MONEY BANKING- MIDTERM

NAME:

CLASS:

ORDINARY NUMBER:

I. Multiple choices (3 points)

1. When borrowers borrow in financial markets, they do so by:

A) Issuing securities.

B) Buying securities.

2. A short-term debt instrument is best defined as one with:

A) Maturity of one day or less.

B) Maturity of less than one month.

C) Maturity of less than six months.

D) Maturity of less than one year.

E) Maturity of less than ten years.

3. When Ford Motor Company issues new shares of stock and sells them off to private
investors,

these transactions are said to take place in an

A) Broker’s market.

B) Dealer’s market.

C) Secondary market.

D) None of the above.

4. Investment banks play a key role in financial markets by underwriting securities. This
means that investment banks

A) Help match up buyers and sellers of existing securities.

B) Hold inventories of securities and stand ready to buy from and sell to other market
participants.

C) Help firms sell newly-issued securities.

D) Guarantee that firms will pay interest and principal on their debt.

5. Which of the following securities markets is organized as an exchange?

A) The New York Stock Exchange.

B) The NASDAQ market for stocks.

C) The US Government bond market.

D) Both (B) and (C) above.

E) All three, (A), (B), and (C), above.

6. Which of the following is true?

A) Negotiable CD’s are short-term debt instruments.

B) Negotiable CD’s are issued by banks.

C) Negotiable CD’s trade on a secondary market.

D) Both (A) and (B) above.

E) All three, (A), (B), and (C), above.

7. Which of the following is true?

A) Commercial paper is issued by corporations.

B) Maturities on commercial paper rarely exceed 9-months.

C) Commercial paper makes no regular interest payments, but instead sells at a discount.

D) Commercial paper trades on a secondary market.

E) All of the above.

8. In the United States monetary policy is carried out by

A) the Federal Reserve System.

B) Congress.

C) the President.

D) Congress and the President acting together.

9. Which of the following is an example of a barter transaction?

A) An individual pays her electric bill with a check.

B) An individual pays her electric bill with currency.

C) An individual provides three light bulbs to her neighbor in exchange for two gallons of milk.

D) An individual deposits three twenty-dollar bills in her checking account

10. Which of the following represented the largest asset on the balance sheet of U.S. banks in
2004?

A) Checkable deposits

B) Loans

C) Non-transaction deposits

D) US Government obligations

11. The interest rate on unsecured loans between banks is called the

A) discount rate.

B) repurchase rate.

C) T-bill rate.

D) federal funds rate.

12. If you deposit a $50 check in the bank, before the check has cleared, the change in your
bank's balance sheet will be

A) a $50 increase in reserves and a $50 increase in checkable deposits.

B) a $50 increase in cash items in the process of collection and a $50 increase in reserves.

C) a $50 increase in cash items in the process of collection and a $50 increase in checkable
deposits.

D) a $50 increase in cash and a $50 increase in checkable deposits.

13. Reserves equal

A) deposits with the Fed plus holdings of U.S. government securities.

B) currency in circulation plus vault cash.

C) deposits with the Fed plus vault cash.

D) currency outstanding plus currency in circulation.

14. If you deposit $100 in your bank and the required reserve ratio is 20%, your bank will
have

A) an increase in required reserves of $20 and an increase in excess reserves of $80.

B) an increase in required reserves of $500.

C) an increase in required reserves of $80.

D) an increase in required reserves of $100.

15. A $10 million open market purchase will increase bank reserves by

A) $10 million divided by the money multiplier.

B) $10 million.

C) An amount between 0 and $10 million, depending on the fraction of the purchase the public
wishes to hold as currency.

D) $10 million times the money multiplier.

II. Problem solving:

1. Answer the next question based on the following consolidated balance sheet for the
commercial banking system. Assume the required reserve ratio is 30 percent. All figures
are in millions of dollars. (3 points)

ASSETS LIABILITIES

Reserves $200 Deposits $600

Securities 500 Capital Stock 700
Loans 100
Property 500

(a) What is the amount of excess reserves in this commercial banking system?

(b) What is the maximum amount that the money supply can be expanded?

(c) If the reserve ratio fell to 25 percent, what is now the maximum amount that the money
supply can be expanded?

2. In the tables that follow you will find consolidated balance sheets for the commercial
bank system and FED. (4 points)
 CONSOLIDATED BALANCE SHEET: ALL COMMERCIAL BANKS

Assets:
Reserves $ 33
Securities 60
Loans 60

Liabilities and net worth:

Checkable deposits 150
Loans from the Federal
Reserve Banks 3
CONSOLIDATED BALANCE SHEET:
TWELVE FEDERAL RESERVE BANKS

Assets:
Securities $60
Loans to commercial banks 3

Liabilities and net worth:

Reserves of commercial banks $33
Treasury deposits 3
Federal Reserve Notes 27

a) A decline in the discount rate prompts commercial banks to borrow an additional

$1billion from FED. Show the new balance sheet.
b) FED sells $3 billion in securities to the non-bank public. Show the new balance sheet
c) FED buys $2 billion in securities. Show the new balance sheet
d) What change, if any took place in the money supply as a direct and immediate result of
each transaction?
Assume a reserve ratio is 20%, what change in money supply of each transaction?
THE END