Money, Banking, and the Financial System (Hubbard/O’Brien)
Chapter 10 The Economics of Banking
10.1 The Basics of Commercial Banking: The Bank Balance Sheet
1) 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.
2) 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.
3) 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.
4) 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.
5) 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
6) Which of the following is NOT a bank liability?
A) checkable deposits
B) CDs
C) mortgage loans
D) borrowings from the Federal Reserve
7) Which of the following is a bank liability?
A) reserves
B) consumer loans
C) nontransaction deposits
D) securities
8) 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.
9) A checkable deposit that pays no interest is known as a
A) demand deposit.
B) certificate of deposit.
C) NOW account.
D) time deposit.
10) 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
11) Short-term loans between banks are called
A) federal funds.
B) repurchase agreements.
C) repos.
D) discount loans.
12) The interest rate on interbank loans is called the
A) discount rate.
B) federal funds rate.
C) repo rate.
D) prime rate.
13) Securities that banks sell and agree to repurchase are known as
A) federal funds.
B) discount loans.
C) repurchase agreements.
D) NOW accounts.
14) 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.
15) Which of the following represented the largest liability on the balance sheet of U.S.
commercial banks in 2010?
A) checkable deposits
B) loans
C) nontransaction deposits
D) borrowings
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.
17) 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.
18) 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
19) 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.
20) 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.
21) 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
22) On a bank’s balance sheet, “borrowings” are
A) loans to households.
B) loans to businesses.
C) nondeposit liabilities.
D) U.S. Treasury securities.
23) 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.
24) 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.
25) 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.
26) 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.
27) 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
28) 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
29) 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.
30) 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.
31) About what percentage of bank assets is made up of cash items in 2010?
A) 7.5%
B) 20%
C) 37%
D) 50%
32) 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
33) 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
34) Any reserves beyond what is required are called
A) required reserves.
B) excess reserves.
C) secondary reserves.
D) bank capital.
35) 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.
36) What percentage of bank assets were in security holdings in 2010?
A) 5%
B) 13%
C) 20%
D) 37%
37) What is the largest category of bank assets?
A) loans
B) reserves
C) securities
D) cash items in the process of collection
38) What percentage of bank assets were in loans in 2010?
A) 7.5%
B) 20%
C) 37%
D) 60%
39) 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.
40) A bank’s remaining value after it has met all its liabilities is known as a
A) bank’s assets.
B) bank’s liabilities.
C) bank capital.
D) bank’s income.
41) In 2010, net worth was about what percentage of total funds raised by banks?
A) 2%
B) 7%
C) 12%
D) 35%
42) 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.
43) What are the advantages of bank deposits compared to other types of assets?
44) In what ways does a certificate of deposit (CD) differ from a savings deposit?
45) What is an important difference between certificates of deposits (CDs) worth less than
$100,000 compared to those worth $100,000 or more?
46) What are the different forms of bank borrowings?
47) What is a repurchase agreement?
48) Why do households hold less in checking accounts then they once did?
49) Compare the characteristics of loans and marketable securities in terms of liquidity, risk, and
information costs.
50) If the Federal Reserve did not require them to do so, would banks still hold reserves?
1) 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.
2) 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.
3) 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.
4) 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.
5) 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 $3000.
D) an increase in required reserves of $30 and an increase in excess reserves of $270.
6) 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.
7) The portion of bank capital set aside in anticipation of future loan losses is known as
A) required reserves.
B) excess reserves.
C) secondary reserves.
D) loan loss reserves.
8) Which of the following is the source of funds for bank loans?
A) marketable securities
B) required reserves
C) excess reserves
D) bank capital
9) 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 reserve at the Federal Reserve.
10) 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.