A) economies of scale.
 
B) economies of scope.
 
C) synergy of service.
 
D) diseconomies of scope.

The correct answer is A

If products or services can be produced in larger volume with a lower average cost than the same products or services produced in smaller volume, the production is said to exhibit economies of scale.

2、A bank can service 1,000 loans for an average cost of $362 per year, per loan. If the bank can service 5,000 loans for an average cost of $298 per year, per loan, the servicing is said to have:

A) economies of scale.
 
B) economies of scope.
 
C) synergy of service.
 
D) diseconomies of scope.

The correct answer is B

Studies of the relationship between the size of banks and their average cost indicate that the average cost curve has a relatively flat U-shape.

3、Comprehensive Bank, with assets of $1 billion and costs of $100 million, purchases a firm with assets of $100 million and expenses of $20 million. The firm purchased provides financial services not yet provided by Comprehensive Bank. The costs of the bank after the purchase are $115 million for the combined assets. The merger most likely reflects:

A) diseconomies of scale.
 
B) diseconomies of scope. 
 
C) economies of scope. 
 
D) economies of scale.

The correct answer is C

Economies of scope represent the synergy of jointly producing two products rather than producing each one independently.

4、The average cost of producing Product A is $37. The average cost of producing Product B is $22. If Product A and Product B can be produced jointly for an average cost of $54, there are:

A) economies of scale.
 
B) economies of scope.
 
C) synergy of products.
 
D) diseconomies of scope.

The correct answer is B

If products or services can be produced jointly for an average cost that is less than the sum of the averages costs for the products produced separately, the production is said to exhibit economies of scope.

5、Research on economies of scale and scope suggest all of the following EXCEPT:

A) I and IV.
 
B) I and II.
 
C) I and III.
 
D) II and III.

The correct answer is A

There is no strong evidence that “bigger is better.” There is relatively low payoff from technological innovation. Economies of scope and scale don’t explain cost differences among the same size firms. Large financial institutions gain efficiency by generating revenue rather than by reducing costs.

AIM 6: List the various operational risks that emerge in an electronic payments system and explain the connections across these risks.

1、A condition in which a bank has a negative balance with the Federal Reserve Bank at some time during the business day is called a(n):

A) intra-day overdraft.
 
B) negative balance float.
 
C) discount window debit.
 
D) daylight overdraft.

The correct answer is D

Banks are allowed to have negative intra-day balances in their accounts with the Federal Reserve Bank. These are referred to as “daylight overdrafts” because they are cleared before the close of the business day.

2、When a payment is made by Fedwire, the credit risk is effectively born by:

A) all parties involved in the funds transfer. 
 
B) the receiving party.
 
C) the Federal Reserve. 
 
D) the paying party. 

The correct answer is C

Because the Fed allows banks to run daylight overdrafts on their reserve accounts, the Fed bears the credit risk of bank failures until end-of-day settlement occurs.

3、“Daylight overdraft risk” arises from:

A) the existence of private funds transfer systems such as CHIPS. 
 
B) the inability of banks to avoid negative inter-day balances in the reserve accounts with the Federal Reserve Bank. 
 
C) banks being allowed to have negative intra-day balances with the Federal Reserve Bank and the Federal Reserve Bank guaranteeing payment for every wire transfer. 
 
D) large customers being allowed to have negative intra-day balances, with the banks guaranteeing payment of any wire transfers.

The correct answer is C

Banks are allowed to have negative intra-day balances in their accounts with the Federal Reserve Bank. The Federal Reserve Bank guarantees the payment of every wire transfer and could potentially be forced to cover wires that banks could not support in their closing day balances.