Please select the best answer and explain why it is the best answer.

1. A bank is insolvent when

a. Its assets increase in value

b. Its capital exceeds its liabilities

c. Its assets exceed its liabilities

d. Its liabilities exceed its assets

2. Bank capital has both benefits and costs for the bank owners. Higher bank capital ____ the likelihood of bankruptcy, but higher bank capital ____ the return on equity for a given return on assets.

a. Increases; increases

b. Reduces; increases

c. Reduces; reduces

d. Increases; reduces

3. If a bank needs to raise the amount of capital relative to assets, a bank manager might choose to

a. Shrink the size of the bank

b. Sell securities the bank owns and put the funds into the reserve account

c. Buy back bank stock

d. Pay higher dividends

4. In the absence of regulation, banks would probably hold

a. Too much capital, making it more difficult to obtain loans

b. Too much capital, reducing the efficiency of the payments system

c. Too much capital, reducing the profitability of banks

d. Too little capital