Question 1

Banks that suffered significant losses in the 1980s made the mistake of

Accepted Answer

A) holding too many liquid assets. 
B) minimizing default risk. 
C) failing to diversify their loan portfolio. 
D) holding only safe securities. 
A) holding too many liquid assets. 
B) minimizing default risk. 
C) failing to diversify their loan portfolio. 
D) holding only safe securities.

Question 2

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.

Accepted Answer

A) reduces; reduces 
B) increases; increases 
C) reduces; increases 
D) increases; reduces 
A) reduces; reduces 
B) increases; increases 
C) reduces; increases 
D) increases; reduces

Question 3

As the costs associated with deposit outflows ________,the banks willingness to hold excess reserves will ________.

Accepted Answer

A) decrease; increase 
B) increase; decrease 
C) increase; increase 
D) decrease; not be affected 
A) decrease; increase 
B) increase; decrease 
C) increase; increase 
D) decrease; not be affected

Question 4

Your bank has the following balance sheet:
 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 5

A bank is insolvent when

Accepted Answer

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) its liabilities exceed its assets. 
B) its assets exceed its liabilities. 
C) its capital exceeds its liabilities. 
D) its assets increase in value.

Question 6

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 7

A bank failure occurs whenever

Accepted Answer

A) a bank cannot satisfy its obligations to pay its depositors and have enough reserves to meet its reserve requirements. 
B) a bank suffers a large deposit outflow. 
C) a bank has to call in a large volume of loans. 
D) a bank is not allowed to borrow from the Fed. 
A) a bank cannot satisfy its obligations to pay its depositors and have enough reserves to meet its reserve requirements. 
B) a bank suffers a large deposit outflow. 
C) a bank has to call in a large volume of loans. 
D) a bank is not allowed to borrow from the Fed.

Question 8

Banks acquire the funds that they use to purchase income-earning assets from such sources as

Accepted Answer

A) cash items in the process of collection 
B) savings accounts. 
C) reserves. 
D) deposits at other banks. 
A) cash items in the process of collection 
B) savings accounts. 
C) reserves. 
D) deposits at other banks.

Question 9

If interest rates increase from 9 percent to 10 percent,a bank with a duration gap of 2 years would experience a decrease in its net worth of

Accepted Answer

A) 0.9 percent of its assets. 
B) 0.9 percent of its liabilities. 
C) 1.8 percent of its liabilities. 
D) 1.8 percent of its assets. 
A) 0.9 percent of its assets. 
B) 0.9 percent of its liabilities. 
C) 1.8 percent of its liabilities. 
D) 1.8 percent of its assets.

Question 10

The most important category of assets on a bank's balance sheet is

Accepted Answer

A) discount loans. 
B) securities. 
C) loans. 
D) cash items in the process of collection. 
A) discount loans. 
B) securities. 
C) loans. 
D) cash items in the process of collection.

Question 11

Property promised to the lender as compensation if the borrower defaults is called ________.

Accepted Answer

A) collateral 
B) deductibles 
C) restrictive covenants 
D) contingencies 
A) collateral 
B) deductibles 
C) restrictive covenants 
D) contingencies

Question 12

In one sense ________ appears surprising since it means that the bank is not ________ its portfolio of loans and thus is exposing itself to more risk.

Accepted Answer

A) specialization in lending; diversifying 
B) specialization in lending; rationing 
C) credit rationing; diversifying 
D) screening; rationing 
A) specialization in lending; diversifying 
B) specialization in lending; rationing 
C) credit rationing; diversifying 
D) screening; rationing

Question 13

If a bank has $200,000 of checkable deposits,a required reserve ratio of 20 percent,and it holds $80,000 in reserves,then the maximum deposit outflow it can sustain without altering its balance sheet is

Accepted Answer

A) $50,000. 
B) $40,000. 
C) $30,000. 
D) $25,000. 
A) $50,000. 
B) $40,000. 
C) $30,000. 
D) $25,000.

Question 14

A bank will want to hold more excess reserves (everything else equal)when

Accepted Answer

A) it expects to have deposit inflows in the near future. 
B) brokerage commissions on selling bonds increase. 
C) the cost of selling loans falls. 
D) the discount rate decreases. 
A) it expects to have deposit inflows in the near future. 
B) brokerage commissions on selling bonds increase. 
C) the cost of selling loans falls. 
D) the discount rate decreases.

Question 15

Of the following methods that banks might use to reduce moral hazard problems,the one not legally permitted in the United States is the

Accepted Answer

A) requirement that firms keep compensating balances at the banks from which they obtain their loans. 
B) requirement that firms place on their board of directors an officer from the bank. 
C) inclusion of restrictive covenants in loan contracts. 
D) requirement that individuals provide detailed credit histories to bank loan officers. 
A) requirement that firms keep compensating balances at the banks from which they obtain their loans. 
B) requirement that firms place on their board of directors an officer from the bank. 
C) inclusion of restrictive covenants in loan contracts. 
D) requirement that individuals provide detailed credit histories to bank loan officers.

Question 16

To reduce moral hazard problems,banks include restrictive covenants in loan contracts.In order for these restrictive covenants to be effective,banks must also

Accepted Answer

A) monitor and enforce them. 
B) be willing to rewrite the contract if the borrower cannot comply with the restrictions. 
C) trust the borrower to do the right thing. 
D) be prepared to extend the deadline when the borrower needs more time to comply. 
A) monitor and enforce them. 
B) be willing to rewrite the contract if the borrower cannot comply with the restrictions. 
C) trust the borrower to do the right thing. 
D) be prepared to extend the deadline when the borrower needs more time to comply.

Question 17

Conditions that likely contributed to a credit crunch in 2008 include:

Accepted Answer

A) capital shortfalls caused in part by falling real estate prices. 
B) regulated hikes in bank capital requirements. 
C) falling interest rates that raised interest rate risk,causing banks to choose to hold more capital. 
D) increases in reserve requirements. 
A) capital shortfalls caused in part by falling real estate prices. 
B) regulated hikes in bank capital requirements. 
C) falling interest rates that raised interest rate risk,causing banks to choose to hold more capital. 
D) increases in reserve requirements.

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 develop statistical models to calculate their maximum loss over a given time period.This approach is known as the

Accepted Answer

A) stress-testing approach. 
B) value-at-risk approach. 
C) trading-loss approach. 
D) doomsday approach. 
A) stress-testing approach. 
B) value-at-risk approach. 
C) trading-loss approach. 
D) doomsday approach.

Question 20

If a banker expects interest rates to fall in the future,her best strategy for the present is

Accepted Answer

A) to increase the duration of the bank's liabilities. 
B) to buy short-term bonds. 
C) to sell long-term certificates of deposit. 
D) to increase the duration of the bank's assets. 
A) to increase the duration of the bank's liabilities. 
B) to buy short-term bonds. 
C) to sell long-term certificates of deposit. 
D) to increase the duration of the bank's assets.

Exam 10: Banking and the Management of Financial Institutions

Banks that suffered significant losses in the 1980s made the mistake of

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.

As the costs associated with deposit outflows ________,the banks willingness to hold excess reserves will ________.

Your bank has the following balance sheet: If the required reserve ratio is 10%,what actions should the bank manager take if there is an unexpected deposit outflow of $50 million?

A bank is insolvent when

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

A bank failure occurs whenever

Banks acquire the funds that they use to purchase income-earning assets from such sources as

If interest rates increase from 9 percent to 10 percent,a bank with a duration gap of 2 years would experience a decrease in its net worth of

The most important category of assets on a bank's balance sheet is

Property promised to the lender as compensation if the borrower defaults is called ________.

In one sense ________ appears surprising since it means that the bank is not ________ its portfolio of loans and thus is exposing itself to more risk.

If a bank has $200,000 of checkable deposits,a required reserve ratio of 20 percent,and it holds $80,000 in reserves,then the maximum deposit outflow it can sustain without altering its balance sheet is

A bank will want to hold more excess reserves (everything else equal)when

Of the following methods that banks might use to reduce moral hazard problems,the one not legally permitted in the United States is the

To reduce moral hazard problems,banks include restrictive covenants in loan contracts.In order for these restrictive covenants to be effective,banks must also

Conditions that likely contributed to a credit crunch in 2008 include:

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 develop statistical models to calculate their maximum loss over a given time period.This approach is known as the

If a banker expects interest rates to fall in the future,her best strategy for the present is

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 and the Subprime Meltdown

Economic Analysis of Financial Regulation

Banking Industry: Structure and Competition

Central Banks and the Federal Reserve System

The Money Supply Process

Tools for Monetary Policy

The Conduct of Monetary Policy: Strategy and Tactics

The Foreign Exchange Market

The International Financial System

The Demand for Money

The Islm Model

Monetary and Fiscal Policy in the ISLM Model

Aggregate Demand and Supply Analysis

Transmission Mechanisms of Monetary Policy: The Evidence

Money and Inflation

Rational Expectations: Implications for Policy

Filters

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.

As the costs associated with deposit outflows ,the banks willingness to hold excess reserves will .

In one sense appears surprising since it means that the bank is not its portfolio of loans and thus is exposing itself to more risk.