Question 1

On a bank's balance sheet, the value of its assets must equal the value of its _____

Accepted Answer

On a bank's balance sheet, the value of its assets must equal the value of its liabilities plus net worth. This is known as the accounting equation or balance sheet equation. It means that the funds raised by a bank through its liabilities and net worth are used to purchase assets that generate income for the bank. The value of assets and liabilities are reported at their book value or fair value, depending on the accounting standard applied by the bank.

Question 2

Which of the following is a liability of a bank?

Accepted Answer

Checkable deposits are a liability of a bank as they represent the depositors' funds that the bank owes to its customers. U.S. government securities owned by the bank, Deposits with the Fed, consumer and business loans, and buildings and furniture owned by the bank are assets of the bank.

Question 3

Suppose the First National Bank acquires $1,000,000 in new deposits. Which of the following is true?

Accepted Answer

Required reserves on the new deposits are $60,000.

Question 4

A bank's net worth is _____

Accepted Answer

A bank's net worth is also known as owners' equity. It is the difference between a bank's total assets and total liabilities.

Question 5

Suppose a bank has $6,000 in checkable deposits and the required reserve ratio is 0.2. If the bank wishes to hold no excess reserves, its actual reserves will be _____

Accepted Answer

The required reserves for the bank, given a 0.2 reserve ratio and $6,000 in checkable deposits, are calculated as 0.2 * $6,000 = $1,200. If the bank wishes to hold no excess reserves, its actual reserves will equal its required reserves, which are $1,200.

Question 6

If a bank has $950,000 million in liabilities and $50,000 in net worth, its assets must equal _____

Accepted Answer

The answer of If a bank has $950,000 million in...

Question 7

Which of the following is true of banks?

Accepted Answer

Banks reduce the transaction costs of borrowing and lending money by providing a centralized location for borrowers and lenders to interact, as well as by providing various financial intermediation services such as credit analysis, documentation, and payment processing.

Question 8

If the required reserve ratio is 10 percent and a bank receives a new deposit for $100,000, then the _____

Accepted Answer

The bank's liabilities increase by $100,000 because the new deposit is recorded as a liability on the bank's balance sheet, reflecting the bank's obligation to return the funds to the depositor upon request.

Question 9

Suppose a bank has $8,000 in checkable deposits and the required reserve ratio is 0.2. If actual reserves equal $3,000, then excess reserves equal _____

Accepted Answer

The required reserves for $8,000 in checkable deposits at a 0.2 reserve ratio is $1,600 ($8,000 * 0.2). With actual reserves at $3,000, the excess reserves are calculated as $3,000 (actual reserves) - $1,600 (required reserves) = $1,400.

Question 10

Banks earn a profit on the difference between _____

Accepted Answer

Banks earn a profit on the difference between the interest charged on loans and the interest paid on deposits. This is known as the net interest margin. The higher the difference, the more profit the bank makes.

Question 11

If the required reserve ratio is 20 percent and a bank has $100,000 in checkable deposits, then its _____

Accepted Answer

The required reserves for the bank would be 20% of $100,000, which is $20,000.

Question 12

To obtain a charter, or the right to operate, a national bank must apply to the _____

Accepted Answer

To obtain a charter, or the right to operate, a national bank must apply to the U.S. Comptroller of the Currency. This is the federal agency responsible for regulating, supervising, and chartering national banks. The other options listed do not have the authority or responsibility to issue charters for national banks.

Question 13

The United Bank of Glassen lent money to only a limited number of big business houses. After a financial crisis, the bank went out of business. Which of the following reasons could have contributed to the collapse of this bank?

Accepted Answer

The bank's lack of diversification in its asset portfolio could lead to significant financial risk if those few big business houses failed to repay their loans, especially during a financial crisis.

Question 14

If a bank has $950,000 million in liabilities and $1,000,000 in assets, its net worth must equal _____

Accepted Answer

Net worth is calculated as assets minus liabilities. Therefore, $1,000,000 million - $950,000 million = $50,000 million.

Question 15

When a customer deposits $100 into a checking account, it _____

Accepted Answer

When a customer deposits $100 into a checking account, it increases the bank's assets by $100 (as they now have $100 more in reserves) and also increases the bank's liabilities by $100 (as they now owe the customer $100). Therefore, it increases both the bank's liabilities and its assets.

Question 16

If a bank has $1,000,000 in assets and $50,000 in net worth, its liabilities must equal _____

Accepted Answer

The liabilities of the bank can be calculated by subtracting its net worth from its total assets. Therefore, $1,000,000 (assets) - $50,000 (net worth) = $950,000 (liabilities).

Question 17

If a bank has $6,000 in checkable deposits and the required reserve ratio is 0.2, then the bank can lend:

Accepted Answer

The answer of If a bank has $6,000 in checkable...

Question 18

When a customer deposits $1,000 in a bank, the deposit is _____

Accepted Answer

When a customer deposits money in a bank, it becomes a liability for the bank because the bank owes that amount to the customer.

Question 19

Which of the following is an asset to a bank?

Accepted Answer

Loans are an asset to the bank because they generate interest income for the bank over time. The other options listed are liabilities (checkable deposits, transaction deposits, borrowings from the Fed) or financial instruments (credit cards) that do not generate substantial income on a standalone basis for the bank.

Question 20

On a bank's balance sheet, the value of its liabilities must equal the value of its _____

Accepted Answer

On a bank's balance sheet, the value of its liabilities must equal the value of its assets minus net worth. This is because the basic accounting equation is Assets = Liabilities + Equity (or Net Worth), which can be rearranged to show that Liabilities = Assets - Net Worth.

Quiz 14: Banking and the Money Supply.