Commercial bank

1. In the absence of regulation, banks would probably

hold
A. too much capital, making it more difficult to obtain loans.
B. too much capital, reducing the profitability of banks.
C. too little capital.
D. too much capital, reducing the efficiency of the payments
system.

2. Bankʹs make their profits primarily by issuing ________.

A. negotiable CDs
B. loans
C. equity
D. NOW accounts

3. Which of the following statements is false?

A. Checkable deposits include NOW accounts
B. Checkable deposits are the primary source of bank funds.
C. Checkable deposits are usually the lowest cost source of
bank funds.
D. Checkable deposits are payable on demand.

4. Bank capital is equal to ________ minus ________.

A. total liabilities; total borrowings
B. total liabilities; total assets
C. total assets; total liabilities
D. total assets; total reserves

5. Which of the following bank assets is the most

liquid?
A. Reserves
B. Consumer loans
C. Cash items in process of collection
D. Gvernment securities

6. The fraction of checkable deposits that banks are

required by regulation to hold are
A. required reserves.
B. vault cash.
C. total reserves.
D. excess reserves.

7. A bank's uses of funds corresponds to the part of its

balance sheet called:
A. assets.
B. liabilities.
C. None of the above is correct.
D. bank capital.

[Link] of the following are reported as assets on a

bank’s balance sheet?
A. Savings deposits
B. Borrowings
C. Bank capital
D. Reserves

9. Credit risk management tools include

a) interest rate swaps.
b) duration analysis
c) collateral.
d) deductibles.

10. Bank capital is listed on the ________ side of the

bank’s balance sheet because it represents a ________ of
funds.
a. asset; use
b. liability; use
c. liability; source
d. asset; source

11. Net profit after taxes per dollar of equity capital is a

basic measure of bank profitability called
a) return on assets.
b) return on investment
c) return on equity.
d) return on capital.

12. 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 lower is the credit risk for the owners of the bank.
c. the lower the possibility of bank failure.
d. the higher is the return for the owners of the bank.

13. Which of the following statements are true?

a) A bank’s balance sheet indicates whether or not the bank is
profitable.
b) A bank’s assets are its sources of funds.
c) A bank’s liabilities are its uses of funds.
d) A bank’s balance sheet shows that total assets equal total
liabilities plus equity capital.

14. Which of the following statements are true?

a. Demand deposits are checkable deposits that pay interest
b. Checkable deposits do not include NOW accounts.
c. Checkable deposits are the primary source of bank funds.
d. Checkable deposits are payable on demand.

15. Which of the following are not reported as assets on

a bank’s balance sheet?
a) Treasury securities
b) Checkable deposits
c) Cash items in the process of collection
d) Deposits with other banks

16. Banks face the problem of ________ in loan markets

because bad credit risks are the ones most likely to
seek bank loans.
a. moral hazard
b. moral suasion
c. adverse selection
d. intentional fraud

17. Which of the following is a bank liability?

a) U.S. Treasury bonds
b) mortgage loans
c) checkable deposits
d) Reserves

18. 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 selection.
b. moral hazard.
c. lemon lenders
d. adverse credit risk.

19. Bank reserves include

a. deposits at other banks and deposits at the central bank.
b. vault cash and deposits at the central bank.
c. vault cash and short-term Treasury securities.
d. deposits at the Fed and short-term treasury securities.

20. Which of the following statements are true?

A. A bank’s liabilities are its uses of funds.
B. A bank’s balance sheet indicates whether or not the bank is
profitable.
C. A bank’s balance sheet shows that total assets equal total
liabilities plus equity capital.
D. A bank’s assets are its sources of funds.

21. Which of the following statements is false?

a. A bank’s assets are its uses of funds.
b. A bank issues liabilities to acquire funds.
c. Bank capital is recorded as an asset on the bank balance
sheet.
d. The bank’s assets provide the bank with income.

22. Which of the following are reported as liabilities on

a bank's balance sheet?
a. U.S. Treasury securities
b. Discount loans
c. Reserves
d. Loans

23. A bank's reserves do not include:

a. currency in the bank.
b. the bank's deposits at the Federal Reserve.
c. U.S. Treasury bills.
d. currency in ATM machines.

24. The difference between a bank's reserves and its

required reserves is:
A. equity.
B. net interest income.
C. nothing; they are the same thing
D. excess reserves.

25. Holding large amounts of bank capital helps prevent

bank failures because
a. it makes it easier to call in loans
b. it means that the bank has a higher income.
c. it makes loans easier to sell.
d. it can be used to absorb the losses resulting from bad
loans.

26. 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. adverse lending
b. moral suasion
c. adverse selection
d. moral hazard

27. The liabilities of a bank represent the its:

a) uses of funds.
b) sources of funds.
c) None of the above is correct.
d) abuses of funds.
 Money supply process

1. The ratio that relates the change in the money

supply to a given change in the monetary base is called
the
a. discount rate.
b. money multiplier.
c. deposit ratio.
d. required reserve ratio

2. An assumption in the model of the money supply

process is that the desired levels of currency and
excess reserves
a. grow proportionally with high-powered money.
b. grow proportionally over time.
c. are given as constants.
d. grow proportionally with checkable deposits.

3. Decisions by depositors to increase their holdings of

________, or of banks to hold ______will result in a smaller
expansion of deposits than the simple model predicts.
a. currency; required reserves
b. deposits; excess reserves
c. deposits; required reserves
d. currency; excess reserves

4. Everything else hed constant, an increase in the

required reserve ratio on checkable deposits causes the
M1 money multiplier to ________ and the money supply to
________.
a. increase; increase
b. increase; decrease
c. decrease; increase
d. decrease; decrease

5. Everything else held constant, a decrease in holdings

of excess reserves will mean
a. an increase in the money supply.
b. an increase in discount loans
c. a decrease in the money supply.
d. a decrease in checkable deposits.

6. Everything else held constant, an increase in

currency holdings will cause
a. the money supply to fall.
b. the money supply to remain constant.
c. the money supply to rise.
d. checkable deposits to rise

7. Everything else held constant, an increase in the

required reserve ratio on checkable deposits will cause
a. checkable deposits to rise
b. the money supply to remain constant.
c. the money supply to fall.
d. the money supply to rise.

8. The simple deposit multiplier can be expressed as

the ratio of the
a. change in reserves in the banking system divided by the change in deposits.
b. change in deposits divided by the change in reserves in the banking system.
c. change in deposits divided by the required reserve ratio.
d. required reserve ratio divided by the change in reserves in the banking
system.

9. The variable that reflects the effect on the money

supply of changes in factors other than monetary base
is the
a. money multiplier.
b. currency-checkable deposits ratio.
c. required reserve ratio.
d. nonborrowed base.

10. When the Fed supplies the banking system with an

extra dollar of reserves, deposits increase by more than
one dollar, a process called
a. expansionary deposit creation.
b. multiple deposit creation.
c. stimulative deposit creation
d. extra deposit creation.
11. If reserves in the banking system increase by $100,
then checkable deposits will increase by $50 in the
simple model of deposit creation when the required
reserve ratio is
a 0.05.
b 0.10.
c 0.01.
d 0.20
12. If the required reserve ratio is 10 percent, the simple deposit multiplier
is
a 10.0
b 2.5.
c 100.0.
d 5.0.

13. If the required reserve ratio is equal to 10 percent, a single bank can
increase its loans up to a maximum amount equal to
a. its total reserves.
b. 10 percent of its excess reserves.
c. its excess reserves.
d. 10 times its excess reserves.

14. In the simple deposit expansion model, an expansion in checkable

deposits of $1,000 when the required reserve ratio is equal to 10 percent
implies that the Fed
a. purchased $100 in government bonds.
b. sold $100 in government bonds.
c. purchased $1000 in government bonds.
d. sold $1,000 in government bonds

15. Individuals that lend funds to a bank by opening a checking account

are called
a. policyholders.
b. debt holders.
c. depositors.
d. partners.

16. The amount of borrowed reserves is ________ related to the discount

rate, and is _____related to the market interest rate.
a. negatively; positively
b. positively; positively
c. negatively; negatively
d. positively; negatively

17. The money supply is ________ related to the nonborrowed monetary

base, and _______ related to the level of borrowed reserves.
a. negatively; not
b. positively; positively
c. negatively; negatively
d. positively; negatively

18. When the Fed supplies the banking system with an extra dollar of
reserves, deposits ________ by ________ than one dollar - a process called
multiple deposit creation.
a. increase; less
b. decrease; more
c. increase; more
d. decrease; less

19. In the model of the money supply process, the bankʹs role in
influencing the money supply process is represented by
a. only borrowed reserves.
b. only the excess reserve ratio.
c. only the currency ratio.
d. both the excess reserve ratio and the market interest rate.

20. In the simple deposit expansion model, a decline in checkable deposits

of $1,000 when the required reserve ratio is equal to 10 percent implies
that the Fed
a. purchased $100 in government bonds.
b. sold $1,000 in government bonds.
c. purchased $1,000 in government bonds.
d. sold $100 in government bonds.