he credit risk arises from __________________ and one of the ways to manage the credit risk is to ______

1. default on loans; keep assets liquid b) deposits outflow; lend assets overnight.

c) adverse selection or moral hazard; sell loans d) low bank capital; keep adequate bank capital.

31. The three primary banking risks are _________________, and the risk are:

a) default risk, adverse selection risk, exchange rate risk.

b) moral hazard risk, systemic risk; deposits outflow risk.

c) exchange risk, adverse selection risk, trade risk.

d) liquidity risk, credit risk, interest rate risk.

32. The actual reason that banks do not hold required reserves is:

1. to enhance liquidity and prevent bank runs.
2. to help fund the Federal Deposits insurance Corporation.
3. to help increase the number of bank loans.
4. to give the Fed control over the lending ability of banks.

33. The two risks that arise with the zero required reserves ratio since March 2020 are:

a) more funds for depositors, higher inflation.

b) more loans, lower liquidity risk.

c) less funds for depositors, banks higher moral hazard.

d) less of lending, lower adverse selection.

34. Following the balance sheet for The First National Bank in the time of limited reserves.

The First National Bank

Assets Liabilities

Total reserves: ________ Deposits: $500,000

Required reserves: $25,000

Excess reserves: $75,000

Loans: $ 400,000

Total Assets: $500,000 Total liabilities $500,000

The First National Bank must hold___________ of deposits as the required reserves, has _________ in excess reserves. The Frist National can safely lend out ____________ and the banking system will expand deposits and the money supply by _______.

a) 20%; $100,000; $80,000; $500,000 b) 5%; $75,000; $75,000; $1,500,000

c) 10%; $20,000; $100,000; $1,000,000 d) 5%; $25,000; $20,000; $400,000

35. Suppose that in the time of limited reserves the banking system's cash reserves are $200,000, the deposits are $100,000, and the required reserve ratio is 20 percent. Also assume banks will loan out any excess reserves and people do not hold cash, only deposits. The baking system required reserves are__________, excess reserves ___________, and the banking system can expand deposits and the money supply by ______________

a) $100,000; $100,000; $2,000,000 b) $80,000; $20,000; $400,000

c) $20,000; $180,000; $900,000 d) $40,000; $160,000; $200,000

36. A bank in the time of limited reserves has $100,000 in deposits and $25,000 in total reserves and the required reserves ratio is 20 percent. If the required reserve ratio is 20 percent, the bank has _________ money- creating potential and can expand deposits and the money supply by___________, but if the Fed lowers the required reserve ratio to 10 percent, the bank would have __________money- creation potential and the maximum expansion in deposits and the money supply would be ______________.

1. $25,000; $100,000; $2,500; $125,000

b) $20,000; $100,000; $75,000; $75,000

c) $125,000; $625,000; $22,500; $225,000

d) $5,000; $25,000; $15,000; $150,000

37. Banks could not create money if ______________ and up to March 2020 banks could not legally lend more than_______________

A) the required reserve ratio was zero; deposits.

C) people held no money as cash; required reserves.

B) the Fed stopped selling bonds, total reserves.

D) people held all their money as cash; excess reserves.

38. The simple money multiplier in the time of limited reserves was:

A) the amount of money banks must hold as reserves at the Fed.

B) the fraction of deposits banks must hold by law.

C) the ratio of reserves to deposits.

D) the amount of money ultimately created per dollar deposited when people hold no

cash.

39. The link between the Fed and banks in the absence of required reserve ratio and the money multiplier, takes primarily place through:

a) discount rate and capital requirements

b) interest rate on banks reserves balances and forward guidance.

c) federal fund rate and other short- term interest rates.

d) open market operations and discount rate.

40. The Federal Reserve System was created to ___________ and most monetary policy decisions are made by the______________________.

A) make it easier to finance budget deficits;Federal Advisory Council.

B) prevent banks panic and create financial system stability, Federal Open Market

Committee.

C) lower the unemployment rate; Federal Depository Insurance Corporation.

D) promote rapid economic growth, Federal Reserve Bank in New York