Question

29. Which of the following would normally lead to a decrease in both the M1 and M2 money multipliers.

A. Households hold a lower fraction of deposits in currency.
B. The reserve requirement decreases.
C. Banks increase holdings of excess reserves relative to deposits. D. Banks are regulated more heavily.

30. A bank could increase ROE by
A. using existing assets to reduce liabilities.
B. issuing shares of stock.
C. selling securities and increasing the quantity of reserves.

D. distributing dividends to shareholders.

31. When banks increase ROE by reducing the leverage ratio, A. risk of insolvency decreases.
B. stockholders earn less.
C. risk of insolvency increases.

D. the risk of a liquidity crisis increases.

Answer 1

Question 29.

Banks increase holding of excess reserve relative to deposits. (C)

Since there is less money bank lend into the market and money supply eventually decreases.

Question 30.

Using existing assets to reduce liability ( A)

So that it will not create any further liabilities to pay the existing liabilities.

Question 31.

Risk of insolvency increases. ( C)

Since bank has finance all its assets with their own capital.;It will increase the risk of losing their own money.