Question 1

All central banks impose reserve requirements on the banks they regulate.

Accepted Answer

Not all central banks impose reserve requirements. Some, like the Federal Reserve in the United States, have the ability to set reserve requirements but may choose to set them to zero, as has been the case since March 2020. Other central banks may use different tools for monetary policy.

Question 2

Some central banks around the world impose reserve requirements on bank loans.

Accepted Answer

Reserve requirements are a common monetary policy tool used by central banks to regulate the amount of money that can be lent out by commercial banks. By requiring banks to maintain a certain percentage of their deposits as reserves, central banks can control the money supply and help stabilize the economy. Many central banks around the world impose reserve requirements on bank loans.

Question 3

All central banks around the world have some specified reserve requirement.

Accepted Answer

Not all central banks have specified reserve requirements. Some, like the Federal Reserve in the United States, have moved to a system of ample reserves where reserve requirements are set to zero, relying instead on interest rates and other tools to manage monetary policy.

Question 4

Discount window loans jumped dramatically the day following 9/11.

Accepted Answer

The discount window loans offered by the Federal Reserve to banks increased significantly on September 12, 2001, the day after the 9/11 attacks. This was done in an effort to prevent a possible liquidity crisis in the banking system.

Question 5

If a bank in the United States runs a legal reserve deficit of more than 2 percent of its required daily average legal reserve position,it will be assessed an interest penalty equal to the Federal Reserve's discount rate plus 5 percent.

Accepted Answer

The answer of If a bank in the United States...

Question 6

One of the problems with liquidity management for a bank is that there is a trade-off between liquidity and profitability.

Accepted Answer

Banks must maintain enough liquidity to meet customer demands for withdrawals, but holding large amounts of cash and other easily liquid assets can lower profitability by reducing investment opportunities. Therefore, banks must strike a balance between maintaining adequate liquidity and maximizing profits.

Question 7

The liquidity problem for banks is made easier because most of their liabilities are not subject to immediate repayment.

Accepted Answer

The answer of The liquidity problem for banks is made...

Question 8

The oldest approach to liquidity management is the asset liquidity management approach.

Accepted Answer

The asset liquidity management approach is indeed the oldest approach to liquidity management, dating back to ancient times when traders would carry goods that were easily exchangeable for cash to ensure they had liquidity.

Question 9

A bank or financial service institution can meet reserve requirements by selling Treasury securities in its portfolio.

Accepted Answer

By selling Treasury securities in its portfolio, a bank or financial service institution can raise cash to meet reserve requirements.

Question 10

Robberies of cash from banks have declined in recent years.

Accepted Answer

The answer of Robberies of cash from banks have declined...

Question 11

One of the problems with liquidity management for a bank is that rarely does the demand for funds equals the supply of funds at a given time.

Accepted Answer

Liquidity management involves balancing the demand for funds (withdrawals, loan requests, etc.) with the supply of funds (deposits, investments, etc.). However, it is rare that these two factors will be perfectly balanced at any given time, which is one of the challenges of liquidity management for banks.

Question 12

The liquidity problem for banks is made easier because depositors and borrowers are not sensitive to changing interest rates.

Accepted Answer

Deposit and borrowers are often sensitive to changing interest rates, making it harder for banks to adjust their liquidity when faced with changes in demand.

Question 13

The sources and uses of funds method of estimating a bank's liquidity requirements divides the bank's liabilities into three categories-hot money,vulnerable funds,and stable funds-and estimates the probability of each being withdrawn from the bank.

Accepted Answer

The sources and uses of funds method does not categorize liabilities into hot money, vulnerable funds, and stable funds. Instead, it focuses on matching the timing of cash inflows and outflows to estimate liquidity needs.

Question 14

According to the textbook,if a bank's liquidity deficit is expected to last for only a few hours,the Federal funds market or the central bank's discount window is normally the preferred source of funds.

Accepted Answer

The textbook states that if a bank's liquidity deficit is expected to be short-term, such as lasting only a few hours, then the preferred sources of funds are the Federal funds market or the central bank's discount window.

Question 15

According to the textbook,banks making heavy use of borrowed sources of liquidity must wrestle with the problem of interest cost uncertainty.

Accepted Answer

Banks that heavily rely on borrowed sources of liquidity may face fluctuations in interest rates, causing uncertainty in their interest costs.

Question 16

Interest in banks' and financial service institutions' liquidity management is a relatively new phenomenon which arose following the 9/11 crisis.

Accepted Answer

Interest in liquidity management by banks and financial institutions began long before the 9/11 crisis. However, the crisis did highlight the importance of effective liquidity management and led to increased regulatory scrutiny in this area.

Question 17

A bank's money position manager is responsible for ensuring that the bank maintains an adequate level of legal reserves.

Accepted Answer

The job of a bank's money position manager is to manage the bank's daily liquidity needs and ensure that the bank has enough money available to meet its obligations. One of the key ways that the money position manager does this is by ensuring that the bank maintains an adequate level of legal reserves, which are the minimum amount of cash and other liquid assets that banks are required to hold by law. Therefore, it is true that a bank's money position manager is responsible for ensuring that the bank maintains an adequate level of legal reserves.

Question 18

The liquidity indicator,core deposits divided by total assets,is a measure of stored liquidity.

Accepted Answer

The answer of The liquidity indicator,core deposits divided by total...

Question 19

Core deposit ratio is used as one of the liquidity indicators for depository institutions and is defined as ratio of the core deposits to total assets.

Accepted Answer

The statement is true.

Question 20

If a bank receives more checks deposited to the accounts it holds than checks drawn against its deposit accounts,the bank's legal reserves will tend to increase.

Accepted Answer

When a bank receives more checks deposited to its accounts than checks drawn against its deposit accounts, the excess funds will increase the bank's deposits, which, in turn, will increase its legal reserves. Legal reserves are defined as the minimum amount of funds that a bank must hold in reserve against its deposit liabilities. Hence, when a bank's deposits increase, its legal reserves also tend to increase.

Quiz 11: Liquidity and Reserves Management: Strategies and Policies