#1
Which of the following is a function of central banks in a monetary system?
Issuing currency
ExplanationCentral banks are responsible for issuing and regulating the currency in circulation.
#2
What is the term used to describe the process of converting bank deposits into financial instruments that can be traded on the market?
Securitization
ExplanationSecuritization involves bundling bank assets like loans into tradable securities, enhancing liquidity and spreading risk across investors.
#3
What is the primary objective of a central bank's monetary policy?
Minimizing inflation
ExplanationCentral banks aim to maintain price stability by controlling inflation through monetary policy tools such as interest rates and money supply regulation.
#4
What is the purpose of open market operations conducted by central banks?
Controlling the money supply
ExplanationOpen market operations involve central banks buying and selling government securities to adjust the money supply, influencing interest rates and economic activity.
#5
What is the term for the risk that a borrower may default on their loan obligations?
Credit risk
ExplanationCredit risk is the risk that a borrower will fail to meet their debt obligations, potentially leading to financial losses for the lender.
#6
What is the primary tool used by central banks to control the money supply?
Interest rates
ExplanationCentral banks adjust interest rates to influence borrowing, spending, and economic activity, thereby controlling the money supply.
#7
What is the term for the interest rate at which commercial banks can borrow reserves from the central bank?
Discount rate
ExplanationThe discount rate is the rate at which commercial banks can borrow from the central bank, impacting their lending practices and the broader money supply.
#8
What is the function of the Federal Open Market Committee (FOMC) in the United States?
Setting monetary policy
ExplanationThe FOMC is responsible for formulating and implementing monetary policy, including decisions on interest rates and money supply targets.
#9
Which of the following is NOT considered a component of the M1 money supply?
Savings deposits
ExplanationM1 money supply includes currency in circulation, demand deposits, and other highly liquid assets, but excludes less liquid assets like savings deposits.
#10
Which entity typically regulates and supervises the banking system in a country?
Central Bank
ExplanationCentral banks oversee and regulate the banking system within a country, ensuring stability, solvency, and adherence to regulations.
#11
What is the purpose of reserve requirements imposed by central banks on commercial banks?
To limit lending capacity
ExplanationReserve requirements mandate that banks hold a portion of their deposits as reserves, limiting the amount they can lend out and thus controlling the money supply.
#12
In the context of banking operations, what does the term 'Liquidity Risk' refer to?
The risk of loss due to insufficient cash to meet obligations
ExplanationLiquidity risk pertains to the danger of being unable to meet short-term financial obligations due to a lack of readily available cash.
#13
What is the role of the lender of last resort function performed by central banks?
To provide emergency funding to financial institutions
ExplanationCentral banks act as lenders of last resort, offering emergency liquidity to financial institutions facing solvency issues to prevent systemic collapse.
#14
Which international organization acts as a lender of last resort for countries facing balance of payment crises?
International Monetary Fund (IMF)
ExplanationThe IMF provides financial assistance to member countries facing balance of payment difficulties, acting as a global lender of last resort.
#15
Which of the following is a function of the Bank for International Settlements (BIS)?
Facilitating cooperation among central banks
ExplanationThe BIS fosters collaboration and coordination among central banks globally, facilitating communication, policy development, and financial stability.