highest interest rates.
b.
refuse to make risky loans and make loans only to the safest borrowers.
c.
invest in U.S. government securities and make loans only to established businesses.
d.
strike the appropriate balance between the attraction of bank profits and the need for bank safety.
DISC: Monetary and fiscal policy
United States – BPROG: Analytic
Monetary and fiscal policy
The Banking System
139. Excess reserves make a bank less vulnerable to runs, but bankers do not like to hold excess reserves because holding
excess reserves
a.
are disliked by depositors.
b.
means lower profits for banks.
c.
are discouraged by government regulators.
d.
All of the above are correct.
DISC: Monetary and fiscal policy
United States – BPROG: Analytic
Monetary and fiscal policy
The Banking System
140. A banker operating under a system of fractional reserves
a.
is exposed to potential bank runs.
b.
must keep a prudent level of reserves.
c.
must lend money carefully.
d.
All of the above are correct.
DISC: Monetary and fiscal policy
United States – BPROG: Analytic
Monetary and fiscal policy
The Banking System
141. Banking under a system of fractional reserves is a(n)
a.
inherently risky business that is unsafe regardless of bank management.
b.
inherently risky business that is relatively safe under prudent management.
c.
fairly safe business unless management is irresponsible.
d.
fairly safe business with no unusual risks.
DISC: Monetary and fiscal policy
United States – BPROG: Analytic
Monetary and fiscal policy
The Banking System
142. Banks that are managed in a very safe and conservative manner can be expected to earn
a.
b.
c.
d.
DISC: Monetary and fiscal policy
United States – BPROG: Analytic
Monetary and fiscal policy
The Banking System
143. A run on a bank may occur if
a.
depositors withdraw some funds to invest in the stock market.
b.
required reserves are increased.
c.
interest rates are raised.
d.
depositors lose confidence in the bank and attempt to withdraw all their funds.
e.
All of the above are correct.
DISC: Monetary and fiscal policy
United States – BPROG: Analytic
Monetary and fiscal policy
The Banking System
144. Bankers must always trade off
a.
honesty and dishonesty.
b.
stocks and loans.
c.
prudence and profits.
d.
gold and cash.
e.
All of the above are correct.
DISC: Monetary and fiscal policy
United States – BPROG: Analytic
Monetary and fiscal policy
The Banking System
145. It is imperative that banks maintain a reputation for safety in order that
a.
regulators can reduce their efforts.
b.
bank runs can be reduced or prevented.
c.
customers will not be afraid to ask for loans.
d.
stockholders can earn a high rate of return.
DISC: Monetary and fiscal policy
United States – BPROG: Analytic
Monetary and fiscal policy
The Banking System
146. Banking under a fractional reserve system is inherently risky, but
a.
safe if banks are allowed to make profits.
b.
regulation removes all danger of failures.
c.
is always safely done with modern management.
d.
is made safer with cautious and prudent management.
DISC: Monetary and fiscal policy
United States – BPROG: Analytic
Monetary and fiscal policy
The Banking System
147. In an economic system with privately owned, profit-maximizing banks, there will always be a difference between
a.
private profits and social profits.
b.
bank profits and other corporate profits.
c.
bank profits and macroeconomic objectives.
d.
bank profits and government profits.
DISC: Monetary and fiscal policy
United States – BPROG: Analytic
Monetary and fiscal policy
The Banking System
148. The FDIC
a.
insures most bank deposits for up to $250,000.
b.
eliminates the need for bank depositors to run to their bank when they hear bad news about the bank.
c.
has been credited with reducing the number of bank failures since 1933.
d.
All of the above are correct.
DISC: Monetary and fiscal policy
United States – BPROG: Analytic
Monetary and fiscal policy
The Banking System
149. Government regulations to insure the safety of bank deposits and to control the money supply include
a.
limitations on the types and quantities of assets in which banks may invest.
b.
elimination of the need for required reserves.
c.
setting interest rate ceilings on savings and money market deposit accounts.
d.
All of the above are correct.
DISC: Monetary and fiscal policy
United States – BPROG: Analytic
Monetary and fiscal policy
The Banking System
150. One intention of deposit insurance is to reduce the danger of
a.
excess lending.
b.
excess profits.
c.
risky lending.
d.
bank runs.
e.
All of the above are correct.
DISC: Monetary and fiscal policy
United States – BPROG: Analytic
Monetary and fiscal policy
The Banking System
151. The government regulates the banking industry by
a.
conducting frequent audits and examinations.
b.
limiting the kinds of assets that a bank may own.
c.
limiting the quantity of some kinds of assets that a bank may own.
d.
All of the above are correct.
DISC: Monetary and fiscal policy
United States – BPROG: Analytic
Monetary and fiscal policy
The Banking System
152. Bank regulation exists because public authorities are convinced that
a.
the balance between public interest and safety does not affect profitability, and should be removed from the
hands of managers.
b.
the balance between bank profitability and public interest cannot be handled with legislation, but can be
handled with regulation.
c.
the balance between bank profitability and safety cannot be left to profit-maximizing managers.
d.
the balance between bank safety and public interest can best be obtained by reliance on the market.
DISC: Monetary and fiscal policy
United States – BPROG: Analytic
Monetary and fiscal policy
The Banking System
153. Some bank regulation limits the types of assets that banks may own. The intent of this regulation is to
a.
protect banks from competition.
b.
provide banks with a minimum level of profits.
c.
limit the level of bank profits.
d.
maintain bank safety.
e.
All of the above are correct.
DISC: Monetary and fiscal policy
United States – BPROG: Analytic
Monetary and fiscal policy
The Banking System
154. Banks are required to keep a minimum level of reserves on hand. The intent of this regulation is
a.
monetary control rather than bank safety.
b.
bank safety in case of bank runs.
c.
maintenance of bank profits.
d.
limiting the level of bank profits.
a
Moderate
DISC: Monetary and fiscal policy
United States – BPROG: Analytic
Monetary and fiscal policy
The Banking System
155. The Federal Deposit Insurance Corporation insures
a.
savings accounts against unlawful transfer into checking accounts.
b.
bank deposits against the failure of an individual bank.
c.
that the bank will maintain sufficient required reserves.
d.
bank buildings and property against fire and theft.
Easy
DISC: Monetary and fiscal policy
United States – BPROG: Analytic
Monetary and fiscal policy
The Banking System
156. Most checkable deposits are insured up to $250,000 by
a.
state banking commissions.
b.
the Federal Reserve Board.
c.
U.S. Department of the Treasury.
d.
the Federal Deposit Insurance Corporation.
Easy
DISC: Monetary and fiscal policy
United States – BPROG: Analytic
Monetary and fiscal policy
The Banking System
157. As a general rule, you would be unwise to keep a deposit at an FDIC-insured bank in an amount greater than
a.
20 percent of the bank’s reserves.
b.
$1,000,000.
c.
$250,000.
d.
an infinite amount; there is no limit.
c
Easy
DISC: Monetary and fiscal policy
United States – BPROG: Analytic
Monetary and fiscal policy
The Banking System
158. The principal innovation that increases the safety of bank deposits is
a.
computerized accounting systems.
b.
credit cards.
c.
automatic teller machines.
d.
deposit insurance.
Easy
DISC: Monetary and fiscal policy
United States – BPROG: Analytic
Monetary and fiscal policy
The Banking System
159. The primary purpose of bank regulation is to
a.
assure that banks do not get into financial trouble.
b.
assure that banks lend to needy persons and businesses.
c.
assure that banks maintain a minimum level of profits.
d.
guarantee bank profitability and prevent stockholder losses.
a
Moderate
DISC: Monetary and fiscal policy
United States – BPROG: Analytic
Monetary and fiscal policy
The Banking System
160. The increase in bank supervision in the U.S. in the 1980s and early 1990s was due to an increase in bank
a.
profits.
b.
ownership of common stocks.
c.
failures.
d.
deposits and loans.
c
Easy
DISC: Monetary and fiscal policy
United States – BPROG: Analytic
Monetary and fiscal policy
The Banking System
161. Which of the following was true regarding sub-prime mortgages that were popular in 2005-2006?
a.
More than 90% of these loans were made by regulated banks.
b.
Bankers expected higher default rates on these loans.
c.
They were generally fixed rate loans.
d.
all of the above
DISC: Monetary and fiscal policy
United States – BPROG: Analytic
Monetary and fiscal policy
The Banking System
162. The occurrence of bank failures in the United States
a.
ended after 1933 and the creation of the FDIC.
b.
increased dramatically during the Clinton administration.
c.
reappeared in intensity in the late 1990s and early 2000s.
d.
reappeared in the 1980s and early 1990s and again in 2006.
DISC: Monetary and fiscal policy
United States – BPROG: Analytic
Monetary and fiscal policy
The Banking System
163. An asset of a bank is
a.
the value of money that is on deposit.
b.
the amount a depositor may legally borrow.
c.
something of value that the bank owes to a depositor.
d.
something of value that a bank owns.
DISC: The role of money
United States – BPROG: Analytic
The role of money
The Origins of the Money Supply
164. The basic equation for a bank’s balance sheet is ____.
a.
assets = liabilities − net worth
b.
net worth = assets − liabilities
c.
net worth = assets + liabilities
d.
liabilities = net worth + assets
DISC: The role of money
United States – BPROG: Analytic
The role of money
The Origins of the Money Supply
165. Under the modern system of fractional reserve banking, banks
a.
keep cash reserves equal to only a fraction of their deposit liabilities.
b.
loan out their excess reserves at interest, which is the key to their profitability.
c.
are always potentially vulnerable to runs.
d.
All of the above are correct.
DISC: The role of money
United States – BPROG: Analytic
The role of money
The Origins of the Money Supply
166. If a bank has $1,000,000 in reserves and checking deposits of $3,000,000, what is the bank’s reserve position if the
required reserve ratio is 20 percent?
a.
The bank has $500,000 of required reserves and $500,000 of excess reserves.
b.
The bank has $600,000 of required reserves and $400,000 of excess reserves.
c.
The bank has $400,000 of required reserves and $600,000 of excess reserves.
d.
The bank has $200,000 of required reserves and $800,000 of excess reserves.
DISC: The role of money
United States – BPROG: Reflective Thinking – BPROG: Analysis
The role of money
The Origins of the Money Supply
BLOOMS: Application
167. When a bank makes loans with excess reserves, it
a.
creates money.
b.
destroys money.
c.
alters the composition of M1.
d.
leaves the money supply unchanged.
DISC: The role of money
United States – BPROG: Analytic
The role of money
The Origins of the Money Supply
168. Which of the following would be an asset to a bank?
a.
cash in the vault
b.
a loan to a university student
c.
a government security
d.
All of the above are correct.
DISC: The role of money
United States – BPROG: Analytic
The role of money
169. Which of the following would be a liability to a bank?
a.
cash in the vault
b.
a loan to a new business
c.
a checking account of a professor
d.
All of the above are correct.
DISC: The role of money
United States – BPROG: Analytic
The role of money
The Origins of the Money Supply
170. The net worth of a bank is defined as the difference between
a.
income and expenses.
b.
assets and liabilities.
c.
loans and deposits.
d.
loans and reserves.
DISC: The role of money
United States – BPROG: Analytic
The role of money
The Origins of the Money Supply
171. When a banker accepts a deposit of $1,000 in cash and puts $200 aside as required reserves and then makes a loan of
$800 to a new borrower, this set of transactions
a.
decreases the money supply by $1,000.
b.
decreases the money supply by $200.
c.
does not change the money supply.
d.
increases the money supply by $200.
e.
increases the money supply by $800.
DISC: The role of money
United States – BPROG: Analytic
The role of money
The Origins of the Money Supply
172. Banks try to keep their level of excess reserves low because
a.
the Fed charges a penalty for holdings of excess reserves.
b.
they are concerned that the money multiplier will become too large.
c.
they wish to maximize profits.
d.
bank regulators levy fines on the amount of excess reserves.
DISC: The role of money
United States – BPROG: Analytic
The role of money
The Origins of the Money Supply
173. The net worth of a bank
a.
determines the level of bank loans possible.
b.
is determined by subtracting liabilities from assets.
c.
is determined by subtracting assets from liabilities.
d.
can never be a negative value.
DISC: The role of money
United States – BPROG: Analytic
The role of money
The Origins of the Money Supply
174. Excess reserves are put to use by a bank when it
a.
puts cash in the vault to back existing loans.
b.
pays off the mortgage on its building.
c.
sells government securities.
d.
makes loans to its customers.
DISC: The role of money
United States – BPROG: Analytic
The role of money
The Origins of the Money Supply
175. If you have a checking account at a local bank, your bank account there is a(n)
a.
asset to the bank and an asset to you.
b.
liability of the bank and a liability of yours.
c.
liability of the bank and an asset to you.
d.
asset to the bank and a liability of yours.
DISC: The role of money
United States – BPROG: Analytic
The role of money
The Origins of the Money Supply
176. The balance sheet of a solvent bank will show
a.
assets = liabilities − net worth.
b.
assets = liabilities + net worth.
c.
net worth = assets + liabilities.
d.
liabilities = assets + net worth.
DISC: The role of money
United States – BPROG: Analytic
The role of money
The Origins of the Money Supply
177. Any reserves held by a bank above the amount of minimum legal reserves are called
a.
total reserves.
b.
required reserves.
c.
fiat money.
d.
excess reserves.
DISC: The role of money
United States – BPROG: Analytic
The role of money
The Origins of the Money Supply
178. Which of the following is a bank liability?
a.
cash in the vault
b.
loans made to customers
c.
money market deposit accounts
d.
bank computers
e.
All of the above are correct.
DISC: The role of money
United States – BPROG: Analytic
The role of money
The Origins of the Money Supply
179. The net worth of a bank is
a.
equal to the value of assets.
b.
equal to the value of deposits.
c.
equal to the value of liabilities.
d.
the value of assets less liabilities.
e.
the value of loans and securities.
DISC: The role of money
United States – BPROG: Analytic
The role of money
The Origins of the Money Supply
180. As of December 31, 2010, the assets listed on the balance sheet of Bank A were: $1.5 million in cash reserves, and
$6 million in outstanding loans to its customers. Its liabilities totaled $6.5 million in checking deposits. What was the
bank’s net worth on that date?
a.
$1 million
b.
$4.5 million
c.
$5 million.
d.
$14 million.
e.
Zero
a
Moderate
DISC: The role of money
United States – BPROG: Analytic
The role of money
The Origins of the Money Supply
181. A liability to a bank is
a.
something that the bank owns.
b.
something that the bank owes.
c.
something a customer owes the bank.
d.
the value of bank buildings and hardware.
Moderate
DISC: The role of money
United States – BPROG: Analytic
The role of money
The Origins of the Money Supply
182. One aspect of bank accounting is that many liabilities of banks are
a.
assets of other persons and businesses in the economy.
b.
also liabilities of other persons and businesses in the economy.
c.
not matched by liabilities of most other banks.
d.
not actually owed to any other person or business in the economy.
a
Moderate
DISC: The role of money
United States – BPROG: Analytic
The role of money
The Origins of the Money Supply
183. Do bankers create money?
a.
No, they cannot do this as private businesses.
b.
No, they are prevented by federal law.
c.
Yes, through multiple deposit creation.
d.
Yes, by opening checking accounts for customers.
c
Moderate
DISC: The role of money
United States – BPROG: Analytic
The role of money
Banks and Money Creation
184. If the reserve requirement is 20 percent and a new deposit of $10,000 in cash is made by a customer to their checking
account, by how much are excess reserves increased?
a.
$10,000
b.
$8,000
c.
$4,000
d.
$2,000
Easy
DISC: The role of money
United States – BPROG: Analytic
The role of money
Banks and Money Creation
185. If Ms. Anniston transfers $1,000 from her checking account to her money market account, then
a.
M1 falls and M2 remains the same.
b.
M1 falls and M2 rises.
c.
both M1 and M2 rise.
d.
M1 remains the same and M2 rises.
a
Moderate
DISC: The role of money
United States – BPROG: Analytic
The role of money
Banks and Money Creation
186. The oversimplified money multiplier formula, when the required reserve ratio is m, is
a.
change in money supply = change in reserves × m.
b.
change in money supply = (1/m) /change in reserves.