2. Which of the following things do banks do with the funds they acquire from savers?

A) Invest in government and corporate bonds.

B) Invest in corporate stocks.

C) Make loans to individuals and firms.

D) All of the above.

3. In banking, the spread refers to the difference between the

A) interest rate on long-term bonds and the interest rate on short-term bonds.

B) interest rate on consumer loans and the interest rate on home mortgages.

C) return earned from lending and the cost of the needed funds.

D) the difference between asset value and liability value.

6. With respect to the last several decades, which of the following statements is true?

A) Bank net worth has been relatively stable, but the riskiness of bank activities has increased substantially.

B) Bank net worth has declined substantially, but the riskiness of bank activities has remained relatively unchanged.

C) Bank net worth has declined substantially, but the riskiness of bank activities has also declined substantially.

D) Bank net worth and the riskiness of bank activities has remained relatively stable.

8. Customers who have long-term relationships with banks

A) pose particular problems with respect to adverse selection.

B) pose particular problems with respect to moral hazard.

C) reduce the moral hazard problem for the bank.

D) reduce the adverse selection and moral hazard problem for the bank.

9. A bank that expects interest rates to fall will

A) want the duration of its assets to be greater than the duration of its liabilities.

B) want the duration of its assets to be less than the duration of its liabilities.

C) want the duration on its rate sensitive assets to be greater than the duration on its rate sensitive liabilities.

D) want to hold more rate sensitive assets than rate sensitive liabilities.

10. One way banks earn a profit is by

A) increasing transactions costs such as interest rates.

B) eliminating transactions costs.

C) passing transactions costs on to the borrowers.

D) charging fees for off-balance-sheet activities that have low transactions costs.

12. Why do lower interest rates decrease adverse selection problems in the loan market?

A) Lower interest rates increase the gains from economies of scale.

B) Lower interest rates reduce information problems in the loan market.

C) At lower interest rates, the tighter credit standards imply the default rate of the average accepted loan applicant declines.

D) At lower interest rates more investment projects are profitable which reduces the odds that loan money will be

diverted to other uses.