification 
D) diversification; moral hazard 
A) adverse selection; moral hazard 
B) moral hazard; adverse selection 
C) adverse selection; diversification 
D) diversification; moral hazard

Question 6

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

Accepted Answer

A) adverse credit risk. 
B) adverse selection. 
C) moral hazard. 
D) lemon lenders. 
A) adverse credit risk. 
B) adverse selection. 
C) moral hazard. 
D) lemon lenders.

Question 7

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,

Accepted Answer

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. 
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.

Question 8

Looking at the Net Interest Margin indicates that the poor bank performance in the late 1980s

Accepted Answer

A) was not the result of interest-rate movements. 
B) was not the result of risky loans made in the early 1980s. 
C) resulted from a narrowing of the gap between interest earned on assets and inters paid on liabilities. 
D) resulted from a huge decrease in provisions for loan losses. 
A) was not the result of interest-rate movements. 
B) was not the result of risky loans made in the early 1980s. 
C) resulted from a narrowing of the gap between interest earned on assets and inters paid on liabilities. 
D) resulted from a huge decrease in provisions for loan losses.

Question 9

Asset transformation can be described as

Accepted Answer

A) borrowing long and lending short. 
B) borrowing short and lending long. 
C) borrowing and lending only for the short term. 
D) borrowing and lending for the long term. 
A) borrowing long and lending short. 
B) borrowing short and lending long. 
C) borrowing and lending only for the short term. 
D) borrowing and lending for the long term.

Question 10

Which of the following would a bank not hold as insurance against the highest cost of deposit outflow-bank failure?

Accepted Answer

A) Excess reserves 
B) Secondary reserves 
C) Bank capital 
D) Mortgages 
A) Excess reserves 
B) Secondary reserves 
C) Bank capital 
D) Mortgages

Question 11

________ may antagonize customers and thus can be a very costly way of acquiring funds to meet an unexpected deposit outflow.

Accepted Answer

A) Selling securities 
B) Selling loans 
C) Calling in loans 
D) Selling negotiable CDs 
A) Selling securities 
B) Selling loans 
C) Calling in loans 
D) Selling negotiable CDs

Question 12

If a bank has $50 million in rate-sensitive assets and $20 million in rate-sensitive liabilities then

Accepted Answer

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. 
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.

Question 13

When a new depositor opens a checking account at the First National Bank,the bank's assets ________ and its liabilities ________.

Accepted Answer

A) increase; increase 
B) increase; decrease 
C) decrease; increase 
D) decrease; decrease 
A) increase; increase 
B) increase; decrease 
C) decrease; increase 
D) decrease; decrease

Question 14

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

Accepted Answer

A) $30,000. 
B) $25,000. 
C) $20,000. 
D) $10,000. 
A) $30,000. 
B) $25,000. 
C) $20,000. 
D) $10,000.

Question 15

A bank with insufficient reserves can increase its reserves by

Accepted Answer

A) lending federal funds. 
B) calling in loans. 
C) buying short-term Treasury securities. 
D) buying municipal bonds. 
A) lending federal funds. 
B) calling in loans. 
C) buying short-term Treasury securities. 
D) buying municipal bonds.

Question 16

When banks involved in trading activities attempt to outguess markets,they are

Accepted Answer

A) forecasting. 
B) diversifying. 
C) speculating. 
D) engaging in riskless arbitrage. 
A) forecasting. 
B) diversifying. 
C) speculating. 
D) engaging in riskless arbitrage.

Question 17

When a $10 check written on the First National Bank of Chicago is deposited in an account at Citibank,then

Accepted Answer

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. 
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.

Question 18

A bank that wants to monitor the check payment practices of its commercial borrowers,so that moral hazard can be prevented,will require borrowers to

Accepted Answer

A) place a bank officer on their board of directors. 
B) place a corporate officer on the bank's board of directors. 
C) keep compensating balances in a checking account at the bank. 
D) purchase the bank's CDs. 
A) place a bank officer on their board of directors. 
B) place a corporate officer on the bank's board of directors. 
C) keep compensating balances in a checking account at the bank. 
D) purchase the bank's CDs.

Question 19

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.

Accepted Answer

A) asset; asset 
B) asset; liability 
C) liability; liability 
D) liability; asset 
A) asset; asset 
B) asset; liability 
C) liability; liability 
D) liability; asset

Question 20

Because checking accounts are ________ liquid for the depositor than passbook savings,they earn ________ interest rates.

Accepted Answer

A) less; higher 
B) less; lower 
C) more; higher 
D) more; lower 
A) less; higher 
B) less; lower 
C) more; higher 
D) more; lower

Exam 10: Banking and the Management of Financial Institutions

Banks hold excess and secondary reserves to

Because borrowers,once they have a loan,are more likely to invest in high-risk investment projects,banks face the

A bank's commitment to provide a firm with loans up to pre-specified limit at an interest rate that is tied to a market interest rate is called

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.

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

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,

Looking at the Net Interest Margin indicates that the poor bank performance in the late 1980s

Asset transformation can be described as

Which of the following would a bank not hold as insurance against the highest cost of deposit outflow-bank failure?

________ may antagonize customers and thus can be a very costly way of acquiring funds to meet an unexpected deposit outflow.

If a bank has $50 million in rate-sensitive assets and $20 million in rate-sensitive liabilities then

When a new depositor opens a checking account at the First National Bank,the bank's assets ________ and its liabilities ________.

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 bank with insufficient reserves can increase its reserves by

When banks involved in trading activities attempt to outguess markets,they are

When a $10 check written on the First National Bank of Chicago is deposited in an account at Citibank,then

A bank that wants to monitor the check payment practices of its commercial borrowers,so that moral hazard can be prevented,will require borrowers to

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.

Because checking accounts are ________ liquid for the depositor than passbook savings,they earn ________ interest rates.

Why Study Money, banking, and Financial Markets

An Overview of the Financial System

What Is Money

Understanding Interest Rates

The Behavior of Interest Rates

The Risk and Term Structure of Interest Rates

The Stock Market, the Theory of Rational Expectations, and the Efficient Market Hypothesis

An Economic Analysis of Financial Structure

Financial Crises

Economic Analysis of Financial Regulation

Banking Industry: Structure and Competition

Central Banks and the Federal Reserve System

The Money Supply Process

Tools of Monetary Policy

The Conduct of Monetary Policy: Strategy and Tactics

The Foreign Exchange Market

The International Financial System

Quantity Theory,inflation and the Demand for Money

The Is Curve

The Monetary Policy and Aggregate Demand Curves

Aggregate Demand and Supply Analysis

Monetary Policy Theory

The Role of Expectations in Monetary Policy

Transmission Mechanisms of Monetary Policy

The ISLM Model

Filters

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.

When a new depositor opens a checking account at the First National Bank,the bank's assets and its liabilities .

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.

Because checking accounts are liquid for the depositor than passbook savings,they earn interest rates.