1.
The quantity of reserves that Central Bank supplies to commercial banks equals
A. reserves from OMO minus reserves from discount lending.
B. reserves from OMO plus reserves from discount lending.
C. required reserves plus reserves from discount lending.
D. total reserves minus required reserves. 2.
When the exchange rate for the USD changes from 22,000 VND to 24,000 VND, the USD has
________ and ________ expensive.
A. appreciated; American goods sold in Vietnam become less
B. appreciated; American goods sold in Vietnam become more
C. depreciated; Vietnamese goods sold in the US becomes more
D. depreciated; Vietnamese goods sold in the US becomes less 3.
A simple deposit multiplier equal to 1 implies a required reserve ratio equal to A. 100%. B. 50%. C. 25%. D. 0%.
Money Multiplier = 1 / Required Reserve Ratio x 100 4.
Through __________, the Fed can adjust supply of reserves to meet expected reserve demand at the target federal funds rate.
A. Require reserves B. Excess reserves C. Open market operations D. Deposit rate 5.
Suppose on any given day there is an excess demand of reserves in the federal funds market. If the
Federal Reserve wishes to keep the federal funds rate at its current level, then the appropriate action
for the Federal Reserve to take is a ________ open market ________, everything else held constant. A. defensive; sale B. defensive; purchase C. dynamic; sale D. dynamic; purchase 6.
Suppose, at a given federal funds rate, there is an excess demand for reserves in the federal funds
market. If the Fed wants the federal funds rate to stay at that level, then it should undertake an open
market ________ of bonds, everything else held constant. If the Fed does nothing, however, the
federal funds rate will ________. A. sale; increase
B. purchase; increase C. sale; decrease D. purchase; decrease 7. The monetary base consists of
A. currency in circulation and Federal Reserve notes.
B. currency in circulation and the U.S. Treasury s ʹ monetary liabilities.
C. currency in circulation and reserves. (Tiền tệ trong lưu thông)
D. reserves and Federal Reserve Notes. 8.
When an individual sells a $100 bond to the Fed, she may either deposit the check she receives or cash it for currency. In both cases A. reserves increase.
B. high-powered money increases. C. reserves decrease.
D. high-powered money decreases. 9.
Open market purchases raise the A. Money multiplier
B. Monetary base (+ money supply) C. Currency D. Reserve requirement 10.
The effect of an open market purchase on reserves differs depending on how the seller of the bonds
keeps the proceeds. If the proceeds are kept in currency, the open market purchase ________ reserves;
if the proceeds are kept as deposits, the open market purchase ________ reserves.
A. has no effect on; has no effect on B. has no effect on; increases C. increases; has no effect on D. decreases; increases 11. Bank reserves include
A. Balances held at other banks and Cash item in the process of collection.
B. Deposits at the Central Bank and Cash item in the process of collection.
C. Vault cash and Balances held at other banks.
D. Vault cash and Deposits at the Central Bank. 12.
In the market for reserves, when the federal funds rate is above the interest rate paid on excess
reserves, the demand curve for reserves is ________. A. vertical B. horizontal C. positively sloped D. negatively sloped 13.
The most important category of assets on a bank s balance sheet is ʹ A. discount loans B. securities. C. loans.
D. cash items in the process of collection. 14.
Banks hold excess and secondary reserves to
A. reduce the interest-rate risk problem.
B. provide for deposit outflows.
C. satisfy margin requirements.
D. achieve higher earnings than they can with loans. 15.
The effect of an open market purchase on reserves differs depending on how the seller of the bonds
keeps the proceeds. If the proceeds are kept in currency, the open market purchase ________ reserves;
if the proceeds are kept as deposits, the open market purchase ________ reserves.
A. has no effect on; has no effect on B. has no effect on; increases C. increases; has no effect on D. decreases; increases 16.
When the State Bank of Vietnam extends a discount loan to Vietcombank, the monetary base increase
and reserves _________.remain unchanged A. decrease B. increase C. fluctuate D. remain unchanged 17.
If the demand for foreign goods increases relative to Vietnamese goods then the VND tends to
________ because Vietnamese goods will continue to sell well if only the value of the VND is
________, everything else held constant. A. appreciate; lower B. appreciate; higher C. depreciate; lower D. depreciate; higher 18.
Suppose that from a new checkable deposit, First National Bank holds two million dollars in vault
cash, eight million dollars on deposit with the Federal Reserve, and one million dollars in required
reserves. Given this information, we can say First National Bank has ________ million dollars in excess reserves. A. three B. nine C. ten D. eleven Explaination:
Excess reserves = Total reserves - Required reserves
Excess reserves = (Vault cash + Deposits with the Federal Reserve) - Required reserves
Excess reserves = ($2 million + $8 million) - $1 million Excess reserves = $9 million 19.
The three players in the money supply process include
A. banks, depositors, and the Treasury.
B. banks, depositors, and borrowers.
C. banks, depositors, and the Central Bank.
D. banks, borrowers, and the Central Bank. 20.
The interest rate the Fed charges banks borrowing from the Fed is the A. federal funds rate. B. Treasury bill rate. C. discount rate. D. prime rate. 21.
If the risk relative to alternative investments increases, the demand for money will be A. Higher B. Lower C. Unchanged D. Variable 22.
Banks make their profits primarily by issuing: A. Loans B. Bonds C. Savings Deposits D. Checkable deposits 23.
If there is a sudden decrease in the liquidity of stocks, bonds and other assets, the demand for money is expected to A. Go up B. Go down C. Keep stable D. Fluctuate 24.
If there are more alternative means of payment, the demand for money will be A. Higher B. Lower C. Unchanged D. Variable 25.
In a hard-peg system, the central bank guarantees convertibility of domestic currency into
A. the foreign currency to which it is pegged.
B. any foreign currency depending on situations C. the USD only D. the GBP only 26.
If Bank A faces a required reserve ratio of 20%, suppose that from a new checkable deposit, the bank
holds seven million dollars on deposit with the Central Bank and two million dollars in required
reserves. Given this information, we can say Bank A has _____ million dollars in vault cash. A. One B. Two C. Three D. Four Explaination: RR = rD x D Required reserves ratio: rD Deposits: D => D = RR : rD 2 : 20% = $10 million
=> Vault cash = Total reserves – Deposits with the Central Bank = $10 million - $7 million = $3 million. 27.
In the market for reserves, if the federal funds rate is above the interest rate paid on excess reserves,
then an open market ________ the supply of reserves, raising the federal funds interest rate, everything else held constant. A. sale decreases B. sale increases C. purchase increases D. purchase decreases Questions
What is the interest rate that sets a floor for the market federal fund rate? - Deposit rate.
What is the interest rate that sets a ceiling for the market federal fund rate? - Discount rate.
Why are securities called secondary reserves of commercial bank? -
Because they are less liquid than primary reserves.
What is the primary source of bank fund? -
Deposits are the primary source of bank funds.
What is the price of a nation’s currency in terms of another currency called? - Exchange rate.
What is the government agency that oversees the banking system and is responsible for the conduct of monetary policy in Vietnam? - Is the State Bank of Vietnam.
What is the government agency that oversees the banking system and is responsible for the conduct of monetary policy in the US? - The Federal Reserve System.
To what extent can a bank increase its loan? What is money velocity? -
Money velocity is the rate at which money is exchanged in an economy over a period of time.
What is the type of discount lending that healthy bank can borrow with short maturities from the Federal Reserves? - Primary credit.
What is the type of discount lending that less healthy bank can borrow with short maturities from the Federal Reserves? - Secondary credit.
What is the type of discount lending that agricultural bank can borrow with short maturities from the Federal Reserves? - Seasonal credit
Explain the costs of each of the following conditions and explain who bears them. a. Interest-rate instability b. Exchange-rate instability c. Inflation d. Unstable growth
a. Interest-rate instability makes output unstable. It also increases risk and therefore the risk premium
on bonds. With a higher risk premium, it is more costly for firms to borrow. Firms will decrease their
investments, which will hurt economic growth.
b. Exchange-rate instability makes the revenue from exports and the costs of imports unpredictable.
This hurt individuals engaged in foreign trade. This problem is particularly severe in emerging markets countries.
c. Inflation creates uncertainty, which reduces investment and hurts growth. When inflation is higher
than expected, the real value of the payments received by lenders falls. Someone on a fixed salary is
also hurt by higher than expected inflation.
d. When a growth is unstable, people are less sure about their future incomes and are less willing to
borrow. Lowers level of borrowing reduce investment and hurt future growth.
The power of a central bank is based on its monopoly over the issuance of currency. Economics
teaches us that monopolies are bad and competition is good. Would competition among several
central banks be better? Provide arguments both for and against.
For competition among central banks: Increased accountability, innovation, reduced risk of systemic failure.
Against competition among central banks: Coordination problems, exchange rate instability, increased costs.
PART 1: Commercial Bank and Bank Management - Fill in the blanks Question 1:
Instead of selling assets in response to a deposit withdrawal, banks find other sources of funds by (b_ _
_ _ _ _ _ _ ) from Central Bank or from another commercial bank. Answer:
…………………………………………………………………………………………………………… ………… Question 2:
The fraction of checkable deposits that commercial banks are required to hold by regulation is called (r _ _ _ _ _ _ _ ) reserves. Answer:
…………………………………………………………………………………………………………… ………… Question 3:
Property which is promised to the bank as compensation if the borrower defaults is called (c_ _ _ _ _ _ _ _ _ ). Answer:
…………………………………………………………………………………………………………… ………… Question 4:
Banks make profit by turning deposit liabilities into loan assets. Banks’ liabilities, however, tend to be
short-term while assets tend to be long term. This mismatch between the maturities of the two sides of
balance sheet creates (i_ _ _ _ _ _ _ - r_ _ _ ) risk. Answer:
…………………………………………………………………………………………………………… ………… Question 5:
The type of bank risk relating to the difference between purchasing price and selling price of financial
instruments is called (t_ _ _ _ _ _ ) risk. Answer:
…………………………………………………………………………………………………………… ………… Question 6:
Bank risk that is related to the uncertainty about interest rate movements is called (i_ _ _ _ _ _ _ - r_ _ _ ) risk. Answer:
…………………………………………………………………………………………………………… ………… Question 7:
Off-balance-sheet activities do not (a_ _ _ _ _ ) as either assets or liabilities on the bank’s balance
sheet even though they may generate an important part of a bank’s profits. Answer:
…………………………………………………………………………………………………………… ………… Question 8:
If, after a deposit outflow, a bank needs an additional $3 million to meet its reserve requirements, the
bank can (s_ _ _ ) $3 million of securities. Answer:
…………………………………………………………………………………………………………… ………… Question 9:
Commercial banks take deposits from savers and make (l_ _ _ _) to borrowers. Answer:
…………………………………………………………………………………………………………… …………
PART 2: Commercial Bank and Bank Management - True/False Questions Question 10:
If the Vietcombank has a gap equal to a negative $30 million, then a 5 percentage point increase in
interest rates will cause profits to increase by $1.5 million. A. True B. False
Change in profits = Amount of gap x Percentage Question 11:
The kind of bank risk relating to the failing of computer system or the burning down of building is called operational risk. A. True B. False Question 12:
If a bank has $100,000 of checkable deposits, a required reserve ratio of 20 percent, and it holds
$40,000 in reserves, then the maximum deposit outflow it can sustain without altering its balance sheet is $25,000. A. True B. False
RR = rD x D $100,000 x 20% = $20,000 (it is required to hold $20,000 in reserves)
The bank currently holds $40,000 in reserves, which is more than the required amount of $20,000.
=> the excess reserves are $40,000 - $20,000 = $20,000. Question 13:
A bank with insufficient reserves can increase its reserves by extending loan to customers. A. True B. False Question 14:
On a commercial bank’s balance sheet, borrowings include discount loan from Central Bank and interbank market. A. True B. False Question 15: All else the same, if a bank s
ʹ liabilities are more sensitive to interest rate fluctuations than are its
assets, then an increase in interest rates will increase bank profits. A. True B. False Question 16:
Checkable deposits are the primary source of bank funds. A. True B. False Question 17:
When a customer opens a checking account at Vietcombank, the bank s assets decrease and its ʹ liabilities increase. A. True B. False Question 18:
Bank capital is equal to total assets minus total liabilities. A. True B. False Question 19:
Certificates of deposits are reported as assets on commercial banks’ balance sheet. A. True B. False
PART 3: Commercial Bank and Bank Management - Multiple Choice Questions Question 20:
Of the following, which would be the first choice for a bank facing a reserve deficiency? A. Call in loans B. Borrow from Central Bank C. Sell securities D. Borrow from other banks Question 21:
To manage foreign exchange risk, commercial bank can
A. Attract deposits that are denominated in the same currency as loans
B. Use foreign exchange futures and swaps C. All of the above D. None of the above Question 22:
Traders working for banks are subject to the A. Principal-agent problem. B. Free-rider problem. C. All of the above. D. None of the above. Question 23:
Which of the following are primary concerns of the bank manager?
A. Maintaining sufficient reserves to minimize the cost of deposit outflows
B. Extending loans to untrustworthy borrowers
C. Acquiring funds at a relatively high cost
D. Maintaining high levels of bank capital to maximize ROE. Question 24:
Which of the following statements are true?
A. A bank s assets are its sources of funds. ʹ
B. A bank s liabilities are its uses of funds. ʹ
C. A bank s balance sheet shows that total assets equal total liabilities plus equity ca ʹ pital.
D. A bank s balance sheet indicates whether or not the bank is profitable. ʹ Question 25:
Banks make their profits primarily by issuing: A. Loans B. Bonds C. Savings Deposits D. Checkable deposits Question 26:
Off-balance-sheet activities include: A. Line of Credit B. Letter of Credit C. All of the above D. None of the above Question 27: Bank reserves include
A. Balances held at other banks and Cash item in the process of collection.
B. Deposits at the Central Bank and Cash item in the process of collection.
C. Vault cash and Balances held at other banks.
D. Vault cash and Deposits at the Central Bank. Question 28:
Credit risk management tools include A. Collateral B. Credit risk analysis C. All of the above D. None of the above Question 29:
The difference of rate-sensitive liabilities and rate-sensitive assets is known as the A. duration. B. interest-sensitivity index. C. rate-risk index. D. gap.
PART 4: Central Bank, Money Supply and Money Demand - True/False Questions Question 30:
The percentage of deposits that banks must hold in reserve is the excess reserve ratio. A. True B. False Question 31:
Open market purchase increases the size of the Central Bank’s balance sheet. A. True B. False Question 32:
In the simple deposit expansion model, if the required reserve ratio is 40% and the Central Bank
increases reserves by $100 by extending discount loan to bank A, checkable deposits in the banking
system can potentially expand by $250. A. True B. False Question 33:
The process in which the Central Bank supplies the banking system with an extra dollar of reserves,
making deposits increase by more than one dollar is called multiple deposit creation. A. True B. False Question 34:
When the Central Bank buys $1,000,000 German government bonds, denominated in euros, the
banking system’s securities portfolio falls by $1,000,000 and reserves balances fall by an equal amount. A. True B. False Question 35:
According to classical economists, in the short run, velocity and real GDP are constant so if the
quantity of money doubled then prices would triple. A. True B. False Question 36:
When the Central Bank sells $300 worth of bonds to a commercial bank, reserves in the banking system increase by $300. A. True B. False Question 37:
Commercial banks hold excess reserves both as insurance against unexpected outflow and for use in
conducting their day-to-day business. A. True B. False Question 38:
In the simple deposit expansion model, if the Fed extends a $200 discount loan to Bank A that
previously had no excess reserves and required reserve ratio is 10%, deposits in the banking system
can potentially increase by $2,000. A. True B. False Question 39:
When the State Bank of Vietnam extends a 200 billion VND discount loan to Vietcombank, reserves in
the banking system decreases by $200 billion VND. A. True B. False Question 40:
In the money supply process, the banks can influence the money supply by their decision about excess
reserve ratio, which is affected by their expectations about deposit outflows. A. True B. False Question 41:
Subtracting borrowed reserves from the monetary base obtains non-borrowed monetary base. A. True B. False Question 42:
Everything else held constant, if the monetary base increases, the money supply will increase. A. True B. False Question 43:
The interest rate the Central Bank charges on borrowing from the Central Bank is the discount rate. A. True B. False Question 44:
If the required reserve ratio increases (rD) then the money multiplier (m) and the money supply (MS) will decrease. A. True B. False Question 45:
By selling government bonds to commercial banks, Central Bank can provide additional reserves to the banking system. A. True B. False Question 46:
As expected future interest rates rises, the demand for money goes down. A. True B. False Question 47:
Every country with high inflation had high money growth. A. True B. False Question 48:
If the required reserve ratio is 35%, currency in circulation is $300 billion, no excess reserves and
checkable deposits are $1,000 billion, then the money supply is 2,000 billion. A. True B. False Question 49:
If people think that interest rates are likely to rise, bonds will become more attractive than money, then, money demand goes down. A. True B. False Question 50:
Everything else held constant, if the market interest rates increase then the opportunity cost of holding
excess reserve will increase. As a result, the banking system’s excess reserves ratio will decrease. A. True B. False
PART 5: Central Bank, Money Supply and Money Demand - Fill in the blanks Question 51:
Suppose that from a new checkable deposit, Bank A holds nine million dollars on deposit with the
Central Bank, one million in vault cash, two million dollars in required reserves and faces a required
reserve ratio of 20%. Given this information, we can say Bank A has (e_ _ _ _) million dollars in excess reserves. Answer:
…………………………………………………………………………………………………………… ………… Question 52:
Monetary base is also called high (p_ _ _ _ _ _) money. Answer:
…………………………………………………………………………………………………………… ………… Question 53:
Reserves are assets of the commercial banks and (l_ _ _ _ _ _ _ _ _ _) of the Central Bank. Answer:
…………………………………………………………………………………………………………… ………… Question 54:
When the Central Bank buys $1,000,000 German government bonds, denominated in euros, the
Central Bank’s assets and liabilities both rise by $_________, and the monetary base expands with them. Answer:
…………………………………………………………………………………………………………… ………… Question 55:
Three major liabilities on the Balance Sheet of the Central Bank include: (c_ _ _ _ _ _ _), the
government’s deposit account and the deposit accounts of the commercial banks. Answer:
…………………………………………………………………………………………………………… ………… Question 56:
The excess reserves ratio has a (p_ _ _ _ _ _ _) relationship to expected deposit outflows. Answer:
…………………………………………………………………………………………………………… ………… Question 57:
Everything else held constant, if the banks increase their holdings of excess reserves then the money
multiplier and the money supply will (d_ _ _ _ _ _ _ ). Answer:
…………………………………………………………………………………………………………… ………… Question 58:
Base on the equation of exchange, if nominal income is $5,000 and the velocity of money is 10, the money supply is $__________. Answer:
…………………………………………………………………………………………………………… ………… Question 59:
High-powered money minus currency in circulation equals (r_ _ _ _ _ _ _ ). Answer:
…………………………………………………………………………………………………………… ………… Question 60:
In the money supply process, the depositor can influence the money supply by deciding the (c_ _ _ _ _ _ _) ratio. Answer:
…………………………………………………………………………………………………………… ………… Question 61:
When a person (w_ _ _ _ _ _ _ _) cash from his/her checkable deposit, his/her assets shift from
checkable deposits to cash with no change in liabilities. Answer:
…………………………………………………………………………………………………………… ………… Question 62:
If a person selling bonds to the Central Bank cashes the Central Bank s check, then reserves remain ʹ
unchanged and currency in circulation (i_ _ _ _ _ _ _ _), everything else held constant. Answer:
…………………………………………………………………………………………………………… ………… Question 63:
All else the same, when the State Bank of Vietnam calls in a 200 billion VND discount loan previously
extended to Vietcombank, monetary base decreases by $__________ billion VND. Answer:
…………………………………………………………………………………………………………… ………… Question 64:
Excess reserves are equal to (v_ _ _ _ c_ _ _) plus deposits with Central Bank minus required reserves. Answer:
…………………………………………………………………………………………………………… ………… Question 65:
If reserves in the banking system increase by $100, then checkable deposits will increase by $2000 in
the simple model of deposit creation when the required reserve ratio is _____%. Answer:
…………………………………………………………………………………………………………… …………
PART 6: Central Bank, Money Supply and Money Demand - Multiple Choice Questions Question 66:
A commercial bank has excess reserves of $1,000 and demand deposit liabilities of $80,000 when the
reserve requirement is 20 percent. If the reserve requirement is lowered to 10 percent, the bank s ʹ
excess reserves will increase by A. $1,000. B. $8,000. C. $9,000. D. $17,000. Question 67:
The important day to day jobs of the Central Bank are to:
A. Provide loans during times of financial stress B. Manage the payment system
C. Oversee commercial banks and the financial system D. All of the above Question 68:
In the simple deposit expansion model, if the required reserve ratio is 20%, a decline in checkable
deposits of $1,000 implies that the Central Bank
A. sold $200 in government bonds.
B. sold $500 in government bonds.
C. purchased $200 in government bonds.
D. purchased $500 in government bonds. Question 69:
The formula for the money multiplier is A. M = 1/(r+e+c). B. M = (1 + c)/(r + e + c). C. m = [1/r] × MB. D. m = (1 + c)/(r + e + c). Question 70:
If Bank A faces a required reserve ratio of 20%, suppose that from a new checkable deposit, the bank
holds seven million dollars on deposit with the Central Bank and two million dollars in required
reserves. Given this information, we can say Bank A has _____ million dollars in vault cash. A. One B. Two C. Three D. Four Question 71:
In the simple deposit expansion model, if the Central Bank purchases $1,000 bonds from a bank that
previously had no excess reserves, deposits in the banking system can increase by A. $10. B. $100.
C. $100 times the reciprocal of the required reserve ratio.
D. $100 times the required reserve ratio. Question 72:
The government agency that oversees the banking system and is responsible for the conduct of monetary policy in Vietnam is A. the State Bank of Vietnam. B. the Ministry of Commerce.
C. the Federal Reserves System. D. the Treasury. Question 73:
Everything else held constant, if the Central Bank conducts open market purchase, the monetary base
will __________ and the money supply will _____________. A. Increase, increase. B. Decrease, increase C. Increase, decrease D. Decrease, decrease Question 74:
If the risk relative to alternative investments increases, the demand for money will be A. Higher B. Lower C. Unchanged D. Variable Question 75:
The monetary base minus currency in circulation equals A. reserves. B. the high powered money. C. the money supply. D. discount loans. Question 76:
Suppose that from a new checkable deposit, Vietcombank holds two million dollars in vault cash, eight
million dollars on deposit with the Central Bank, and one million dollars in required reserves. Given
this information, we can say Vietcombank has ________ million dollars in excess reserves. A. Three B. Nine C. Ten D. Eleven Question 77:
If there is a sudden decrease in the liquidity of stocks, bonds and other assets, the demand for money is expected to A. Go up B. Go down C. Keep stable D. Fluctuate Question 78:
If banks expect that deposit outflows are likely to increase, banks will ________ the excess reserves ratio. A. Increase B. Decrease C. Change D. Peg Question 79:
When a commercial bank buys a government bond from the Central Bank, reserves in the banking
system ________ and the monetary base ________, everything else held constant. A. increase; increases B. increase; decreases C. decrease; increases D. decrease; decreases Question 80:
Everything else held constant, if the required reserve ratio on checkable deposits increases then A. the money supply will rise.
B. the money supply will remain unchanged.
C. the checkable deposits will rise. D. the money supply will fall.