Q&A Hero

Q: If the Fed were to increase the required reserve rate from ten percent to twenty percent, the simple deposit expansion multiplier would: A. double.B. increase by 10 percent.C. decrease by a factor of ten.D. be half as large as it was before the increase.

Q: An most important service provided by underwriters is A) lowering of information costs. B) dealing with problems of moral hazard. C) insuring firms against loss from fire. D) insuring firms against loss from employee theft.

Q: If required reserves are expressed by RR; the required reserve rate by rD and deposits by D, the simple deposit expansion multiplier is expressed as: A. RDD.B. (1/rD) D.C. RD.D. 1/rD.

Q: What does it mean for an investment bank conducts a "road show"? A) It involves an investment bank marketing its services to firms considering new issues. B) It is when an investment bank goes to the SEC to seek approval for a new issue. C) It is when firms seeking an underwriter consider alternative investment banks. D) It involves visits to institutional investors who might want to buy the security issue.

Q: The formula for required reserves is: A. (1/rD) D.B. 1/rD.C. rD.D. D/rD.

Q: The due diligence process is A) the process by which a firm chooses an investment bank. B) when an investment bank researches a firm's value. C) how an investment bank underwrites large issues. D) the review of a prospectus by the SEC.

Q: If the required reserve rate is ten percent and banks do not hold any excess reserves and there are no changes in currency holdings, a $1 million open market purchase by the Fed will result in deposit creation of: A. $9 million.B. $90 million.C. $10 million.D. $900,000.

Q: A syndicate is A) a group of brokers illegally making use of insider information. B) a group of commercial banks that agrees to accept the checks of each other's depositors. C) a group of investment banks underwriting a large security issue. D) a group of dealers that markets a government bond issue.

Q: A customer of Bank A writes a $20,000 check for a new car, which the car dealer deposits in his bank, Bank B. Which of the following statements pertaining to this transaction is most true? A. Banks A's reserves will decrease by the required reserve rate times $20,000 and Banks B's reserves will increase by (1 - required reserve rate) times $20,000B. Bank A's reserves decrease by $20,000 and Bank B's reserves increase by $20,000C. Neither Bank A's nor B's reserves will changeD. Bank B's reserves will decrease and Bank A's reserves will increase by $20,000

Q: In investment banking the "spread" is the difference between A) the value of a firm's assets and the value of its liabilities. B) the bid and asked prices on a bond. C) the price of new capital guaranteed to the issuing firm and the price that can be obtained in the market. D) the price of a new stock issue and the price of an equivalent new bond issue.

Q: Bank A has checkable deposits of $140 million, vault cash equaling $1 million and deposits at the Fed equaling $14 million. If the required reserve rate is ten percent what is the amount of excess reserves Bank A is holding? A. It does not have any excess reservesB. $15 millionC. $2 millionD. $1 million

Q: Underwriting involves A) insuring the life or health of individuals. B) guaranteeing a price for new capital to the issuing firm. C) selling stock more cheaply than conventional stockbrokers. D) issuing stock and using the proceeds to buy bonds.

Q: Bank A has checkable deposits of $100 million, vault cash equaling $1 million and deposits at the Fed equaling $14 million. If the required reserve rate is ten percent what is the maximum amount Bank A could lend? A. $85 millionB. $15 millionC. $14 millionD. $5 million

Q: The most a bank could lend at any time without altering its assets is an amount equal to its: A. checkable deposits.B. reserves.C. excess reserves.D. net worth.

Q: Currently, the FDIC insures deposits up to a limit of A) $1000. B) $100,000. C) $250,000. D) $1,000,000.

Q: If Bank A sells a $100,000 U.S. Treasury bond to the Fed, Bank A's excess reserves will: A. increase by less than $100,000.B. not change.C. decrease by less than $100,000.D. increase by $100,000.

Q: In the current U.S. economy, who plays the role of lender of last resort? A) The Securities and Exchange Commission B) The Federal Deposit Insurance Corporation C) The Federal Reserve System D) The Social Security Administration

Q: During a banking panic, a lender of last resort will A) purchase banks which are having difficulty but appear sound. B) make loans to solvent but temporality illiquid banks. C) make loans to insolvent but liquid banks. D) make loans to any banks which request them.

Q: If Bank A sells a $100,000 U.S. Treasury bond to the Fed, Bank A's reserves will: A. increase by $100,000.B. increase by less than $100,000.C. not change.D. decrease.

Q: The McFadden Act of 1927 A) separated commercial banking from investment banking. B) put a tax on the issuance of bank notes by state banks. C) prohibited national banks from operating branches outside their home states. D) established the Federal Reserve System.

Q: If Bank A sells a $100,000 U.S. Treasury bond to the Fed, Bank A's required reserves will: A. not change.B. increase by $100,000.C. decrease.D. increase but by less than $100,000.

Q: The FDIC was created inA) 1863B) 1913C) 1934D) 1991

Q: Over the two-year period during which the financial crisis occurred, the amount of assets in the Federal Reserve balance sheet increased by: A. 2.5 times.B. 3 times.C. 4.5 times.D. 6 times.

Q: The Federal Reserve System was created inA) 1836B) 1863C) 1913D) 1945

Q: Harry gets $1000 in currency from his grandfather when he graduates from college. He deposits these funds into his checking account. What is the impact on the monetary base of Harry's deposit? A. The monetary base did not changeB. The monetary base increased by $1000C. The monetary base decreased by $1000D. The monetary base increases by more than a $1000

Q: The Federal Reserve System was created in response to A) the stock market crash of 1929. B) the ending of the Civil War. C) the banking panic of 1907. D) difficulties of the free-banking era.

Q: Harry gets $1000 in currency from his grandfather when he graduates from college. He deposits these funds into his checking account. Considering Harry's personal balance sheet, his assets: A. increased by $1000 when he deposited the $1000 into his checking account.B. Increased when he received the $1000 in currency from his grandfather.C. And liabilities increased by $1000 when he deposited the funds into his checking account.D. Increased by $1000 and his liabilities decreased by $1000 when he deposited the funds into his checking account.

Q: A bank run involves A) a failure by a bank to get the maximum return on its investments. B) large numbers of depositors withdrawing their deposits within a short period of time. C) a bank being forced out of business. D) fraud on the part of a bank's managers.

Q: Congress introduced deposit insurance in response to A) the savings-and-loan crisis of the 1980s. B) the banking crisis of the 1930s. C) the demise of the Second Bank of the United States in 1836. D) the demise of the First Bank of the United States in 1811.

Q: When an individual withdraws funds from a checking account the: A. bank's balance sheet shrinks but the size of the Fed's balance sheet is not affected.B. bank's balance sheet shrinks and so does the Fed's balance sheet.C. bank's balance sheet shrinks but the size of the Fed's balance sheet increases.D. size of the bank's balance sheet stays the same but the size of the Fed's balance sheet shrinks.

Q: National banks are chartered by the A) Office of the Comptroller of the Currency. B) Office of Bank Supervision. C) Securities and Exchange Commission. D) Office of Management and the Budget.

Q: Tom decides to withdraw $300 out of his checking account. The impact of this transaction on the Fed's balance sheet will be: A. no change in total assets or total liabilities, but an increase in the liability of currency and a decrease in the liability of reserves by $300 respectively.B. no change in total assets but the liability of currency increases by $300.C. total assets decrease by $300 and the liability of currency increases by $300.D. no change in either total assets or total liabilities.

Q: What are federally chartered banks called? A) federal banks B) Federal Reserve banks C) national banks D) central banks

Q: Mary decides to withdraw $500 out of her checking account. The impact of this transaction on the Banking System's balance sheet will be to: A. only reduce checkable deposits by $500.B. increase reserves and reduce checkable deposits by $500 respectively.C. decrease reserves and checkable deposits by $500 respectively.D. only reduce reserves by the required reserve rate times $500.

Q: Securitization refers to A) changing the mix in a financial portfolio away from stocks and toward bonds. B) selling directly to investors loans or securities that were formerly held by financial intermediaries. C) banks insisting that collateral be supplied on previously unsecured loans. D) reducing the exposure of a bank's portfolio to interest rate risk.

Q: Which of the following have the same impact on the Fed's balance sheet? A. An open market purchase and an increase in loans by the Fed to banksB. An open market sale and an increase in foreign exchange reservesC. An open market purchase and a decrease in foreign exchange reservesD. An increase in loans by the Fed to banks and a decrease in foreign exchange reserves

Q: Standby letters of credit A) are a form of swaps. B) are a promise by a bank to lend the borrower funds to pay off its maturing commercial paper. C) are a promise by a large depositor to provide additional funds to a bank should the bank face an unexpectedly large deposit outflow. D) represent the unused balance on a bank credit card.

Q: During the 2007-2009 financial crisis which of the following became the largest component of assets on the Fed's balance sheet: A. foreign exchange reserves.B. loans.C. U.S. Treasury securities.D. mortgage backed securities.

Q: The United States has a dual banking system in the sense that A) the public may deposit money in either commercial banks or savings-and-loan associations. B) banks offer both demand deposits and time deposits to savers. C) banks are chartered by the federal government and by state governments. D) banks both take in deposits and make loans.

Q: When the Fed makes a discount loan, the impact on the Banking System's balance sheet will reflect: A. an increase in liabilities with no change in assets.B. an increase in assets and a decrease in liabilities.C. a decrease in assets and an increase in liabilities.D. an increase in assets and liabilities.

Q: What is the primary reason for the differences between the U.S. banking system and those in other major industrial countries? A) Economies of scale are greater in banking in the United States than in banking in other countries. B) legislation that led to the development of state and national banks C) the Federal Reserve System D) the National Bank

Q: When the Fed makes a discount loan, the impact on the Banking System's balance sheet is: A. an increase in liabilities with no change in assets.B. an increase in assets and a decrease in liabilities.C. a decrease in assets and an increase in liabilities.D. the same as that of an open market purchase.

Q: Which of the following is NOT an example of off-balance-sheet lending? A) a swap B) a standby letter of credit C) a loan commitment D) a loan sale

Q: When the Fed makes a discount loan, the impact on the Fed's balance sheet will reflect: A. no change in liabilities but an increase in assets.B. a decrease in assets and liabilities.C. an increase in assets and liabilities.D. an increase in assets and a decrease in liabilities.

Q: By 2012, what share of U.S. assets were held by the 10 largest banks in the United States? A) 10% B) 29% C) 55% D) 68%

Q: To obtain a discount loan from the Fed, a commercial bank must: A. prove that it will fail if it does not obtain the loan.B. prove that the loan will be used to make loans.C. provide collateral.D. agree to more frequent examinations.

Q: As of 2012, about how many banks were there in the United States? A) 57 B) 2000 C) 6200 D) 14,000

Q: The Fed sells German bonds to commercial banks. Which of the following best describes the impact on the Fed's and the Banking System's balance sheets resulting from this transaction? A. The Fed's assets and liabilities increase, the banking systems assets and liabilities decrease.B. The Fed's assets increase and its liabilities both increase. For the banking system, the value of assets and liabilities do not change, only the composition of assets changes.C. The Fed's assets and liabilities do not change, only the compositions of the assets change. For the banking system, assets and liabilities increase.D. The Fed's assets and liabilities both decrease. For the banking system, the value of assets and liabilities do not change, only the composition of assets changes.

Q: Banks in the United States have been prohibited from investing deposits in significant equity holdings since the passage of the A) Bank Reform Act of 1980. B) Securities and Exchange Acts of 1933 and 1934. C) National Banking Acts of 1863 and 1864. D) Sherman Antitrust Act of 1890.

Q: The Fed purchases German bonds from commercial banks. Which of the following best describes the impact on the Fed's and the Banking System's balance sheets resulting from this transaction? A. The Fed's assets and liabilities increase, the banking systems assets and liabilities decrease.B. The Fed's assets increase and its liabilities increase, for the banking system, the value of assets and liabilities do not change, only the composition of assets changes.C. The Fed's assets and liabilities do not change, only the compositions of the assets change. For the banking system, assets and liabilities increase.D. The Fed's assets increase and its liabilities decrease, for the banking system, the value of assets and liabilities do not change, only the composition of assets changes.

Q: How can banks measure interest-rate risk?

Q: An open market sale of U.S. Treasury securities by the Fed will cause the Banking System's balance sheet to show: A. only an increase in liabilities.B. only a decrease in assets.C. no net change in assets or liabilities, only a change in the composition of assets with securities decreasing and reserves increasing.D. no net change in assets or liabilities, only a change in the composition of assets with securities increasing and reserves decreasing.

Q: How do banks manage credit risk?

Q: An open market sale of U.S. Treasury securities by the Fed will cause the Fed's balance sheet to show: A. a decrease in the asset of securities and a decrease in the liability of reserves.B. an increase in the liability of reserves.C. no change in the size of the balance sheet, just the composition of assets will change from securities to cash.D. an increase in the asset category of securities and the liability category of reserves.

Q: What steps can a bank take to deal with a significant outflow of deposits?

Q: Consider a $2 billion open market purchase of U.S. Treasury securities by the Federal Reserve. The Banking System's balance sheet will specifically show: A. only an increase in liabilities of $2 billion.B. only a decrease in assets of $2 billion.C. no net change in assets or liabilities, only a change in the composition of assets with securities decreasing and reserves increasing by $2 billion respectively.D. no net change in assets or liabilities, only a change in the composition of assets with securities increasing and reserves decreasing by $2 billion respectively.

Q: In managing its liabilities to deal with liquidity problems, banks trade off A) credit risk against interest rate risk. B) adverse selection against moral hazard. C) the need for available funds to meet deposit outflows against the desire for greater profit. D) present tax liabilities against future tax liabilities.

Q: Consider a $2 billion open market purchase of U.S. Treasury securities by the Federal Reserve. The Fed's balance sheet will show: A. only an increase in the asset of securities of $2 billion.B. only show an increase in the liability of reserves of $2 billion.C. no change in the size of the balance sheet, just the composition of assets will change from cash to securities.D. an increase in the asset category of securities and the liability category of reserves by $2 billion.

Q: Suppose First National Bank has $200 million of assets and $20 million of equity capital. If First National has a 2% return on assets (ROA), what is its return on equity (ROE)? Suppose First National's equity capital declines to $10 million, while its assets and ROA are unchanged. What is First National's ROE now?

Q: A central bank's sale of securities from its portfolio will: A. decrease the size of its balance sheet.B. have no impact at all on the balance sheet.C. only change the composition of its liabilities.D. only change the composition of its assets.

Q: How does moral hazard contribute to high bank leverage?

Q: A central bank's purchase of securities made by writing checks on itself will: A. decrease the size of its balance sheet.B. have no impact at all on the balance sheet.C. increase the size of their balance sheet.D. only change the composition of its assets.

Q: Suppose a bank has assets of $500 million and capital of $100 million. Its return on assets is -3%. What is its leverage ratio? What is its return on equity?

Q: When a business purchases a $50,000 computer system by writing a check, the business's balance sheet will: A. only show an increase in liabilities of $50,000.B. show an increase in assets and liabilities for $50,000.C. not reflect any increase in assets or liabilities, only a change in the composition of assets.D. only show an increase in assets of $50,000.

Q: Suppose a bank has $10 million in capital, $100 million in assets, and after-tax profit of $2 million? what is its return on assets? What is its return on equity?

Q: When a business purchases a $25,000 computer system by writing a check, the business's balance sheet will: A. show an increase in assets and liabilities of $25,000.B. only show an increase in assets of $25,000.C. only show an increase in liabilities of $25,000.D. still show the same total amount of assets as before the purchase.

Q: Describe the three ways that banks normally earn revenue.

Q: When the Federal Reserve purchases a U.S. Treasury bond for $1 million by writing a check, when the check returns, the Fed's balance sheet will show: A. an increase in assets and a decrease in liabilities of $1 million.B. only an increase in assets of $1 million.C. only an increase in liabilities of $1 million.D. an increase in assets and liabilities of $1 million.

Q: Limits on the value of the assets that commercial banks can acquire relative to their capital is known as: A) equity requirements B) capital requirements C) required reserves D) asset requirements

Q: One trait a central bank has over other businesses including banks is that it: A. receives all of its funding from the government.B. can control the size of its balance sheet.C. doesn't have stockholders.D. doesn't have a board of directors.

Q: Banks have responded to new regulations resulting from the Dodd-Frank Act in all of the following ways EXCEPT: A) raising minimum balances on free checking accounts B) closing branches in low-income neighborhoods C) raising overdraft fees D) increased marketing of securities and financial advice to high-income customers

Q: In dollar amounts: A. the monetary base is larger than M2 and M1 is less than M2.B. M1 is smaller than the monetary base and M2 is larger than both.C. the monetary base is larger than M1 and M2.D. the monetary base is smaller than M1 and M2 is larger than M1.

Q: In order to reduce the likelihood of excessive leverage in the banking system, governments have traditionally A) imposed capital requirements on commercial banks. B) imposed capital requirement on investment banks. C) imposed capital requirements on both commercial and investment banks. D) imposed asset requirements on all banks.

Q: The monetary base is also known as: A. M1.B. M2.C. high-powered money.D. free reserves.

Q: If a bank's ratio of assets to capital is 25 and it's return on assets is -5%, what is its return on equity? A) -0.2% B) -5% C) -30% D) -125%

Q: The monetary base is the sum of: A. reserves and currency in the hands of the public.B. reserves and M2.C. currency in the hands of the public and M2.D. currency in the hands of the public M1.

Q: Moral hazard can contribute to high bank leverage in all of the following ways EXCEPT A) having high capital requirements. B) bank managers are compensated in part on providing shareholders with high returns on equity. C) high bank leverage provides shareholders with a potential for a higher return on equity. D) federal deposit insurance has reduced the incentive of depositors to monitor the behavior of bank managers.

Q: The monetary base is the sum of: A. reserves and M2.B. M1 and reserves.C. currency in the hands of the public, reserves and M1.D. currency in the hands of the public and reserves in the banking system.

Q: 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.

Q: The experience of the Marcos Presidency in the Philippines in 1986 showed: A. the importance of keeping the central bank independent from political pressure.B. published central bank balance sheets do not always reflect reality.C. transparency is critical if people are going to trust a central bank.D. all of the answers given are correct.