Question 1

A depositor withdraws $10 from their account. According to the bank balance sheet, which of the following accurately describes the immediate impact on the bank’s accounts?

Accepted Answer

Deposits decrease by $$10 and Reserves decrease by 10.$$

Question 2

Which of the following best explains the concept of a bank run?

Accepted Answer

A self-fulfilling panic where many depositors withdraw funds simultaneously, causing the bank to fail due to insufficient reserves.

Question 3

If a bank faces an unexpected reserve drain, which of the following is NOT a typical liquidity management strategy?

Accepted Answer

Issuing new long-term bonds to the public.

Question 4

Suppose a bank’s total assets are $$120M and total liabilities are 110M. $$What is the bank’s capital (equity)?

$$	ext{Bank Capital} = 	ext{Total Assets} - 	ext{Total Liabilities}$$

Accepted Answer

$$10M$$

Question 5

Which of the following best describes the concept of moral hazard in the context of deposit insurance?

Accepted Answer

Banks may take on excessive risk because depositors are protected from losses by government insurance.

Question 6

If the market value of a bank’s securities falls by 15%, what is the direct impact on the bank’s balance sheet?

Accepted Answer

The loss reduces the bank’s capital (equity) by the same dollar amount.

Question 7

Which of the following assets would regulators assign the highest risk weighting to when determining capital requirements?

Accepted Answer

Tech/growth equities.

Question 8

A bank is considered insolvent when:

$$	ext{Total Assets} \u003c 	ext{Total Liabilities}$$

Which of the following scenarios describes insolvency?

Accepted Answer

A bank with $$105M in $$assets and $$110M in $$liabilities.

Question 9

Which of the following is a primary function of the Federal Reserve as the 'lender of last resort'?

Accepted Answer

Providing emergency liquidity to solvent but illiquid banks during financial crises.

Question 10

If the central bank increases the reserve requirements for checking accounts, what is the likely immediate effect on commercial banks?

Accepted Answer

Banks must hold more reserves, reducing the funds available for lending.

Question 11

Which of the following best describes the monetary base ($$MB$$)?

$$MB = 	ext{Currency} + 	ext{Reserve Accounts}$$

Accepted Answer

The sum of currency in circulation and reserves held at the central bank.

Question 12

Why do time-locked certificates of deposit (CDs) typically have lower reserve requirements than checking accounts?

Accepted Answer

Because the funds are contractually locked and cannot be withdrawn instantly.

Question 13

Which of the following is a key reason why deposit insurance can increase the risk of financial crises in countries with weak institutions?

Accepted Answer

Weak enforcement and transparency allow banks to take excessive risks without adequate oversight.

Question 14

If the central bank increases reserve accounts by $$50M$$, what is the direct effect on the monetary base ($$MB$$)?

$$MB = 	ext{Currency} + 	ext{Reserve Accounts}$$

Accepted Answer

$$MB$$ increases by $$50M$$

Question 15

Which of the following is NOT a direct liability on a bank’s balance sheet?

Accepted Answer

Securities

Question 16

A bank sells $$20M in $$government securities to manage a reserve shortfall. What is the immediate effect on the bank’s balance sheet?

Accepted Answer

Securities decrease by $$20M$$ and reserves increase by $$20M.$$

Question 17

Which of the following best describes the role of transparency in banking regulation?

Accepted Answer

Publicly visible balance sheets allow for baseline oversight and reduce the risk of hidden losses.

Question 18

If interest rates rise, what happens to the value of a bond held by a bank, and why?

Accepted Answer

The value of the bond falls because new bonds offer higher yields, making existing bonds less attractive.

Banking Regulation and Monetary Policy: Balance Sheets, Bank Runs, and Central Bank Roles

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