Question

When a bank has more liabilities than assets, the bank is considered:

Question 1 options:

a)

liquid.

b)	insolvent.

c)

illiquid.

d)

solvent.

The risk that the failure of one financial institution can lead to the failure of other financial institutions is called:

Question 2 options:

a)	solvency risk.

b)	liquidity risk.

c)	moral hazard.

d)	systemic risk.

_____ refers to the Federal Reserve's purchase of longer-term government bonds or other securities.

Question 3 options:

a)	An open market sale

b)	Quantitative tightening

c)	Quantitative easing

d)	An open market purchase

U.S. currency has the words "Federal Reserve Note" on it.

Question 4 options:

a)

False

b)

True

If the Fed wants to increase the money supply, it will:

Question 5 options:

a)	require more reserves to be held.

b)	buy government bonds.

c)	sell government bonds.

d)	increase the rate of interest paid on reserves.

Quantitative easing occurs when the:

Question 6 options:

a)	government raises income and other taxes.

b)	Fed sells long-term securities.

c)	Fed buys long-term securities.

d)	government lowers income and other taxes.

(Table: Statistics for a Small Economy) Refer to the table. The table shows some statistics for a small economy. Using only the information provided, M2 in this country amounts to:

Question 7 options:

a)	$105 million.

b)	$121 million.

c)	$129 million.

d)	$137 million.

Which serves as a means of payment in the United States?

Question 8 options:

a)	savings deposits

b)

currency

c)	checkable deposits

d)	currency, checkable deposits, and savings deposits

Answer 1

1) The right answer is (b) Insolvent
A bank asset includes cash, govt securities, interest earning loans like mortgage, inter bank loans
And liabilities include loan less reserve and debt it owns.
Insolvency happens when a bank have more liability than assets and is unable to pay off ones debts and his lack of liquidity.

2) The right answer is (a) solvency risk and (b) liquidity risk
Solvency is a stage when the financial institutions fail as a result of lack of liquidity and has no funds and it's debts are greater than its assets and unable to sustain. Liquidity risk is when assets are being sold at loss and the liability still remains.
3) The right answer is (c) Quantitative easing
This method is an unconventional monetary policy used as a technique where central bank purchases long term securities from an open market in order to increase money supply to improve and encourage the lending investment, also purchasing these securities adds new money to the economy and serves low interest rates by bidding up for fixed income securities that helps to expand the central bank balance sheet.

4) True - Federal Reserve notes are the paper notes in circulation on U.S and backed up by government declaration that it's solely legal. The U.S has enhanced security system set on these notes. The lifespan of a note depends on its value, as it is used by less people.

5) Answer b, buy government bonds
Fed controls money supply by selling or purchasing of government securities, this process called open market operations.
If Fed wants to increase money supply, it will nuy government bonds from market and By selling government bonds Fed decreases money supply in market.
If Fed increase Reserve, it will cause shortage of money in commercial banks. It leads to decrease in lending by banks and decrease money supply in the market.
If interest rate is increased by Fed, it will lead to loans more costly for commercial banks and banks are decrease lending to people, it will decrease the money supply in the market.

6) Answer C, Fed buys long term securities.

This method is an unconventional monetary policy used as a technique where central bank purchases long term securities from an open market in order to increase money supply to improve and encourage the lending investment.