Lesson 4.2.4.2

4.2.4.2 Commercial banks and investment banks Quiz: AQA Economics, Unit 2

20 questions

Written by Revision Ninja · Last reviewed 11 October 2026

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Lesson 4.2.4.2, Commercial banks and investment banks: 20 multiple choice questions for the AQA Economics (7136), Unit 2: The national and international economy, written with Revision Ninja.

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The 20 questions

  1. What is the main function of a commercial bank?

    • Regulating the stability of the financial system
    • Setting interest rates and controlling the money supply for the whole economy, including the size of every bank's lending
    • Accepting deposits and making loans to households and businesses
    • Issuing government bonds on behalf of the Treasury

  2. Which statement best describes an investment bank?

    • It accepts small household deposits and offers personal current accounts, and it also manages retail customers' savings
    • It mainly provides financial services such as advice, underwriting of securities and trading for corporate and institutional clients
    • It regulates other banks and sets capital ratios
    • It sets the bank rate and controls the money supply

  3. Which of the following are the three main objectives of a commercial bank?

    • Taxation, spending and borrowing
    • Exports, imports and reserves
    • Liquidity, profitability and security
    • Growth, inflation and employment, which are the three macroeconomic objectives that every commercial bank is required to meet each year

  4. What is meant by liquidity in banking?

    • The total value of a bank's loans to customers
    • The share of a bank's profit paid as dividends
    • The ease with which an asset can be converted into cash without significant loss of value
    • The rate of interest a bank earns on its long-term lending, which is set by the central bank each month for all customers

  5. What is the structure of a commercial bank's balance sheet?

    • Income from interest, and costs of staff and premises only
    • Liabilities such as customer deposits, and assets such as loans and liquid reserves
    • Assets such as customer deposits, and liabilities such as loans to firms, which are recorded as money owed to the bank by its customers
    • Government bonds, and shares issued to employees

  6. Why is there a potential conflict between liquidity and profitability for a commercial bank?

    • Liquidity and profitability never conflict because banks always hold the same assets
    • Profitability depends only on the bank's exchange rate, not on its assets, which is why banks do not need to consider liquidity at all
    • Highly liquid assets usually earn lower returns than long-term loans, so holding more of them reduces profit
    • Liquid assets always earn higher returns than loans, so holding them reduces liquidity

  7. How do commercial banks create credit?

    • Banks take money from the central bank and deposit it into customers' accounts
    • Banks create credit only by selling shares to the public
    • Banks print new notes and coins to lend to customers
    • When a bank makes a loan, it creates a new deposit in the borrower's account

  8. A bank has deposits of 1000 million pounds and holds 100 million pounds of liquid reserves. What is its liquidity ratio?

    • 1 per cent
    • 100 per cent
    • 0.1 per cent
    • 10 per cent

  9. A bank increases its lending sharply without holding more liquid assets. What is the most likely consequence?

    • It becomes less liquid and more vulnerable if depositors demand their money back
    • Its security improves because it has more deposits to lend
    • It becomes more liquid, because it has more loans that can be sold immediately to other banks at full value without any delay
    • It is unaffected, because liquidity depends only on the central bank's rate

  10. A bank raises the interest rate it pays on deposits to attract more savers. What is the most likely effect on its profitability?

    • Its costs rise, so its profitability falls unless it earns more on loans
    • Profitability is unaffected because deposits are not part of the balance sheet
    • Its costs fall, so its profitability rises
    • Profitability rises because customers have more money

  11. Why does a bank's lending of 10,000 pounds to a customer increase the money supply?

    • The loan only moves existing money between accounts with no change in total money, because the deposit is funded by existing reserves
    • The bank prints 10,000 pounds in notes and gives them to the borrower
    • The loan takes money out of circulation, so the money supply falls
    • The loan creates a new deposit in the borrower's account, which is counted as money

  12. Why might combining investment banking and commercial banking increase systemic risk?

    • Losses from risky investment activities can threaten the deposit-taking side and spread across the financial system
    • Investment banking always raises the value of deposits, which reduces risk and removes any need for regulators to supervise either activity
    • Commercial banks are not affected by any risks from investment banking
    • Combining activities means banks hold more government bonds, which removes risk

  13. A bank wants to keep its security high. Which objective does this most directly relate to?

    • Avoiding losses that could threaten depositors' savings and the bank's solvency
    • Maximising the bank's share of the market for mortgages
    • Minimising the liquidity ratio so that more money can be lent to customers and businesses, which raises the bank's returns each year
    • Maximising the return to shareholders in the short term

  14. Which statement best describes the role of an investment bank in the financial system?

    • It provides small everyday loans to individuals for personal use
    • It supports large companies and governments by arranging finance, such as share and bond issues
    • It sets interest rates for the whole economy
    • It holds the reserves of other banks and manages the money supply, which makes it the main lender to households and firms

  15. A bank buys long-term government bonds with much of its funds. What is the likely trade-off?

    • Higher liquidity and lower returns than cash, with no risk to the bank, since government bonds can always be sold at face value
    • Higher returns than liquid assets, but less liquidity if depositors withdraw funds quickly
    • Higher security because bonds are always repaid early
    • Lower profitability and higher liquidity, with no effect on security

  16. Evaluate whether liquidity and profitability always conflict for a commercial bank.

    • No, because liquidity has no effect on the bank's ability to repay depositors
    • Yes, but only in periods of inflation, so the conflict is temporary
    • Not always, because the bank can manage a portfolio that balances the two, though a trade-off remains
    • Yes, they always conflict, so a bank cannot earn any profit while remaining liquid, and any bank that tries to do both will fail quickly

  17. Why might banks take more risk in pursuit of profit, and what does this imply for stability?

    • Banks take no risks because they are regulated, so stability is always guaranteed
    • Risk-taking reduces the chance of failure, so it improves security
    • Profit and risk are unrelated, so banks have no incentive to change their behaviour, even when returns on lending fall sharply
    • Higher returns often come with greater risk, which can weaken the bank's security and raise the chance of failure

  18. A bank funds long-term loans with short-term deposits that depositors can withdraw at any time. Which risk does this create?

    • Exchange rate risk, because the bank must hold all its assets in dollars, which fall in value whenever the pound strengthens against them
    • Inflation risk, because the bank's deposits always lose value
    • No risk, because short-term deposits always match long-term loans
    • Liquidity risk, because the bank may not be able to meet withdrawals without selling assets at a loss

  19. Which is the best evaluation of the balance sheet structure of a commercial bank in a crisis?

    • Balance sheets matter only for tax purposes, not for risk
    • The balance sheet has no effect on whether a bank can survive a crisis
    • A balance sheet made only of liquid assets is always the most profitable, since cash and short-term securities earn high returns
    • A balance sheet heavy in illiquid loans can fail quickly when depositors withdraw funds, so its structure matters for stability

  20. Why must a commercial bank keep some of its deposits in liquid form?

    • To earn the highest possible return on every pound deposited
    • Because the investment bank must hold all deposits in government securities, which are the only assets commercial banks may lend against
    • To meet customers' withdrawal demands without having to sell assets at a loss
    • To avoid paying any interest to depositors on their savings

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