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Economics of Money, Banking, and Financial Markets, 11e, Global Edition (Mishkin) Chapter 9 Banking and the Management of Financial Institutions 9.1 The Bank Balance Sheet 1) Which of the following statements are TRUE? A) A bank's assets are its sources of funds. B) A bank's liabilities are its uses of funds. C) A bank's balance sheet shows that total assets equal total liabilities plus equity capital. D) A bank's balance sheet indicates whether or not the bank is profitable. Answer: C AACSB: Reflective Thinking 2) Which of the following statements is FALSE? A) A bank's assets are its uses of funds. B) A bank issues liabilities to acquire funds. C) The bank's assets provide the bank with income. D) Bank capital is recorded as an asset on the bank balance sheet. Answer: D AACSB: Reflective Thinking 3) Which of the following are reported as liabilities on a bank's balance sheet? A) reserves B) checkable deposits C) consumer loans D) deposits with other banks Answer: B AACSB: Analytical Thinking 4) Which of the following are reported as liabilities on a bank's balance sheet? A) discount loans B) reserves C) U.S. Treasury securities D) real estate loans Answer: A AACSB: Analytical Thinking 5) The share of checkable deposits in total bank liabilities has A) expanded moderately over time. B) expanded dramatically over time. C) shrunk over time. D) remained virtually unchanged since 1960. Answer: C AACSB: Analytical Thinking

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6) Which of the following statements is FALSE? A) Checkable deposits are usually the lowest cost source of bank funds. B) Checkable deposits are the primary source of bank funds. C) Checkable deposits are payable on demand. D) Checkable deposits include NOW accounts. Answer: B AACSB: Reflective Thinking 7) In recent years the interest paid on checkable and nontransaction deposits has accounted for around ________ of total bank operating expenses, while the costs involved in servicing accounts have been approximately ________ of operating expenses. A) 45 percent; 55 percent B) 55 percent; 4 percent C) 25 percent; 50 percent D) 50 percent; 30 percent Answer: C AACSB: Application of Knowledge 8) Which of the following statements are TRUE? A) Checkable deposits are payable on demand. B) Checkable deposits do not include NOW accounts. C) Checkable deposits are the primary source of bank funds. D) Checkable deposits are assets for the bank. Answer: A AACSB: Reflective Thinking 9) Because checking accounts are ________ liquid for the depositor than savings accounts, they earn ________ interest rates. A) less; higher B) less; lower C) more; higher D) more; lower Answer: D AACSB: Reflective Thinking 10) Which of the following are transaction deposits? A) savings accounts B) small-denomination time deposits C) checkable deposits D) certificates of deposit Answer: C AACSB: Analytical Thinking

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11) All of the following are nontransaction deposits EXCEPT A) savings accounts. B) small-denomination time deposits. C) checkable deposits. D) certificates of deposit. Answer: C AACSB: Analytical Thinking 12) Large-denomination CDs are ________, so that like a bond they can be resold in a ________ market before they mature. A) nonnegotiable; secondary B) nonnegotiable; primary C) negotiable; secondary D) negotiable; primary Answer: C AACSB: Application of Knowledge 13) Because ________ are less liquid for the depositor than ________, they earn higher interest rates. A) money market deposit accounts; time deposits B) checkable deposits; savings accounts C) savings accounts; checkable deposits D) savings accounts; time deposits Answer: C AACSB: Reflective Thinking 14) Because ________ are less liquid for the depositor than ________, they earn higher interest rates. A) savings accounts; time deposits B) money market deposit accounts; time deposits C) money market deposit accounts; savings accounts D) time deposits; savings accounts Answer: D AACSB: Reflective Thinking 15) Banks acquire the funds that they use to purchase income-earning assets from such sources as A) cash items in the process of collection. B) savings accounts. C) reserves. D) deposits at other banks. Answer: B AACSB: Application of Knowledge

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16) Bank loans from the Federal Reserve are called ________ and represent a ________ of funds. A) discount loans; use B) discount loans; source C) fed funds; use D) fed funds; source Answer: B AACSB: Application of Knowledge 17) Which of the following is NOT a source of borrowings for a bank? A) federal funds B) Eurodollars C) transaction deposits D) discount loans Answer: C AACSB: Analytical Thinking 18) Bank capital is equal to ________ minus ________. A) total assets; total liabilities B) total liabilities; total assets C) total assets; total reserves D) total liabilities; total borrowings Answer: A AACSB: Analytical Thinking 19) Bank ________ is/are listed on the liability side of the bank's balance sheet. A) reserves B) capital C) securities D) cash items Answer: B AACSB: Application of Knowledge 20) Bank reserves include A) deposits at the Fed and short-term treasury securities. B) vault cash and short-term Treasury securities. C) vault cash and deposits at the Fed. D) deposits at other banks and deposits at the Fed. Answer: C AACSB: Analytical Thinking

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21) The amount of checkable deposits that banks are required by regulation to hold are the A) excess reserves. B) required reserves. C) vault cash. D) total reserves. Answer: B AACSB: Analytical Thinking 22) Which of the following are reported as assets on a bank's balance sheet? A) borrowings B) reserves C) savings deposits D) bank capital Answer: B AACSB: Analytical Thinking 23) Which of the following are NOT reported as assets on a bank's balance sheet? A) cash items in the process of collection B) deposits with other banks C) U.S. Treasury securities D) checkable deposits Answer: D AACSB: Analytical Thinking 24) Through correspondent banking, large banks provide services to small banks, including A) loan guarantees. B) foreign exchange transactions. C) issuing stock. D) debt reduction. Answer: B AACSB: Application of Knowledge 25) The largest percentage of banks' holdings of securities consist of A) Treasury and government agency securities. B) tax-exempt municipal securities. C) state and local government securities. D) corporate securities. Answer: A AACSB: Application of Knowledge 26) Which of the following bank assets is the most liquid? A) consumer loans B) reserves C) state and local government securities D) U.S. government securities Answer: B AACSB: Reflective Thinking 5 Copyright © 2016 Pearson Education, Ltd.

27) Secondary reserves include A) deposits at Federal Reserve Banks. B) deposits at other large banks. C) short-term U.S. government securities. D) state and local government securities. Answer: C AACSB: Application of Knowledge 28) Because of their ________ liquidity, ________ U.S. government securities are called secondary reserves. A) low; short-term B) low; long-term C) high; short-term D) high; long-term Answer: C AACSB: Application of Knowledge 29) Secondary reserves are so called because A) they can be converted into cash with low transactions costs. B) they are not easily converted into cash, and are, therefore, of secondary importance to banking firms. C) 50% of these assets count toward meeting required reserves. D) they rank second to bank vault cash in importance of bank holdings. Answer: A AACSB: Reflective Thinking 30) Banks' asset portfolios include state and local government securities because A) they help to attract business from these government entities. B) banks consider them helpful in attracting accounts of Federal employees. C) the Federal Reserve requires member banks to buy securities from state and local governments located within their respective Federal Reserve districts. D) there is no default-risk with state and local government securities. Answer: A AACSB: Reflective Thinking 31) Bank's make their profits primarily by issuing A) equity. B) negotiable CDs. C) loans. D) NOW accounts. Answer: C AACSB: Application of Knowledge

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32) The most important category of assets on a bank's balance sheet is A) other assets. B) securities. C) loans. D) cash items in the process of collection. Answer: C AACSB: Reflective Thinking 33) Which of the following are bank assets? A) the building owned by the bank B) a discount loan C) a negotiable CD D) a customer's checking account Answer: A AACSB: Analytical Thinking 34) Banks may borrow from or lend to another bank in the Federal Funds market. A loan of excess reserves from one bank to another bank is recorded as a(n) ________ for the borrowing bank and a(n) ________ for the lending bank. A) asset; asset B) asset; liability C) liability; liability D) liability; asset Answer: D AACSB: Reflective Thinking 9.2 Basic Banking 1) Banks earn profits by selling ________ with attractive combinations of liquidity, risk, and return, and using the proceeds to buy ________ with a different set of characteristics. A) loans; deposits B) securities; deposits C) liabilities; assets D) assets; liabilities Answer: C AACSB: Reflective Thinking 2) In general, banks make profits by selling ________ liabilities and buying ________ assets. A) long-term; shorter-term B) short-term; longer-term C) illiquid; liquid D) risky; risk-free Answer: B AACSB: Reflective Thinking

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3) Asset transformation can be described as A) borrowing long and lending short. B) borrowing short and lending long. C) borrowing and lending only for the short term. D) borrowing and lending for the long term. Answer: B AACSB: Reflective Thinking 4) When a new depositor opens a checking account at the First National Bank, the bank's assets ________ and its liabilities ________. A) increase; increase B) increase; decrease C) decrease; increase D) decrease; decrease Answer: A AACSB: Reflective Thinking 5) When Jane Brown writes a $100 check to her nephew and he cashes the check, Ms. Brown's bank ________ assets of $100 and ________ liabilities of $100. A) gains; gains B) gains; loses C) loses; gains D) loses; loses Answer: D AACSB: Analytical Thinking 6) When you deposit a $50 bill in the Security Pacific National Bank A) its liabilities decrease by $50. B) its assets increase by $50. C) its reserves decrease by $50. D) its cash items in the process of collection increase by $50. Answer: B AACSB: Analytical Thinking 7) When you deposit $50 in currency at Old National Bank A) its assets increase by less than $50 because of reserve requirements. B) its reserves increase by less than $50 because of reserve requirements. C) its liabilities increase by $50. D) its liabilities decrease by $50. Answer: C AACSB: Analytical Thinking

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8) Holding all else constant, when a bank receives the funds for a deposited check A) cash items in the process of collection fall by the amount of the check. B) bank assets increase by the amount of the check. C) bank liabilities decrease by the amount of the check. D) bank reserves increase by the amount of required reserves. Answer: A AACSB: Reflective Thinking 9) When a $10 check written on the First National Bank of Chicago is deposited in an account at Citibank, then A) the liabilities of the First National Bank increase by $10. B) the reserves of the First National Bank increase by $ 10. C) the liabilities of Citibank increase by $10. D) the assets of Citibank fall by $10. Answer: C AACSB: Analytical Thinking 10) When a $10 check written on the First National Bank of Chicago is deposited in an account at Citibank, then A) the liabilities of the First National Bank decrease by $10. B) the reserves of the First National Bank increase by $10. C) the liabilities of Citibank decrease by $10. D) the assets of Citibank decrease by $10. Answer: A AACSB: Analytical Thinking 11) When you deposit $50 in your account at First National Bank and a $100 check you have written on this account is cashed at Chemical Bank, then A) the assets of First National rise by $50. B) the assets of Chemical Bank rise by $50. C) the reserves at First National fall by $50. D) the liabilities at Chemical Bank rise by $50. Answer: C AACSB: Analytical Thinking 12) When $1 million is deposited at a bank, the required reserve ratio is 20 percent, and the bank chooses not to hold any excess reserves but makes loans instead, then, in the bank's final balance sheet A) the assets at the bank increase by $800,000. B) the liabilities of the bank increase by $1,000,000. C) the liabilities of the bank increase by $800,000. D) reserves increase by $160,000. Answer: B AACSB: Analytical Thinking

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13) When $1 million is deposited at a bank, the required reserve ratio is 20 percent, and the bank chooses not to make any loans but to hold excess reserves instead, then, in the bank's final balance sheet A) the assets at the bank increase by $1 million. B) the liabilities of the bank decrease by $1 million. C) reserves increase by $200,000. D) liabilities increase by $200,000. Answer: A AACSB: Analytical Thinking 14) With a 10% reserve requirement ratio, a $100 deposit into New Bank means that the maximum amount New Bank could lend is A) $90. B) $100. C) $10. D) $110. Answer: A AACSB: Analytical Thinking 15) A deposit outflow results in equal reductions in A) loans and reserves. B) assets and liabilities. C) reserves and capital. D) assets and capital. Answer: B AACSB: Reflective Thinking 16) A $100 deposit into my checking account at My Bank increases my checkable deposits by $100, and the bank's ________ by $100. A) reserves B) loans C) capital D) securities Answer: A AACSB: Application of Knowledge 17) Using T-accounts show what happens to reserves at Security National Bank if one individual deposits $1000 in cash into her checking account and another individual withdraws $750 in cash from her checking account. Answer: Security National Bank Assets Liabilities Reserves +$250 Checkable deposits +$250 AACSB: Analytical Thinking

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9.3 General Principles of Bank Management 1) Which of the following are primary concerns of the bank manager? A) maintaining sufficient reserves to minimize the cost to the bank of deposit outflows B) extending loans to borrowers who will pay low interest rates, but who are poor credit risks C) acquiring funds at a relatively high cost, so that profitable lending opportunities can be realized D) maintaining high levels of capital and thus maximizing the returns to the owners Answer: A AACSB: Reflective Thinking 2) If a bank has $100,000 of checkable deposits, a required reserve ratio of 20 percent, and it holds $40,000 in reserves, then the maximum deposit outflow it can sustain without altering its balance sheet is A) $30,000. B) $25,000. C) $20,000. D) $10,000. Answer: B AACSB: Analytical Thinking 3) If a bank has $200,000 of checkable deposits, a required reserve ratio of 20 percent, and it holds $80,000 in reserves, then the maximum deposit outflow it can sustain without altering its balance sheet is A) $50,000. B) $40,000. C) $30,000. D) $25,000. Answer: A AACSB: Analytical Thinking 4) If a bank has $10 million of checkable deposits, a required reserve ratio of 10 percent, and it holds $2 million in reserves, then it will not have enough reserves to support a deposit outflow of A) $1.2 million. B) $1.1 million. C) $1 million. D) $900,000. Answer: A AACSB: Analytical Thinking

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5) If a bank has excess reserves greater than the amount of a deposit outflow, the outflow will result in equal reductions in A) deposits and reserves. B) deposits and loans. C) capital and reserves. D) capital and loans. Answer: A AACSB: Reflective Thinking 6) A $5 million deposit outflow from a bank has the immediate effect of A) reducing deposits and reserves by $5 million. B) reducing deposits and loans by $5 million. C) reducing deposits and securities by $5 million. D) reducing deposits and capital by $5 million. Answer: A AACSB: Analytical Thinking 7) Bankers' concerns regarding the optimal mix of excess reserves, secondary reserves, borrowings from the Fed, and borrowings from other banks to deal with deposit outflows is an example of A) liability management. B) liquidity management. C) managing interest rate risk. D) managing credit risk. Answer: B AACSB: Reflective Thinking 8) If, after a deposit outflow, a bank needs an additional $3 million to meet its reserve requirements, the bank can A) reduce deposits by $3 million. B) increase loans by $3 million. C) sell $3 million of securities. D) repay its discount loans from the Fed. Answer: C AACSB: Reflective Thinking 9) A bank with insufficient reserves can increase its reserves by A) lending federal funds. B) calling in loans. C) buying short-term Treasury securities. D) buying municipal bonds. Answer: B AACSB: Reflective Thinking

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10) Of the following, which would be the last choice for a bank facing a reserve deficiency? A) Call in loans. B) Borrow from the Fed. C) Sell securities. D) Borrow from other banks. Answer: A AACSB: Reflective Thinking 11) In general, banks would prefer to acquire funds quickly by ________ rather than ________. A) reducing loans; selling securities B) reducing loans; borrowing from the Fed C) borrowing from the Fed; reducing loans D) "calling in" loans; selling securities Answer: C AACSB: Reflective Thinking 12) ________ may antagonize customers and thus can be a very costly way of acquiring funds to meet an unexpected deposit outflow. A) Selling securities B) Selling loans C) Calling in loans D) Selling negotiable CDs Answer: C AACSB: Reflective Thinking 13) Banks hold excess and secondary reserves to A) reduce the interest-rate risk problem. B) provide for unexpected deposit outflows. C) satisfy margin requirements. D) achieve higher earnings than they can with loans. Answer: B AACSB: Reflective Thinking 14) If a bank needs to acquire funds quickly to meet an unexpected deposit outflow, the bank could A) borrow from another bank in the federal funds market. B) buy U.S. Treasury bills. C) increase loans. D) buy corporate bonds. Answer: A AACSB: Reflective Thinking

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15) Which of the following statements most accurately describes the task of bank asset management? A) Banks seek the highest returns possible subject to minimizing risk and making adequate provisions for liquidity. B) Banks seek to have the highest liquidity possible subject to earning a positive rate of return on their operations. C) Banks seek to prevent bank failure at all cost; since a failed bank earns no profit, liquidity needs supersede the desire for profits. D) Banks seek to acquire funds in the least costly way. Answer: A AACSB: Reflective Thinking 16) The goals of bank asset management include A) maximizing risk. B) minimizing liquidity. C) lending at high interest rates regardless of risk. D) purchasing securities with high returns and low risk. Answer: D AACSB: Reflective Thinking 17) Banks that suffered significant losses in the 1980s made the mistake of A) holding too many liquid assets. B) minimizing default risk. C) failing to diversify their loan portfolio. D) holding only safe securities. Answer: C AACSB: Reflective Thinking 18) A bank will want to hold more excess reserves (everything else equal) when A) it expects to have deposit inflows in the near future. B) brokerage commissions on selling bonds increase. C) the cost of selling loans falls. D) the discount rate decreases. Answer: B AACSB: Reflective Thinking 19) As the costs associated with deposit outflows ________, the banks willingness to hold excess reserves will ________. A) decrease; increase B) increase; decrease C) increase; increase D) decrease; not be affected Answer: C A...