1. A financial intermediary that accepts deposits from savers, and makes loans to borrowers is a
a. stock exchange.
b. bond market.
c. bank.
d. finance company.
2. When one party to a transaction knows more than another, the situation is one of
a. rational expectations.
b. imperfect credibility.
c. opportunity cost.
d. asymmetric information.
3. Borrowers know more about their abilities to repay loans than the banks do. This is a situation of
a. adverse selection.
b. rational behavior.
c. credit crunch.
d. bank run.
4. The main problems caused by asymmetric information are
a. irrational expectations and moral hazard.
b. imperfect credibility and adverse selection.
c. adverse selection and irrational expectations.
d. adverse selection and moral hazard.
5. When people or firms that are worse than average risks are most likely to enter a contract that is offered to
everyone, the problem is called
a. irrational expectations.
b. adverse selection.
c. opportunity cost.
d. moral hazard.
6. When the existence of a contract changes the behavior of a party to the contract, the problem is called
a. irrational expectations.
b. adverse selection.
c. opportunity cost.
d. moral hazard.
7. Borrowers who default are more likely to seek loans than the borrowers who don’t default. This is an example of
a. irrational expectations.
b. rent-seeking behavior.
c. moral hazard.
d. adverse selection.
8. occurs in banking if the firm receiving a bank loan behaves differently after it receives the loan, in a way that
harms the bank.
a. Irrational expectations
b. Adverse selection
c. Moral hazard
d. Rent-seeking behavior
9. A bank offers credit cards with a 25 percent interest rate, when its competitors’ cards have just a 15 percent interest
rate. Despite the high rate, the bank finds itself losing money because many of its customers fail to repay the
balances on their cards. The bank’s losses are most likely to have occurred because of
a. bad management.
b. the lock-in effect.
c. redlining.
d. adverse selection.
10. If a business firm takes out a loan from a bank, but does not use the funds as the bank intended, the problem is
a. moral hazard.
b. adverse selection.
c. intermediation.
d. securitization.
11. Collateral is a(n)
bank’s loan.
a. document
b. liability
c. asset
d. interest payment
that a borrower promises to give to the bank if that borrower is unable to repay the
12. A legally enforced part of a loan contract that requires the borrower to act in a certain way or to use the borrowed
funds for a particular purpose is known as
a. collateral.
b. a net worth requirement.
c. a covenant.
d. a clause.
13. Which of the following reduces the risk of moral hazard and the bank‘s risk in making loans?
a. Collateral
b. Adverse selection
c. Fixed interest rate
d. Securitization
14. Savings-and-loan associations suffered losses in the late 1970s when
a. the farm sector of the economy became unprofitable, forcing many farmers into bankruptcy, leading to many
bad farm loans.
b. inflation rose, causing short-term interest rates to rise.
c. oil prices rose sharply, causing S&Ls to lose money invested in the oil sector.
d. short-term interest rates fell, causing S&Ls to suffer capital losses on their portfolios of short-term securities.
15. The S&L crisis in the late 1970s and early 1980s was made much worse by
a. moral hazard, when regulators failed to close bankrupt S&Ls, which in turn caused a credit crunch.
b. adverse selection, when commercial banks were allowed to buy financially sound S&Ls but did not buy
bankrupt S&Ls.
c. asymmetric information, because the government did not realize the bad financial condition of the S&Ls.
d. the regulatory dialectic.
16. A credit crunch occurs when
a. banks do not lend as they ordinarily would, but rather have much higher requirements for borrowers to qualify
for loans than normal.
b. inflation rises, driving up interest rate near their legal ceiling, causing people to pull their funds out of banks.
c. regulators pressure banks to increase loans to under-served groups in society.
d. government officials force banks to lend in areas where they wish to establish branches.
17. Which of the following is true of the credit crunch that occured in the U.S. economy in the early 1990s?
a. The credit crunch affected only big business firms.
b. Small business firms that were unable to obtain bank loans were most affected during the credit crunch.
c. The main reason behind the credit crunch was the dramatic decline in housing prices.
d. The government bailed out many of the financial firms that were affected by the credit crunch.
18. Which of the following is the main reason behind the financial crisis of 2008?
a. There was a sharp decline in the growth rate of money supply.
b. There was a sharp increase in the quantity of exports from the U.S. to Asian countries.
c. Banks in the U.S. made subprime mortgage loans.
d. Banks had much higher requirements for borrowers to qualify for loans than normal.
19. Banks earn profit by
a. borrowing from depositors at a lower interest rate, and lending those funds at a higher interest rate.
b. reducing the service charges for safety vaults and ATM facilities.
c. lending more loans to non-risky business firms.
d. reducing the amount of transaction deposits.
20. Accounting rules require that a bank’s equals its .
a. equity capital; assets plus liabilities.
b. assets; liabilities minus equity capital.
c. liabilities; assets plus equity capital.
d. liabilities; assets minus equity capital.
21. Which of the following is recorded under the asset side of a bank‘s balance sheet?
a. Transaction deposits
b. Equity capital
c. Borrowings
d. Reserves
22. Which of the following is recorded under the liabilities side of a bank’s balance sheet?
a. Transaction deposits
b. Securities
c. Reserves
d. Loans
23. A bank’s reserves equal its
a. government securities.
b. transactions deposits.
c. vault cash plus deposits at the Federal Reserve.
d. cash assets plus government securities.
24. Paul, a customer of a bank, writes a check for $50,000 to a customer of another bank. Which of the following
changes will be reflected in Paul’s bank’s balance sheet?
a. Reserves decrease by $50,000.
b. Transactions deposits increase by $50,000.
c. Nontransactions deposits increase by $50,000.
d. Borrowings increase by $50,000.
25. Sarah, a customer of a bank, transfers $10,000 from her checking account to her money-market deposit account.
Which of the following changes will be reflected in Sarah’s bank‘s balance sheet?
a. Reserves decrease by $10,000.
b. Transactions deposits increase by $10,000.
c. Nontransactions deposits decrease by $10,000.
d. Borrowings increase by $10,000.
26. A bank has currency and coins equal to $20 million in its vaults. It has securities worth $10 million, has borrowings
equal to $5 million, and has given out loans equal to $2 million. It also has deposits with the Federal Reserve equal to
$4 million. The total reserves of the bank equals
a. $12 million.
b. $22 million.
c. $24 million.
d. $36 million.
27. A bank with transaction deposits totaling $45 million had reserves equal to $0.98 million. The reserve requirement for
this bank is percent. (Hint: use the cutoff amounts as per the reserve requirements for the year 2013)
a. 10
b. 8
c. 3
d. 2
28. The reserve requirement is 0 percent on the first $8 million in transaction deposits, 3 percent on amounts between $8
million and $50 million, and 10 percent on amounts above $50 million. A bank with transaction deposits totaling $7
million has required reserves equal to
a. $0.00 million.
b. $0.21 million.
c. $0.70 million.
d. $1.17 million.
29. The reserve requirement is 0 percent on the first $8 million in transaction deposits, 3 percent on amounts between $8
million and $50 million, and 10 percent on amounts above $50 million. A bank with transaction deposits totaling $83
million has required reserves equal to
a. $2.49 million.
b. $4.56 million.
c. $6.54 million.
d. $8.30 million.
30. A bank’s excess reserves equal its
a. vault cash plus deposits at the Federal Reserve.
b. total reserves minus required reserves.
c. reserve requirement times transactions deposits.
d. vault cash plus required reserves.
31. Suppose a bank has $200 million as transaction deposits, and holds $25 million as reserves. If the reserve
requirement is uniformly 10% on any positive amount, the bank’s excess reserves equals
a. $25 million.
b. $10 million.
c. $5 million.
d. $1 million.
32. Suppose a bank’s excess reserves are equal to $100 million. The bank is required to hold $50 million as reserves. The
bank currently holds as reserves.
a. $50 million
b. $100 million
c. $150 million
d. $200 million
33. Under which of the following options does the Fed offer reserves to banks through a competitive auction process?
a. Term deposit facility
b. Discount lending
c. Quantitative easing
d. Safety vault facility
34. The market in which banks with excess reserves lend them to banks that desire additional reserves is known as the
________ market.
a. capital reserves
b. excess reserves
c. federal funds
d. excess funds
35. The federal funds rate is the interest rate in the market for
a. mortgage loans.
b. loans of reserves between banks.
c. loans of government securities.
d. federal agency securities.