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Credit Creation and Bank Deposits Quiz

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Questions and Answers

What are the three most important guiding principles of asset distribution for a bank mentioned in the text?

Safety, stability, liquidity

Liquidity, profitability, security (correct)

Profitability, liquidity, stability

Security, profitability, liquidity

Which item on the assets side is considered the 'first line of defense' for a bank?

Money at Call and Short Notice

Cash on hand in vaults (correct)

Money kept with central bank

Loans to brokers in the stock market

What is the purpose of keeping money at Call and Short Notice according to the text?

To maintain liquidity (correct)

To meet depositor obligations

To earn interest from long-term loans

To secure long-term investments

How are items on the assets side distributed in terms of liquidity and profitability?

Descending order of liquidity, ascending order of profitability Signup and view all the answers

Where does the bank keep some money apart from cash on hand as a backup?

With central bank Signup and view all the answers

What is the dual nature of bills in hand for a bank according to the text?

Asset and liability Signup and view all the answers

Why is bank capital important for protecting depositors according to the text?

It safeguards against losses to depositors Signup and view all the answers

Which type of capital account is designed to cover unanticipated losses on loans and investments?

Special reserve accounts Signup and view all the answers

How are reserve accounts different from cash reserves for banks?

Cash reserves involve fund transfers, while reserve accounts do not. Signup and view all the answers

According to Crowther, what do assets represent on a bank's balance sheet?

Ownership funds Signup and view all the answers

Why are bills in hand shown on both sides of the balance sheet?

Due to their dual nature as assets and liabilities Signup and view all the answers