Tutorial Questions #7

ECON7200

1. The bank you own has the following balance sheet:

Assets Liabilities

Reserves $75 million Deposits $500 million

Loans $525 million Bank capital $100 million

If the bank suffers a deposit outflow of $50 million with a required reserve ratio on

deposits of 10%, what actions should you take?

2. (a) NewBank started its first day of operations with $155 million in capital. A total of $92

million in checkable deposits is received. The bank makes a $28 million commercial loan

and lends another $23 million in mortgage loans. If required reserves are 5.4%, what

does the bank balance sheet look like?

(b) NewBank decides to invest $273 million in 30-day T-bills. The T-bills are currently

trading at $4,981 (including commissions) for a $5,000 face value instrument. How

many T-bills do they purchase? What does the balance sheet look like?

3. Using the T-accounts of the First National Bank and the Second National Bank given in

this chapter, describe what happens when Jane Brown writes a check for $90 on her

account at the First National Bank to pay her friend Joe Green, who in turn deposits the

check in his account at the Second National Bank.

4. Rank the following bank assets from most to least liquid:

a. Commercial loans

b. Securities

c. Reserves

d. Physical capital

5. If the bank you own has no excess reserves and a sound customer comes in asking for a

loan, should you automatically turn the customer down, explaining that you don’t have

any excess reserves to lend out? Why or why not? What options are available that will

enable you to provide the funds your customer needs?

6. A bank almost always insists that the firms it lends to keep compensating balances at the

bank. Why?

MCQs

1. Which of the following are reported as assets on a bank's balance sheet?

A) borrowings

B) reserves

C) savings deposits

D) bank capital

2. 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

3. 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

4. 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.

5. 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.

6. 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.

7. 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.

8. 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

9. 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.

10. 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.