Chapter 9
The Banking Firm and the Management of Financial
Institutions
� Multiple Choice
1) A bank’s balance sheet
(a) shows that total assets equals total liabilities plus equity capital.
(b) lists sources and uses of bank funds.
(c) indicates whether or not the bank is profitable.
(d) does all of the above.
(e) does only (a) and (b) of the above.
Answer: E
Question Status: Previous Edition
2) A bank’s balance sheet
(a) shows that total assets equals total liabilities plus equity capital.
(b) lists sources and uses of bank funds.
(c) indicates whether or not the bank is solvent.
(d) does all of the above.
(e) does only (a) and (b) of the above.
Answer: D
Question Status: Previous Edition
3) 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) Each of the above.
Answer: C
Question Status: Previous Edition
304 Frederic S. Mishkin • Economics of Money, Banking, and Financial Markets, Seventh Edition
4) Which of the following statements are true?
(a) A bank’s assets are its uses of funds.
(b) A bank’s liabilities are its sources of funds.
(c) A bank’s balance sheet has the property that total assets equal the sum of total liabilities and
equity capital.
(d) Each of the above are true.
(e) Only (a) and (b) of the above are true.
Answer: D
Question Status: Previous Edition
5) Which of the following statements is true?
(a) A bank’s assets are its uses of funds.
(b) A bank’s assets are its sources of funds.
(c) A bank’s liabilities are its uses of funds.
(d) Only (b) and (c) of the above are true.
Answer: A
Question Status: Previous Edition
6) 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 an asset in the bank balance sheet.
Answer: D
Question Status: Previous Edition
7) Which of the following are reported as liabilities on a bank’s balance sheet?
(a) Reserves
(b) Checkable deposits
(c) Loans
(d) Deposits with other banks
Answer: B
Question Status: Previous Edition
8) Which of the following are reported as liabilities on a bank’s balance sheet?
(a) Discount loans
(b) Checkable deposits
(c) U.S. Treasury securities
(d) Only (a) and (b) of the above
Answer: D
Question Status: Previous Edition
Chapter 9 The Banking Firm and the Management of Financial Institutions 305
9) Which of the following are reported as liabilities on a bank’s balance sheet?
(a) Reserves
(b) Small denomination time deposits
(c) Loans
(d) Deposits with other banks
Answer: B
Question Status: Previous Edition
10) Which of the following are reported as liabilities on a bank’s balance sheet?
(a) Nontransaction deposits
(b) Bank capital
(c) Loans
(d) Only (a) and (b) of the above
(e) Only (b) and (c) of the above
Answer: D
Question Status: Previous Edition
11) Which of the following are reported as liabilities on a bank’s balance sheet?
(a) Discount loans
(b) Cash items in the process of collection
(c) State government securities
(d) All of the above
(e) Only (a) and (b) of the above
Answer: A
Question Status: Previous Edition
12) Which of the following are reported as liabilities on a bank’s balance sheet?
(a) Bank capital
(b) Loans
(c) Reserves
(d) All of the above
(e) Only (a) and (b) of the above
Answer: A
Question Status: Study Guide
13) The share of checkable deposits in total bank liabilities has
(a) expanded moderately over time.
(b) expanded dramatically over time.
(c) shrunk over time.
(d) remained virtually unchanged since 1960.
Answer: C
Question Status: Previous Edition
306 Frederic S. Mishkin • Economics of Money, Banking, and Financial Markets, Seventh Edition
14) Checkable deposits and money market deposit accounts are
(a) payable on demand.
(b) liabilities of the banks.
(c) assets of the banks.
(d) only (a) and (b) of the above.
(e) only (a) and (c) of the above.
Answer: D
Question Status: Previous Edition
15) Which of the following statements is false?
(a) Checkable deposits are usually the lowest cost source of bank funds.
(b) Checkable deposits are the primary source of bank funds.
(c) Checkable deposits are payable on demand.
(d) Checkable deposits include NOW accounts.
Answer: B
Question Status: Previous Edition
16) In recent years the interest paid on checkable and time deposits has accounted for around _____ of
total bank operating expenses, while the costs involved in servicing accounts have been
approximately _____ of operating expenses.
(a) 45 percent; 55 percent
(b) 55 percent; 4 percent
(c) 30 percent; 50 percent
(d) 50 percent; 30 percent
Answer: C
Question Status: Previous Edition
17) In recent years the interest paid on checkable and time deposits has accounted for around
(a) 60 percent of total bank operating expenses.
(b) 45 percent of total bank operating expenses.
(c) 30 percent of total bank operating expenses.
(d) 20 percent of total bank operating expenses.
Answer: C
Question Status: Previous Edition
18) In recent years the costs involved in servicing checkable and time deposit accounts have been
approximately
(a) 65 percent of total bank operating expenses.
(b) 75 percent of total bank operating expenses.
(c) 50 percent of total bank operating expenses.
(d) 25 percent of total bank operating expenses.
Answer: C
Question Status: Previous Edition
Chapter 9 The Banking Firm and the Management of Financial Institutions 307
19) Which of the following statements is false?
(a) The expenses involved in servicing accounts (salaries, building rent, etc.) make up over half the
costs of running a bank.
(b) Nontransaction deposits are the primary source of bank funds.
(c) Demand deposits are checkable deposits that pay no interest.
(d) Technically, savings deposits are not payable on demand.
Answer: A
Question Status: Previous Edition
20) Which of the following statements are true?
(a) Checkable deposits are usually the lowest cost source of bank funds.
(b) Checkable deposits are payable on demand.
(c) Checkable deposits include NOW accounts.
(d) All of the above are true.
Answer: D
Question Status: Previous Edition
21) Which of the following statements are true?
(a) Checkable deposits are payable on demand.
(b) Checkable deposits include NOW accounts.
(c) Checkable deposits are the primary source of bank funds.
(d) All of the above are true.
(e) Only (a) and (b) of the above are true.
Answer: E
Question Status: Previous Edition
22) Which of the following statements are true?
(a) Nontransaction deposits are the primary source of bank funds.
(b) Demand deposits are checkable deposits that pay no interest.
(c) Technically, savings deposits are not payable on demand.
(d) All of the above are true.
(e) Only (a) and (b) of the above are true.
Answer: D
Question Status: Previous Edition
23) Which of the following statements are true?
(a) Demand deposits are the primary source of bank funds.
(b) Demand deposits are checkable deposits that pay no interest.
(c) The expenses involved in servicing accounts (salaries, building rent, etc.) make up over half the
costs of running a bank.
(d) Only (a) and (b) of the above are true.
Answer: B
Question Status: Previous Edition
308 Frederic S. Mishkin • Economics of Money, Banking, and Financial Markets, Seventh Edition
24) Which of the following are transaction deposits?
(a) Savings accounts
(b) Small-denomination time deposits
(c) Negotiable order of withdraw accounts
(d) Certificates of deposit
Answer: C
Question Status: Previous Edition
25) Which of the following are not nontransaction deposits?
(a) Savings accounts
(b) Small-denomination time deposits
(c) Negotiable order of withdraw accounts
(d) Certificates of deposit
Answer: C
Question Status: Previous Edition
26) Which of the following are nontransaction deposits?
(a) Savings accounts
(b) Small-denomination time deposits
(c) Certificates of deposit
(d) All of the above
(e) Only (a) and (b) of the above.
Answer: D
Question Status: Previous Edition
27) Which of the following are nontransaction deposits?
(a) Savings accounts
(b) Small-denomination time deposits
(c) Negotiable order of withdraw accounts
(d) All of the above
(e) Only (a) and (b) of the above
Answer: E
Question Status: Previous Edition
28) Large-denomination CDs are _____, so that like a bond they can be resold in a _____ market before
they mature.
(a) nonnegotiable; secondary
(b) nonnegotiable; primary
(c) negotiable; secondary
(d) negotiable; primary
Answer: C
Question Status: Previous Edition
Chapter 9 The Banking Firm and the Management of Financial Institutions 309
29) Because checking accounts are _____ liquid for the depositor than passbook savings, they earn
_____ interest rates.
(a) less; higher
(b) less; lower
(c) more; higher
(d) more; lower
Answer: D
Question Status: Previous Edition
30) Because passbook savings are _____ liquid for the depositor than checking accounts, they earn
_____ interest rates.
(a) less; higher
(b) less; lower
(c) more; higher
(d) more; lower
Answer: A
Question Status: Previous Edition
31) Because _____ are less liquid for the depositor than _____, they earn higher interest rates.
(a) money market deposit accounts; time deposits
(b) checkable deposits; passbook savings
(c) passbook savings; checkable deposits
(d) passbook savings; time deposits
Answer: C
Question Status: Previous Edition
32) Because time deposits are _____ liquid for the depositor than passbook savings, they earn _____
interest rates.
(a) less; higher
(b) less; lower
(c) more; higher
(d) more; lower
Answer: A
Question Status: Previous Edition
33) Because _____ are less liquid for the depositor than _____, they earn higher interest rates.
(a) passbook savings; time deposits
(b) money market deposit accounts; time deposits
(c) money market deposit accounts; passbook savings
(d) time deposits; passbook savings
Answer: D
Question Status: Previous Edition
310 Frederic S. Mishkin • Economics of Money, Banking, and Financial Markets, Seventh Edition
34) Bank capital is listed on the _____ side of the bank’s balance sheet because it represents a _____ of
funds.
(a) liability; use
(b) liability; source
(c) asset; use
(d) asset; source
Answer: B
Question Status: Previous Edition
35) Banks acquire funds from such sources as
(a) checkable deposits.
(b) savings accounts.
(c) reserves.
(d) all of the above.
(e) only (a) and (b) of the above.
Answer: E
Question Status: Previous Edition
36) Banks acquire funds from such sources as
(a) bank capital.
(b) cash items in the process of collection.
(c) reserves.
(d) only (a) and (b) of the above.
Answer: A
Question Status: Previous Edition
37) Banks acquire the funds that they use to purchase income-earning assets from such sources as
(a) checkable deposits.
(b) savings accounts.
(c) reserves.
(d) all of the above.
(e) only (a) and (b) of the above.
Answer: E
Question Status: Previous Edition
38) Banks acquire the funds that they use to purchase income-earning assets from such sources as
(a) bank capital.
(b) cash items in the process of collection.
(c) reserves.
(d) all of the above.
(e) only (a) and (b) of the above.
Answer: A
Question Status: Previous Edition
Chapter 9 The Banking Firm and the Management of Financial Institutions 311
39) Bank loans from the Federal Reserve are called _____ and represent a _____ of funds.
(a) discount loans; use
(b) discount loans; source
(c) fed funds; use
(d) fed funds; source
Answer: B
Question Status: Previous Edition
40) Bank reserves
(a) equal bank deposits at the Fed.
(b) include holdings of U.S. government securities.
(c) can be divided up into required and excess reserves.
(d) all of the above.
(e) both (a) and (c) of the above.
Answer: C
Question Status: Study Guide
41) Bank reserves include
(a) deposits at the Fed.
(b) vault cash.
(c) short-term Treasury securities.
(d) all of the above.
(e) both (a) and (b) of the above.
Answer: E
Question Status: New
42) Bank reserves include
(a) deposits at the Fed and short-term treasury securities.
(b) vault cash and short-term Treasury securities.
(c) short-term Treasury securities and municipal securities.
(d) deposits at other banks and deposits at the Fed.
(e) vault cash and deposits at the Fed.
Answer: E
Question Status: New
43) The fraction of checkable deposits that banks are required by regulation to hold are
(a) excess reserves.
(b) required reserves.
(c) vault cash.
(d) all of the above.
(e) both (a) and (b) of the above.
Answer: B
Question Status: New
312 Frederic S. Mishkin • Economics of Money, Banking, and Financial Markets, Seventh Edition
44) The sum of reserves, cash items in the process of collection, and deposits in other banks are know as
(a) secondary reserves.
(b) cash items.
(c) liquid items.
(d) compensating balances.
(e) correspondent balances.
Answer: B
Question Status: Study Guide
45) Which of the following are reported as assets on a bank’s balance sheet?
(a) U.S. Treasury securities
(b) Loans
(c) Discount loans from the Fed
(d) Only (a) and (b) of the above
Answer: D
Question Status: Previous Edition
46) Which of the following are reported as assets on a bank’s balance sheet?
(a) Discount loans from the Fed
(b) Loans
(c) Borrowings
(d) Only (a) and (b) of the above
Answer: B
Question Status: Previous Edition
47) Which of the following are reported as assets on a bank’s balance sheet?
(a) Cash items in the process of collection
(b) Loans
(c) Borrowings
(d) Only (a) and (b) of the above
Answer: D
Question Status: Previous Edition
48) Which of the following are reported as assets on a bank’s balance sheet?
(a) Cash items in the process of collection
(b) Checkable deposits
(c) Borrowings
(d) Bank capital
Answer: A
Question Status: Previous Edition
Chapter 9 The Banking Firm and the Management of Financial Institutions 313
49) Which of the following are reported as assets on a bank’s balance sheet?
(a) Cash items in the process of collection
(b) Deposits with other banks
(c) Checkable deposits
(d) Bank capital
(e) Only (a) and (b) of the above
Answer: E
Question Status: Previous Edition
50) Which of the following are reported as assets on a bank’s balance sheet?
(a) U.S. Treasury securities
(b) Reserves
(c) Loans
(d) All of the above
(e) Only (a) and (b) of the above
Answer: D
Question Status: Previous Edition
51) Which of the following are reported as assets on a bank’s balance sheet?
(a) Discount loans from the Fed
(b) Loans
(c) Reserves
(d) Only (a) and (b) of the above
(e) Only (b) and (c) of the above
Answer: E
Question Status: Previous Edition
52) Which of the following are reported as assets on a bank’s balance sheet?
(a) Borrowings
(b) Reserves
(c) Savings deposits
(d) Bank capital
(e) Only (a) and (b) of the above
Answer: B
Question Status: Previous Edition
53) Which of the following are reported as assets on a bank’s balance sheet?
(a) Reserves
(b) Checkable deposits
(c) Borrowings
(d) Bank capital
Answer: A
Question Status: Previous Edition
314 Frederic S. Mishkin • Economics of Money, Banking, and Financial Markets, Seventh Edition
54) Which of the following are reported as assets on a bank’s balance sheet?
(a) Cash items in the process of collection
(b) Deposits with other banks
(c) U.S. Treasury securities
(d) All of the above
Answer: D
Question Status: Previous Edition
55) Which of the following are not reported as assets on a bank’s balance sheet?
(a) Cash items in the process of collection
(b) Deposits with other banks
(c) U.S. Treasury securities
(d) Checkable deposits
Answer: D
Question Status: Previous Edition
56) Which of the following are not reported as assets on a bank’s balance sheet?
(a) Cash items in the process of collection
(b) Borrowings
(c) U.S. Treasury securities
(d) Reserves
Answer: B
Question Status: Previous Edition
57) Which of the following are not reported as assets on a bank’s balance sheet?
(a) Discount loans from the Fed
(b) Loans
(c) Reserves
(d) Only (a) and (b) of the above
Answer: A
Question Status: Previous Edition
58) Which of the following are not reported as assets on a bank’s balance sheet?
(a) Borrowings
(b) Savings deposits
(c) Reserves
(d) Only (a) and (b) of the above
Answer: D
Question Status: Previous Edition
Chapter 9 The Banking Firm and the Management of Financial Institutions 315
59) Through correspondent banking, large banks provide services to small banks, including
(a) check collection.
(b) foreign exchange transactions.
(c) issuing stock.
(d) all of the above.
(e) both (a) and (b) of the above.
Answer: E
Question Status: New
60) Through correspondent banking, large banks provide services to small banks, including
(a) check collection.
(b) foreign exchange transactions.
(c) help with security purchases.
(d) all of the above.
(e) both (a) and (b) of the above.
Answer: D
Question Status: New
61) Banks’ holdings of securities consist primarily of
(a) Treasury and government agency securities.
(b) tax-exempt municipal securities.
(c) state and local government securities.
(d) corporate securities.
Answer: A
Question Status: Previous Edition
62) Which of the following bank assets is the most liquid?
(a) Consumer loans
(b) Reserves
(c) Cash items in process of collection
(d) U.S. government securities
Answer: B
Question Status: Previous Edition
63) Of the following bank assets, the most liquid is
(a) consumer loans.
(b) state and local government securities.
(c) physical capital.
(d) U.S. government securities.
(e) commercial loans.
Answer: D
Question Status: Study Guide
316 Frederic S. Mishkin • Economics of Money, Banking, and Financial Markets, Seventh Edition
64) The most important category of assets on a bank’s balance sheet is
(a) discount loans.
(b) securities.
(c) gold.
(d) cash items in the process of collection.
(e) none of the above.
Answer: E
Question Status: Previous Edition
65) The most important category of assets on a bank’s balance sheet is
(a) discount loans.
(b) securities.
(c) loans.
(d) cash items in the process of collection.
Answer: C
Question Status: Previous Edition
66) Which of the following bank assets is the least liquid?
(a) Reserves
(b) Secondary reserves
(c) Deposits with other banks
(d) Cash items in process of collection
Answer: B
Question Status: Previous Edition
67) Secondary reserves include
(a) deposits at Federal Reserve Banks.
(b) deposits at other large banks.
(c) short-term Treasury securities.
(d) state and local government securities.
(e) all of the above.
Answer: C
Question Status: New
68) Because of their _____ liquidity, _____ U.S. government securities are called secondary reserves.
(a) low; short-term
(b) low; long-term
(c) high; short-term
(d) high; long-term
Answer: C
Question Status: Previous Edition
Chapter 9 The Banking Firm and the Management of Financial Institutions 317
69) Secondary reserves are so called because
(a) they can be converted into cash with low transactions costs.
(b) they are not easily converted into cash, and are, therefore, of secondary importance to banking
firms.
(c) 50% of these assets count toward meeting required reserves.
(d) of none of the above.
Answer: A
Question Status: Previous Edition
70) Banks’ holdings of securities consist primarily of
(a) Treasury and government agency securities.
(b) tax-ex