Question 1

The primary function of commercial banks is to&#10;A) Underwrite securities&#10;B) Receive core deposits and make loans&#10;C) Broker transactions for customers&#10;D) Acquire long-term assets

Accepted Answer

The primary function of commercial banks is to receive deposits from the public and extend loans to individuals and businesses, acting as intermediaries between depositors and borrowers. This process helps in the creation of credit and liquidity in the economy.

Question 2

A write-down of assets by a commercial bank results in&#10;A) Fewer liabilities&#10;B) Greater net worth&#10;C) A loss of net worth&#10;D) None of the above

Accepted Answer

A write-down of assets by a commercial bank results in a loss of net worth because the value of the assets decreases, which directly reduces the equity (net worth) of the bank.

Question 3

Predecessors of fractional reserve commercial banks were&#10;A) Private insurers&#10;B) Goldsmiths&#10;C) Underwriters&#10;D) Undertakers

Accepted Answer

Goldsmiths, who stored gold and issued receipts that became an early form of currency, are considered predecessors of modern fractional reserve commercial banks. They lent out more receipts than the gold they held, creating the basis for fractional reserve banking.

Question 4

Clearinghouses are used&#10;A) In conducting the business of ECNs&#10;B) By specialist systems in executing trades&#10;C) In the process of making payments using transaction deposits where more than one bank is involved&#10;D) In routing orders to over-the-counter markets

Accepted Answer

Clearinghouses are used in the process of making payments using transaction deposits where more than one bank is involved, as they facilitate the clearing and settlement of transactions between different financial institutions.

Question 5

The payment system connecting commercial banks requires which of the following to be able to make a payment between customers using different banks?&#10;A) An ECN&#10;B) A clearinghouse, including an ACH&#10;C) An OTC&#10;D) All of the above

Accepted Answer

A clearinghouse, including an Automated Clearing House (ACH), is essential for facilitating payments between customers of different banks by clearing and settling transactions. ECNs are used for trading financial instruments, and OTC refers to over-the-counter trading, neither of which are directly involved in bank-to-bank customer payments.

Question 6

Seignorage is&#10;A) The license required to open a commercial bank&#10;B) Another term for the intermediation function&#10;C) Profits from issuing money&#10;D) The costs of running a commercial bank

Accepted Answer

Seignorage refers to the profits made by a government by issuing currency, especially the difference between the face value of money and the cost of producing it. This concept does not relate to licenses, intermediation functions, or operational costs of banks.

Question 7

The velocity of money refers to&#10;A) The speed by which payments are made through a clearinghouse&#10;B) The role of transaction deposits in funding bank assets&#10;C) Profits from issuing money&#10;D) The number of times per year that the money stock turns over in making payment for final goods and services

Accepted Answer

The velocity of money is a measure of the rate at which money is exchanged in an economy. It is defined as the number of times one unit of money is spent to buy goods and services per unit of time. Choice D accurately describes this concept, emphasizing the turnover of the money stock in transactions for final goods and services.

Question 8

Central banks no longer use money stock targets to achieve macroeconomic goals because&#10;A) The demand for money has proven to be unstable and unpredictable&#10;B) The money stock is no longer fashionable&#10;C) Fiscal policy has taken center stage&#10;D) Central banks still rely on the money stock

Accepted Answer

The demand for money has proven to be unstable and unpredictable, making it difficult for central banks to use money stock targets effectively for achieving macroeconomic goals.

Question 9

Under a gold standard, equilibrium between money demand and money supply is achieved by&#10;A) The money supply's adjusting to money demand&#10;B) The economy's (and thus money demand's) adjusting to the supply of money determined by the amount of gold in the economy&#10;C) Equilibrium between money demand and money supply is never achieved&#10;D) Intervention by international monetary institutions

Accepted Answer

Under a gold standard, the supply of money is directly tied to the amount of gold a country possesses. The economy and the demand for money adjust to this fixed supply, as the amount of gold essentially sets the money supply limits.

Question 10

Through maturity transformation&#10;A) Commercial banks address information asymmetries&#10;B) Commercial banks issue payment media&#10;C) Commercial banks are exposed to risk of higher interest rates&#10;D) None of the above

Accepted Answer

Maturity transformation refers to the practice of banks borrowing money on shorter terms and lending it out on longer terms. This exposes them to the risk of higher interest rates, as the cost of their short-term borrowings may increase while the interest they receive from long-term loans remains fixed.

Question 11

Commercial banks&#10;A) Address information asymmetries&#10;B) Provide liquidity to the economy&#10;C) Transform maturities&#10;D) All of the above

Accepted Answer

The answer of Commercial banks&#10;A) Address information asymmetries&#10;B) Provide liquidity...

Question 12

A federal safety net is extended to commercial banks because&#10;A) They hold a lot of the retail public's assets&#10;B) They pose systemic risk to the financial system and the economy&#10;C) They play a pivotal role in the payment system&#10;D) All of the above

Accepted Answer

The answer of A federal safety net is extended to...

Deck 3: The Special Role of Commercial Banks