11.2 The Banking System
1) A commercial bank is deined as
A) any institution that accepts deposits.
B) a irm that is chartered to accept deposits and make loans.
C) the institution that sets regulations for commercial activities.
D) a irm that obtains funds by selling shares and then buys U.S. Treasury bills.
E) any institution that makes loans.
Skill: Level 1: Deinition
Section: Checkpoint 11.2
Status: Old
AACSB: Relective thinking
2) Which statement is most correct about the types of deposits a commercial bank can
accept?
A) A commercial bank accepts checking, savings and time deposits.
B) A commercial bank can only accept checking deposits from commercial enterprises.
C) A commercial bank accepts savings and time deposits, but not checking deposits.
D) A commercial bank does not accept deposits but sells shares.
E) A commercial bank can accept loan deposits, reserve deposits, and checkable deposits.
Skill: Level 2: Using deinitions
Section: Checkpoint 11.2
Status: Old
AACSB: Relective thinking
3) The goal of a commercial bank is to
A) establish good regulations for commercial activities.
B) make only safe, no-risk loans.
C) maximize its stockholders’ wealth.
D) minimize its taxes paid to state governments.
E) accept only deposits made in money.
Skill: Level 2: Using deinitions
Section: Checkpoint 11.2
Status: Old
AACSB: Relective thinking
31
4) Banks earn a proit by
A) keeping as many reserves on hand as possible.
B) making loans at a lower interest rate than the rate that they ofer on their deposits.
C) charging an interest rate on their depositors’ accounts.
D) making loans at a higher interest rate than the rates that they ofer on their deposits.
E) not paying interest on their reserves.
Skill: Level 3: Using models
Section: Checkpoint 11.2
Status: Old
AACSB: Relective thinking
5) Which of the following are assets of commercial banks?
i. reserves
ii. loans
iii. deposits
A) i only
B) ii only
C) i and ii
D) ii and iii
E) i, ii, and iii
Skill: Level 1: Deinition
Section: Checkpoint 11.2
Status: Old
AACSB: Relective thinking
6) Banks generally earn the highest interest rate
A) on service charges on individuals’ checking accounts.
B) by making loans to business irms.
C) by making mortgage loans to individuals.
D) by making credit card loans.
E) by buying government securities.
Skill: Level 1: Deinition
Section: Checkpoint 11.2
Status: Old
AACSB: Relective thinking
32
7) The largest category of commercial banks’ assets is
A) loans.
B) reserves.
C) currency.
D) securities.
E) checkable deposits.
Skill: Level 1: Deinition
Section: Checkpoint 11.2
Status: Old
AACSB: Relective thinking
8) Which of the following is NOT held as an asset by banks?
A) reserves
B) loans
C) securities
D) currency in the banks’ vaults
E) checkable deposits
Skill: Level 2: Using deinitions
Section: Checkpoint 11.2
Status: Old
AACSB: Relective thinking
9) Which of the following describes the “invention” of banking?
A) The British Empire created a banking system to fund its exploration of the New World.
B) Members of the New York Stock Exchange founded the Bank of America in the 1700s.
C) Goldsmiths in the sixteenth century issued gold receipts which entitled its owners to
reclaim their gold on demand.
D) Clergy in the Renaissance created the banking system to help further the growth of the
church.
E) The United States government founded the Federal Reserve in 1913.
Skill: Level 2: Using deinitions
Section: Checkpoint 11.2
Status: Old
AACSB: Relective thinking
33
10) When goldsmiths issued receipts to gold owners, and those gold receipts circulated
while gold stayed in the goldsmiths’ safes,
A) the gold receipts were considered money because they were used as a means of
payment.
B) an infant banking system developed in sixteenth century Europe.
C) iat money was created.
D) money was invented.
E) Both A and B are correct.
Skill: Level 5: Critical thinking
Section: Checkpoint 11.2
Status: Old
AACSB: Relective thinking
11) A commercial bank’s reserves are equal to the amount of
A) the bank’s deposits.
B) the bank’s government securities.
C) the bank’s loans.
D) currency in the bank’s vault plus the balance on its reserve account at a Federal Reserve
Bank.
E) only the currency in its vault.
Skill: Level 1: Deinition
Section: Checkpoint 11.2
Status: Old
AACSB: Relective thinking
12) In 2013 banks kept reserves equal to about ________ of their assets.
A) 75 percent
B) 25 percent
C) 18 percent
D) 50 percent
E) 37 percent
Skill: Level 2: Using deinitions
Section: Checkpoint 11.2
Status: Revised
AACSB: Relective thinking
34
13) Commercial bank reserves are typically less than 1 percent of total assets, however in
2013 bank reserves ________ because of ________.
A) rose to around 88 percent; the inancial crisis of 2008-2009
B) dropped drastically to near zero; the inancial crisis of 2008-2009
C) rose to around 18 percent; the inancial crisis of 2008-2009
D) dropped drastically to near zero; the wave of natural disasters experienced in the nation
and around the world
E) rose drastically to around 18 percent; the wave of natural disasters experienced in the
nation and around the world
Skill: Level 3: Using models
Section: Checkpoint 11.2
Status: New
AACSB: Relective thinking
14) When a commercial bank receives a deposit, it must keep part of the deposit as cash
reserves to satisfy its
A) securities and loans.
B) required reserves.
C) excess reserves.
D) interbank loans.
E) loan requirements.
Skill: Level 2: Using deinitions
Section: Checkpoint 11.2
Status: Old
AACSB: Relective thinking
15) A bank has checkable deposits of $1,000,000, loans of $600,000, and government
securities of $400,000. If the required reserve ratio is 5 percent, the amount of required
reserves is
A) $100,000.
B) $30,000.
C) $50,000.
D) $80,000.
E) $20,000.
Skill: Level 2: Using deinitions
Section: Checkpoint 11.2
Status: Old
AACSB: Analytical thinking
35
16) A bank has $250 in checking deposits, $1,000 in savings deposits, $1,200 in time
deposits, $1,000 in loans to businesses, $400 in outstanding credit card balances, $800 in
government securities, $25 in currency in its vault, and $25 in deposits at the Fed. Of
these, ________ are part of M2.
A) $3,450
B) $2,450
C) $2,850
D) $2,200
E) $2,600
Skill: Level 3: Using models
Section: Checkpoint 11.2
Status: Old
AACSB: Analytical thinking
17) A bank has $250 in checking deposits, $1,000 in savings deposits, $1,200 in time
deposits, $1,000 in loans to businesses, $400 in outstanding credit card balances, $800 in
government securities, $25 in currency in its vault, and $25 in deposits at the Fed. The
bank’s reserves are equal to
A) $25.
B) $275.
C) $2,225
D) $50.
E) $350.
Skill: Level 3: Using models
Section: Checkpoint 11.2
Status: Old
AACSB: Analytical thinking
36
18) The above table gives assets and deposits for a (small) bank. The bank’s deposits that
are part of M1 are equal to
A) $1,600.
B) $600.
C) $3,100.
D) $3,130.
E) $30.
Skill: Level 3: Using models
Section: Checkpoint 11.2
Status: Old
AACSB: Analytical thinking
19) The above table gives assets and deposits for a (small) bank. The bank’s deposits that
are part of M2 are equal to
A) $600.
B) $1600.
C) $3,100.
D) $30.
E) $5,100.
Skill: Level 3: Using models
Section: Checkpoint 11.2
Status: Old
AACSB: Analytical thinking
37
20) The above table gives assets and deposits for a (small) bank. The bank’s reserves are
equal to
A) $20.
B) $30.
C) $600.
D) $630.
E) $620.
Skill: Level 3: Using models
Section: Checkpoint 11.2
Status: Old
AACSB: Analytical thinking
21) Cisco is considering opening a inancial institution that accepts savings deposits from
only its employees and makes loans to only its employees. The best description of this
inancial institution is that it is a
A) credit union.
B) commercial bank.
C) savings and loan association.
D) savings bank.
E) federal government chartered credit bank.
Skill: Level 2: Using deinitions
Section: Checkpoint 11.2
Status: Old
AACSB: Relective thinking
22) Which of the following is a thrift institution?
i. a credit union
ii. the Fed
iii. a savings bank
A) i only
B) ii only
C) iii only
D) Both i and iii
E) i, ii, and iii
Skill: Level 1: Deinition
Section: Checkpoint 11.2
Status: Old
AACSB: Relective thinking
38
23) A commercial bank’s main goal is to
A) provide loans to its customers.
B) maximize the wealth of its stockholders.
C) help the government when it needs money.
D) lend money to the Federal Reserve Banks.
E) open checking accounts.
Skill: Level 2: Using deinitions
Section: Checkpoint 11.2
Status: Old
AACSB: Relective thinking
24) Which of the following lists includes only banks’ assets?
A) liquid assets, loans, securities, and reserves
B) reserves, savings deposits, securities, and loans
C) reserves, securities, liquid assets, and savings deposits
D) securities, reserves, checkable deposits, and liquid assets
E) reserves, checkable deposits, securities, and loans
Skill: Level 2: Using deinitions
Section: Checkpoint 11.2
Status: Old
AACSB: Relective thinking
25) A commercial bank’s reserves are
A) bonds issued by the U.S. government that are very safe.
B) the provision of funds to businesses and individuals.
C) currency in its vault plus the balance on its reserve account at a Federal Reserve Bank.
D) savings and time deposits.
E) its loans.
Skill: Level 1: Deinition
Section: Checkpoint 11.2
Status: Old
AACSB: Relective thinking
39
26) A bank has $400 in checkable deposits, $800 in savings deposits, $700 in time deposits,
$900 in loans to businesses, $300 in outstanding credit card balances, $500 in government
securities, $10 in currency in its vault, and $20 in deposits at the Fed. The bank’s deposits
that are part of M1 are equal to
A) $1,900.
B) $400.
C) $1,210.
D) $530.
E) $410.
Skill: Level 2: Using deinitions
Section: Checkpoint 11.2
Status: Old
AACSB: Analytical thinking
27) Which of the following accept deposits from or sell shares to the general public?
i. money market funds
ii. thrift institutions
iii. commercial banks
A) i only
B) ii only
C) iii only
D) Both ii and iii
E) i, ii, and iii
Skill: Level 1: Deinition
Section: Checkpoint 11.2
Status: Old
AACSB: Relective thinking
28) Which of the following is a thrift institution?
A) a savings and loan association
B) a money market fund
C) a commercial bank
D) a loan institution
E) the Federal Reserve
Skill: Level 2: Using deinitions
Section: Checkpoint 11.2
Status: Old
AACSB: Relective thinking
40