$\text{Stockholders' equity} = \$1{,}000\text{ million} - \$900\text{ million} = \$100\text{ million}$

Question 1

Suppose the nominal interest rate on a loan is 8% and the inflation rate is 3%. What is the real interest rate according to the Fisher Equation?

Accepted Answer

$r = 8\% - 3\% = 5\%$

Question 2

Which of the following would most likely cause a rightward shift in the credit demand curve?

Accepted Answer

Firms expect higher future profits and increase investment in capital equipment.

Question 3

If the real interest rate increases, what is the most likely effect on the quantity of credit supplied?

Accepted Answer

The quantity of credit supplied will increase.

Question 4

A bank’s balance sheet shows total assets of $1,000 million and total liabilities of $900 million. What is the bank’s stockholders’ equity?

Accepted Answer

$	ext{Stockholders' equity} = \$1{,}000	ext{ million} - \$900	ext{ million} = \$100	ext{ million}$

Question 5

Which of the following best describes the function of maturity transformation performed by banks?

Accepted Answer

Banks use short-term liabilities to fund long-term investments.

Question 6

If a bank suffers a 30% reduction in the value of its long-term assets and its stockholders’ equity becomes negative, what does this indicate?

Accepted Answer

The bank is insolvent because its liabilities exceed its assets.

Question 7

Which of the following is NOT a typical reason for households to save money?

Accepted Answer

To pay off existing loans immediately.

Question 8

What is the main reason individuals and businesses base their borrowing decisions on the real interest rate rather than the nominal interest rate?

Accepted Answer

Because the real interest rate accounts for inflation, reflecting the true cost of borrowing.

Question 9

If the U.S. federal government increases its budget deficit, what is the most likely effect on the credit market?

Accepted Answer

The credit demand curve shifts right, increasing the real interest rate.

Question 10

Which of the following is a plausible consequence of a bank run?

Accepted Answer

The bank may be forced to sell illiquid assets at lower prices, potentially leading to insolvency.

Question 11

Which of the following financial institutions is NOT considered part of the shadow banking system?

Accepted Answer

Commercial banks.

Question 12

What does the steepness of the credit demand curve indicate?

Accepted Answer

The sensitivity of the quantity of credit demanded to changes in the real interest rate.

Question 13

Which of the following would most likely cause a leftward shift in the credit supply curve?

Accepted Answer

Households buy the new Apple iPhone, reducing their savings.

Question 14

If the real interest rate is negative, what does this imply for savers?

Accepted Answer

The purchasing power of their savings will decrease over time.

Question 15

Which of the following is NOT a function performed by banks as financial intermediaries?

Accepted Answer

Setting government fiscal policy.

Question 16

During the 2007-2009 financial crisis, what was a key reason for widespread bank failures?

Accepted Answer

A large fraction of mortgage assets became delinquent, causing negative returns on bank assets.

Question 17

If a bank’s total assets are less than its total liabilities, what is the status of the bank?

Accepted Answer

The bank is insolvent.

Question 18

What is the primary role of the FDIC when a bank fails?

Accepted Answer

To protect depositors by either paying them up to the insured limit or transferring the bank to new ownership.

Question 19

Which equation correctly represents the relationship between total assets, total liabilities, and stockholders’ equity for a bank?

Accepted Answer

$	ext{Total Assets} = 	ext{Total Liabilities} + 	ext{Stockholders' Equity}$

Question 20

Which of the following best explains why diversification alone may not be sufficient for banks to manage risk?

Accepted Answer

A large fraction of diverse assets can underperform simultaneously during a financial crisis.

Credit Markets and Financial Intermediation: Study Notes

Study Guide - Practice Questions