Econ 102 - Principles of Macroeconomics » Spring 2020 » iVAT Credit Theory Banking

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Question #1
When a bank customer deposits physical currency into a bank:
A.   The customer is swapping liabilities, and the customer is receiving physical currency, in exchange for bank assets.
B.   The customer is reducing the size of its balance sheet.
C.   The customer is swapping assets, and the customer is receiving a checking account balance, in exchange for physical currency.
D.   The customer is expanding its balance sheets.
Question #2
When Wells Fargo transfers $2 million in central bank reserves to Bank of America. The Federal Reserve does the following:
A.   it mandates that Wells Fargo $2 million in gold to facilitate the transaction
B.   provides a $2 million loan at the discount window
C.   credits (increases) Bank of America's account by $2 million and debits (decreases) Wells Fargo's account by $2 million
D.   credits (decreases) Bank of America's account by $2 million and debits (increases) Wells Fargo's account by $2 million
E.   it buys bonds through open market operations
Question #3
According to the credit theory of banking:
A.   Banks can become insolvent by not making loans
B.   banks create deposits when they make loans
C.   Banks create loans and fund those loans through loans from the central bank
D.   Central bank reserves' most important funtion is to meet reserve requirements
E.   banks receive deposits and multiply those deposits through the loan creation process
Question #4
Immediately after a loan is granted to a debtor, what happens to the debtor's stockholder's equity?
A.   Nothing, but its balance sheet contracts
B.   It decreases
C.   Nothing, but its balance sheet expands
D.   None of the avaialble answers is correct
E.   It increases
Question #5
Immediately after a commercial bank creates a loan what happens to its stockholder's equity?
A.   It increases
B.   It decreases
C.   Nothing, but its balance sheet contracts
D.   Nothing, but its balance sheet expands
E.   None of the avaialble answers is correct
Question #6
In order to facilitate transactions between commercial banks, what asset does a commercial bank need?
A.   deposits
B.   central bank reserves or physical currency
C.   bonds
D.   real estate
E.   gold
Question #7
Suppose we have the following example of Citibank’s balance sheet: Assets: $4,400,000 (Loans) $3,000,000 (Central Bank Reserves) Liabilities: $4,200,000 (Deposits) Now suppose that a large depositor requests that $3,500,000 in deposits be transferred to Wells Fargo. Question: What problem is Citibank facing?
A.   Citibank needs an additional $500,000 in loans to facilitate the transfer.
B.   Citibank needs an additional $500,000 in central bank reserves to facilitate the transfer.
C.   Citibank is currently insolvent.
D.   Citibank currently has enough liquid assets to facilitate the transfer.
Question #8
What is one of the ways a commercial bank can acquire reserves:
A.   All of the available answers are correct
B.   sell assets
C.   borrow them directly from the federal reserve
D.   attract deposits
E.   borrow them in the federal funds market
Question #9
If Wells Fargo lends central bank reserves overnight to Bank of America it will lead to an expansion of Wells Fargo's balance sheet.
A.   FALSE
B.   TRUE
Question #10
Why have banks historically not used the discount window to obtain central bank reserves?
A.   Because of a fear of stigma attached to the discount window, which may send a signal to other banks that they are insolvent
B.   Becasue of a fear of paying too much interest
C.   Because borrowing in the federal funds rate is always available to banks
D.   Becasue the discount window interest rates have always been higher than the federal funds rate
E.   None of the available answers is correct
Question #11
If the Federal Reserve lends central bank reserves to Bank of America at the discount window, stockholder's equity for both the Federal Reserve and Bank of America increases.
A.   TRUE
B.   FALSE
Question #12
Suppose a commercial bank has the following items on its balance sheet: Assets: $500,000 loans Liabilities: $450,000 deposits Suppose that the bank has to write down (reduce) the value of some its loans by $200,000. What is the stockholder's equity of the bank after the write down and what is the financial position of the bank?
A.   +$150,000 and the bank is solvent
B.   -$150,000 and the bank is illiquid
C.   +$250,000 and the bank is solvent
D.   -$150,000 and the bank is insolvent
E.   -$250,000 and the bank is insolvent
Question #13
What are some reasons why commercial banks will not create an unlimited amount of loans?
A.   If too many loans are created than there can be a massive amount of loan defaults, which can lead to insolvency issues.
B.   Creating loans will lead to transfers of deposits from the bank which requires central bank reserves, which are costly to obtain and imposes a constraint on loan creation.
C.   All of the available answers are correct
D.   Loan creation can create immediate liqudity needs due to outgoing deposit transfers from the debtor. This can cause the commercial bank to have a firesale on assets, which can cause insolvency.
Question #14
Which two assets are equivalent in the eyes of the Federal Reserve and Commercial banks?
A.   Physical currency and loans
B.   Central bank reserves and corporate stocks
C.   Central bank reserves and treasury bonds
D.   Physical currency and treasury bonds
E.   Central bank reserves and physical currency
Question #15
Money is destroyed when people and firms pay back loans because:
A.   People and firms increase their deposit balances when paying back loans to commercial banks.
B.   Paying back loans cause balance sheets to expand.
C.   People and firms reduce their deposit balances when paying back loans to commercial banks.
D.   Paying back loans causes stockholder's equity to be reduced.
Question #16
Economists who state that the money supply is endogenous will argue the following:
A.   All of the available answers are correct.
B.   Commercial banks and bank customers determine how much money there will be in the economy, and that the central bank has to accommodate them in order to ensure the payment system and banking system is stable.
C.   Commercial banks and bank customers determine how much money there will be in the economy, and that the central bank has to accommodate them in order to ensure the federal funds rate goes above the central bank's target rate.
D.   Commercial banks and investment banks determine how much money there will be in the economy, and that the central bank has to accommodate them in order to ensure the federal funds rate goes below the central bank's target.

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