iVAT Credit Theory Banking

A  Commercial banks and bank customers determine how much money there will be in the economy, and that the central bank has to accommodate them in order to ensure the payment system and banking system is stable.

B  Commercial banks and bank customers determine how much money there will be in the economy, and that the central bank has to accommodate them in order to ensure the federal funds rate goes above the central bank’s target rate.

C  Commercial banks and investment banks determine how much money there will be in the economy, and that the central bank has to accommodate them in order to ensure the federal funds rate goes below the central bank’s target.

D  All of the available answers are correct.

A  People and firms reduce their deposit balances when paying back loans to commercial banks.

B  Paying back loans cause balance sheets to expand.

C  People and firms increase their deposit balances when paying back loans to commercial banks.

D  Paying back loans causes stockholder’s equity to be reduced.

A  Central bank reserves and corporate stocks

B  Central bank reserves and treasury bonds

C  Central bank reserves and physical currency

D  Physical currency and loans

E  Physical currency and treasury bonds

A  Creating loans will lead to transfers of deposits from the bank which requires central bank reserves, which are costly to obtain and imposes a constraint on loan creation.

B  Loan creation can create immediate liqudity needs due to outgoing deposit transfers from the debtor. This can cause the commercial bank to have a firesale on assets, which can cause insolvency.

C  All of the available answers are correct

D  If too many loans are created than there can be a massive amount of loan defaults, which can lead to insolvency issues.

A  -$150,000 and the bank is illiquid

B  +$150,000 and the bank is solvent

C  +$250,000 and the bank is solvent

D  -$250,000 and the bank is insolvent

E  -$150,000 and the bank is insolvent

A  TRUE

B  FALSE

A  Becasue of a fear of paying too much interest

B  None of the available answers is correct

C  Because borrowing in the federal funds rate is always available to banks

D  Because of a fear of stigma attached to the discount window, which may send a signal to other banks that they are insolvent

E  Becasue the discount window interest rates have always been higher than the federal funds rate

A  TRUE

B  FALSE

A  sell assets

B  All of the available answers are correct

C  borrow them directly from the federal reserve

D  borrow them in the federal funds market

E  attract deposits

A  Citibank needs an additional $500,000 in central bank reserves to facilitate the transfer.

B  Citibank currently has enough liquid assets to facilitate the transfer.

C  Citibank is currently insolvent.

D  Citibank needs an additional $500,000 in loans to facilitate the transfer.

A  central bank reserves or physical currency

B  real estate

C  deposits

D  bonds

E  gold

A  It decreases

B  Nothing, but its balance sheet contracts

C  Nothing, but its balance sheet expands

D  None of the avaialble answers is correct

E  It increases

A  Nothing, but its balance sheet contracts

B  It decreases

C  None of the avaialble answers is correct

D  It increases

E  Nothing, but its balance sheet expands

A  Banks can become insolvent by not making loans

B  Central bank reserves’ most important funtion is to meet reserve requirements

C  banks create deposits when they make loans

D  Banks create loans and fund those loans through loans from the central bank

E  banks receive deposits and multiply those deposits through the loan creation process

A  provides a $2 million loan at the discount window

B  it mandates that Wells Fargo $2 million in gold to facilitate the transaction

C  it buys bonds through open market operations

D  credits (increases) Bank of America’s account by $2 million and debits (decreases) Wells Fargo’s account by $2 million

E  credits (decreases) Bank of America’s account by $2 million and debits (increases) Wells Fargo’s account by $2 million

A  The customer is expanding its balance sheets.

B  The customer is reducing the size of its balance sheet.

C  The customer is swapping assets, and the customer is receiving a checking account balance, in exchange for physical currency.

D  The customer is swapping liabilities, and the customer is receiving physical currency, in exchange for bank assets.