Deck 10: The Economics of Banking

Question 1

Which of the following is NOT a nontransaction deposit?

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

Answer 1

a NOW account

Question 2

Which of the following helps explain why depositors sometimes put their funds in demand deposits rather than NOW accounts?

A) Demand deposits pay interest, whereas NOW accounts do not pay interest.
B) Businesses may not hold NOW accounts.
C) Checks may be written against demand deposits, but not against NOW accounts.
D) Demand deposits are more liquid than NOW accounts.

Answer 2

Businesses may not hold NOW accounts.

Question 3

A key difference between small-denomination and large-denomination time deposits is that

A) small-denomination time deposits pay no interest.
B) large-denomination time deposits may be bought and sold on secondary markets.
C) large-denomination time deposits carry a significant penalty for early withdrawal.
D) small-denomination time deposits carry a significant penalty for early withdrawal.

Answer 3

large-denomination time deposits may be bought and sold on secondary markets.

Question 4

Securities that banks sell and agree to repurchase are known as

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

Question 5

Which of the following is a bank liability?

A) reserves
B) consumer loans
C) nontransaction deposits
D) securities

Question 6

The interest rate on interbank loans is called the

A) discount rate.
B) federal funds rate.
C) repo rate.
D) prime rate.

Question 7

Short-term loans between banks are called

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

Question 8

Which of the following things do banks do with the funds they acquire from savers?

A) invest in corporate stock
B) invest in corporate bonds
C) make loans to individuals
D) all of the above

Question 9

The difference between a demand deposit and a NOW account is that

A) checks may not be written against NOW account balances.
B) demand deposits pay no interest.
C) NOW accounts pay no interest.
D) checks may not be written against demand deposit balances.

Question 10

Which of the following is NOT a bank liability?

A) checkable deposits
B) CDs
C) mortgage loans
D) borrowings from the Federal Reserve

Question 11

A balance sheet

A) is a statement showing an individual's or a firm's financial position at a particular point in time.
B) is a statement showing an individual's or a firm's income over a period of time.
C) is a statement listing the tax liabilities incurred by an individual or a firm.
D) can be constructed for any nonfinancial firm, but cannot be constructed for a financial firm.

Question 12

On a bank's balance sheet,assets are

A) the uses of acquired funds.
B) the sources of acquired funds.
C) those items owed by the bank to depositors and others.
D) by definition equal to the bank's liabilities.

Question 13

A checkable deposit that pays no interest is known as a

A) demand deposit.
B) certificate of deposit.
C) NOW account.
D) time deposit.

Question 14

Which of the following is a checkable deposit?

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

Question 15

Which of the following statements about checkable deposits is correct?

A) Checkable deposits are a larger fraction of banks' funds today than in 1973.
B) Checkable deposits are a smaller fraction of banks' funds today than in 1973.
C) All checkable deposits pay interest.
D) No checkable deposits pay interest.

Question 16

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

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

Question 17

Bank capital is equal to

A) the value of the capital originally invested in the bank by its owners.
B) the value of everything the bank owns.
C) the difference between the value of the bank's assets and the value of its liabilities.
D) the value of the buildings and other physical assets the bank owns.

Question 18

Which of the following represented the largest liability on the balance sheet of U.S.commercial banks in 2016?

A) checkable deposits
B) loans
C) nontransaction deposits
D) borrowings

Question 19

On a bank's balance sheet,liabilities are

A) the uses of acquired assets.
B) the sources of acquired funds.
C) all those items of value owned by the bank.
D) by definition equal to the bank's assets.

Question 20

The difference between a savings deposit and a time deposit is

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 21

What is the largest category of bank assets?

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

Question 22

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

A) $100,000
B) $250,000
C) $500,000
D) $1,000,000

Question 23

On a bank's balance sheet,"borrowings" are

A) loans to households.
B) loans to businesses.
C) nondeposit liabilities.
D) U.S. Treasury securities.

Question 24

A cash item in the process of collection is

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 25

Which asset is sometimes referred to as a bank's secondary reserves?

A) vault cash
B) U.S. government securities
C) repurchase agreements
D) federal funds

Question 26

Which of the following is NOT considered a cash item by banks?

A) U.S. Treasury bills
B) deposits at other banks
C) deposits at the Federal Reserve
D) vault cash

Question 27

Any reserves beyond what is required are called

A) required reserves.
B) excess reserves.
C) secondary reserves.
D) bank capital.

Question 28

About what percentage of bank assets was made up of cash items in 2016?

A) 11%
B) 22%
C) 37%
D) 59%

Question 29

Banks use repurchase agreements to

A) ensure that payments on consumer loans are made on time.
B) borrow funds from business firms or other banks.
C) guard against price fluctuations on long-term bonds.
D) ensure that they always have enough funds on hand to meet their federal tax liabilities.

Question 30

Federal funds are

A) the tax revenues of the federal government.
B) loans by the Federal Reserve to banks.
C) loans by banks to the Federal Reserve.
D) short-term loans between banks.

Question 31

Why are U.S.government securities referred to as a bank's secondary reserves?

A) Their current market value may count toward meeting a bank's legal reserve requirements.
B) They are very liquid.
C) Banks are legally required to hold a certain minimum amount of these securities.
D) They are the same thing as vault cash.

Question 32

Bank capital is

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 33

The interest rate on unsecured loans between banks is called the

A) discount rate.
B) repurchase rate.
C) T-bill rate.
D) federal funds rate.

Question 34

Which of the following is a bank asset?

A) checkable deposits
B) savings deposits
C) borrowings in the federal funds market
D) cash items in the process of collection

Question 35

In which of the following assets are commercial banks in the United States NOT allowed to invest checkable deposits?

A) home mortgages
B) corporate bonds
C) municipal bonds
D) U.S. Treasury bonds

Question 36

A bank's remaining value after it has met all its liabilities is known as

A) a bank's assets.
B) a bank's liabilities.
C) bank capital.
D) a bank's income.

Question 37

About what percentage of bank assets were loans in 2016?

A) 11%
B) 22%
C) 37%
D) 59%

Question 38

What percentage of bank assets were in security holdings in 2016?

A) 11%
B) 22%
C) 37%
D) 59%

Question 39

Required reserves are

A) the portion of demand deposits and NOW accounts banks must hold.
B) zero on demand deposits.
C) zero on NOW accounts.
D) imposed on all deposits at commercial banks.

Question 40

Loans by the Federal Reserve to banks are known as

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

Question 41

If the value of bank's loans declines,what is the corresponding reduction in a liability entry that the bank makes?

A) Deposits are reduced by the amount of the decline in the value of the loan.
B) Borrowings are reduced by the amount of the decline in the value of the loan.
C) Net worth is reduced by the amount of the decline in the value of the loan.
D) Cash items in the process of collection are reduced by the amount of the decline in the value of the loan.

Question 42

If a bank's total assets = $3,500 billion,its total liabilities = $3,200 billion,and its bank capital = $300 billion,its bank capital as a percentage of assets is approximately

A) 8.6%.
B) 9.4%.
C) 11.7%.
D) 91.4%.

Question 43

The very low interest rates following the financial crisis of 2007-2009 resulted in

A) many people moving their funds from CDs and money market accounts to checking accounts in order to have more liquidity without sacrificing much interest.
B) funds being transferred from checking accounts to time deposits.
C) further declines in checking accounts that began in the early 1970s.
D) people switching their funds from checking deposits to CDs in the pursuit of higher interest rates.

Question 44

What are the different forms of bank borrowings?

Question 45

In what ways does a certificate of deposit (CD)differ from a savings deposit?

Question 46

As of 2016,mortgage-backed securities made up what portion of securities held by a bank?

A) 5%
B) 29%
C) 57%
D) 75%

Question 47

Businesses hold substantial balances in demand deposits for all of the following reasons EXCEPT

A) they cannot hold NOW accounts.
B) the existence of low transactions costs.
C) to maintain liquidity.
D) relatively high interest rates.

Question 48

Which of the following is NOT covered by federal deposit insurance?

A) savings account
B) money market mutual fund
C) checking account
D) money market deposit account

Question 49

In 2016,net worth was about what percentage of total funds raised by banks?

A) 2%
B) 7%
C) 14%
D) 35%

Question 50

Which of the following involves banks borrowing funds from firms or other banks using the value of underlying securities as collateral?

A) federal funds
B) repurchase agreement
C) counterparty lending
D) money market account

Question 51

What is an important difference between certificates of deposits (CDs)worth less than $100,000 compared to those worth $100,000 or more?

Question 52

Bank capital can best be described as

A) funds contributed by shareholder purchasers of a bank's stock plus the accumulated retained earnings.
B) the accumulated amount of reserves held by a bank.
C) the location of most of the major banks of a country.
D) another name for bank assets.

Question 53

Which of the following is a hybrid of a checking and savings account?

A) CD
B) negotiable CD
C) passbook account
D) money market deposit account

Question 54

What is a repurchase agreement?

Question 55

On a bank's balance sheet,total assets are equal to

A) total liabilities.
B) bank capital.
C) total liabilities plus bank capital.
D) total liabilities minus bank capital.

Question 56

What are the advantages of bank deposits compared to other types of assets?

Question 57

Which of the following statements about a checking deposit is TRUE?

A) It is a liability for both households and banks.
B) It is an asset for both households and banks.
C) It is an asset for households but a liability for a bank.
D) It is a liability for households but an asset for a bank.

Question 58

As a result of the financial crisis,checkable deposits

A) became a smaller portion of overall liabilities.
B) experienced little change.
C) hit a new record high in terms of the percent of liabilities.
D) roughly doubled in terms of the percent of liabilities.

Question 59

Why do households hold less in checking accounts than they once did?

Question 60

On a bank's balance sheet,bank capital is considered

A) an asset.
B) a liability.
C) the difference between a firm's assets and it's shareholder's equity.
D) the total amount of funds banks have available to make loans.

Question 61

The difference between the interest a bank earns on loans and securities and the interest paid on deposits and debt divided by the total value of its assets is called

A) interest spread.
B) net interest margin.
C) return on assets.
D) return on equity.

Question 62

Limits on the value of the assets that commercial banks can acquire relative to their capital is known as

A) equity requirements.
B) capital requirements.
C) required reserves.
D) asset requirements.

Question 63

If a bank has a leverage ratio of 0.1 and a return on assets of 2%,what is its return on equity?

A) 0.2%
B) 2.1%
C) 5%
D) 20%

Question 64

If you deposit $300 in your bank and the required reserve ratio is 10%,your bank will have

A) an increase in required reserves of $300.
B) an increase in required reserves of $270.
C) an increase in required reserves of $3,000.
D) an increase in required reserves of $30 and an increase in excess reserves of $270.

Question 65

Which of the following is the source of funds for bank loans?

A) marketable securities
B) required reserves
C) excess reserves
D) bank capital

Question 66

The ratio of a bank's after-tax profit to bank capital is known as

A) net interest margin.
B) return on equity.
C) return on capital.
D) spread.

Question 67

A bank's costs include all of the following EXCEPT

A) the interest it pays to depositors.
B) the interest it pays on its loans or debt.
C) the cost of providing services.
D) the fees paid to maintain its reserves at the Federal Reserve.

Question 68

If you deposit a $50 check in the bank,the immediate impact on your bank's balance sheet will be a

A) $50 increase in reserves and a $50 increase in checkable deposits.
B) $50 decrease in reserves and a $50 increase in checkable deposits.
C) $50 increase in reserves and a $50 decrease in checkable deposits.
D) $50 decrease in liabilities and a $50 increase in checkable deposits.

Question 69

For a bank,the ratio of after-tax profit to assets is its

A) net interest margin.
B) return on assets.
C) return on equity.
D) spread.

Question 70

When a bank issues a checkable deposit and loans the funds out to a business,it has transformed

A) a financial asset for a saver into a liability for a borrower.
B) a financial liability for a saver into a financial asset for a borrower.
C) a short-term liability to a borrower into a long-term asset to a saver.
D) one liability into another liability.

Question 71

Moral hazard can contribute to high bank leverage in all of the following ways EXCEPT

A) having high capital requirements.
B) bank managers are compensated in part on providing shareholders with high returns on equity.
C) high bank leverage provides shareholders with a potential for a higher return on equity.
D) federal deposit insurance has reduced the incentive of depositors to monitor the behavior of bank managers.

Question 72

Excess reserves equal

A) total reserves less required reserves.
B) required reserves less total reserves.
C) total reserves plus required reserves.
D) required reserves divided by total reserves.

Question 73

Suppose a bank has $10 million in capital,$100 million in assets,and after-tax profit of $2 million.what is its return on assets? What is its return on equity?

Question 74

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

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 75

In order to reduce the likelihood of excessive leverage in the banking system,governments have traditionally

A) imposed capital requirements on commercial banks.
B) imposed capital requirement on investment banks.
C) imposed capital requirements on both commercial and investment banks.
D) imposed asset requirements on all banks.

Question 76

A bank's revenue comes from all of the following EXCEPT

A) interest earned on vault cash.
B) fees for services provided.
C) interest on loans.
D) interest on securities.

Question 77

The ratio of bank capital to bank assets is known as the bank's

A) leverage ratio.
B) net interest margin.
C) return on equity.
D) return on capital.

Question 78

Compare the characteristics of loans and marketable securities in terms of liquidity,risk,and information costs.

Question 79

If a bank's ratio of assets to capital is 25 and it's return on assets is -5%,what is its return on equity?

A) -0.2%
B) -5%
C) -30%
D) -125%

Question 80

In banking,the spread refers to the difference between the

A) interest rate on long-term bonds and the interest rate on short-term bonds.
B) interest rate on car loans and the interest rate on home mortgages.
C) average interest rate earned on assets and the average interest rate paid on liabilities.
D) bid and asked prices on a bond.