Question 1

An individual deposits $12,000 in a commercial bank. The bank is required to hold 10 percent of all deposits on reserve at the regional Federal Reserve Bank. The deposit increases the loan capacity of the bank by:

Accepted Answer

A)   $11,000
B)   $10,800
C)   $9,600
D)   $6,000E) C) and D)
F) None of the above

Question 2

Maximum checkable-deposit expansion in the banking system is equal to:

Accepted Answer

A)   Actual reserves minus required reserves
B)   Assets plus net worth and liabilities
C)   Excess reserves times the monetary multiplier
D)   Excess reserves divided by the monetary multiplierE) B) and C)
F) A) and C)

Question 3

What is one significant consequence of fractional reserve banking?

Accepted Answer

A)   Banks are vulnerable to "panics" or "bank runs"
B)   Banks can only lend an amount equal to its deposits
C)   Banks hold a portion of their deposits in gold
D)   Banks can serve the withdrawals of all their depositorsE) B) and C)
F) A) and B)

Question 4

The amount of required reserves that a bank must hold is computed as a certain fraction of the bank's assets.

Accepted Answer

A) True 
 B)False

Question 5

When loans are repaid at commercial banks:

Accepted Answer

A)   Money is created
B)   Money is destroyed
C)   The assets of commercial banks increase
D)   The net worth of commercial banks increasesE) B) and C)
F) A) and C)

Question 6

The use of high leveraging by banks leads to the banking system's:

Accepted Answer

A)   Competitiveness
B)   Instability
C)   Vital role in the economy
D)   Monopoly powerE) A) and C)
F) C) and D)

Question 7

In an unregulated environment, the commercial banking system would tend to vary the supply of money in a way that:

Accepted Answer

A)   Increased the money supply to the maximum at all times
B)   Decreased the money supply to the minimum at all times
C)   Emphasized the use of currency over demand deposits
D)   Reinforced cyclical variations in the economyE) A) and D)
F) B) and D)

Question 8

The primary reason commercial banks must keep required reserves on deposit at the Fed is to:

Accepted Answer

A)   Add to the liquidity of the commercial bank
B)   Allow the Fed to control the amount of bank lending
C)   Protect the deposits in the commercial bank against losses
D)   Ensure that depositors can withdraw their money if they wish toE) B) and C)
F) A) and C)

Question 9

If Bank A has excess reserves of $1 million and all other banks in the system do not have any excess reserves, then the amount of additional loans that can be made by the banking system will be:

Accepted Answer

A)   $1 million also
B)   A fraction of $1 million
C)   A multiple of $1 million
D)   $1 million times the required-reserve ratioE) B) and D)
F) A) and C)

Question 10

Henry deposits $2,000 in currency in the First Street Bank. Later that same day Jane Harris negotiates a loan for $5,400 at the same bank. After these transactions, the supply of money has:

Accepted Answer

A)   Increased by $2,100
B)   Increased by $3,300
C)   Increased by $5,400
D)   Decreased by $3,300E) B) and D)
F) B) and C)

Question 11

One way to enhance the stability of the banking system is to:

Accepted Answer

A)   Require higher bank capitalization or net worth
B)   Increase the federal funds rate
C)   Reduce the required-reserve ratio
D)   Require more leveraging by banksE) All of the above
F) A) and D)

Question 12

Answer the question based on the following consolidated balance sheet for the commercial banking system. Assume the required reserve ratio is 12 percent. All figures are in billions of dollars:  Refer to the above data. The commercial banking system has excess reserves of:

Accepted Answer

A)   $32 billion
B)   $36 billion
C)   $42 billion
D)   $60 billionE) None of the above
F) B) and C)

Question 13

The federal funds rate is the interest rate that the Fed charges banks for its loans to them.

Accepted Answer

A) True 
 B)False

Question 14

The following table is the consolidated balance sheet for the commercial banking system. All figures are in billions. Assume that the required reserve ratio is 10 percent:  Refer to the above information. The maximum amount by which this commercial banking system can expand the supply of money by lending is:

Accepted Answer

A)   $120,000 billion
B)   $300,000 billion
C)   $600,000 billion
D)   $900,000 billionE) A) and B)
F) A) and C)

Question 15

If the Federal Reserve System sells $5 billion of government securities to commercial banks, the banks' reserves would:

Accepted Answer

A)   Increase by $5 billion
B)   Decrease by $5 billion
C)   Be added to net worth
D)   Remain the sameE) None of the above
F) A) and C)

Question 16

What is one significant characteristic of fractional reserve banking?

Accepted Answer

A)   Banks hold a fraction of their loans in reserve
B)   Banks use deposit insurance for loans to customers
C)   Bank loans will be equal to the amount of gold on deposit
D)   Banks can create money through lending their reservesE) A) and B)
F) B) and D)

Question 17

One bank can borrow reserves from another bank, and the interest on the loan is called the federal funds rate.

Accepted Answer

A) True 
 B)False

Question 18

In essence, which of the following groups "creates" money?

Accepted Answer

A)   Banks' loan officers when they grant loans
B)   Consumers when they go shopping
C)   Depositors when they deposit or withdraw money from their banks
D)   Firms when they pay workers their wages and salariesE) A) and B)
F) C) and D)

Question 19

Answer the question based on the following balance sheet for the First National Bank. Assume the reserve ratio is 15 percent:  Refer to the above data. First National Bank can make new loans of up to:

Accepted Answer

A)   $50,000
B)   $41,000
C)   $32,000
D)   $27,000E) None of the above
F) B) and C)

Question 20

Suppose the Northwestern Bank has excess reserves of $12,000 and checkable deposits of $125,000. If the reserve requirement is 20 percent, what are the bank's actual reserves?

Accepted Answer

A)   $25,000
B)   $37,000
C)   $44,000
D)   $47,000E) A) and B)
F) All of the above

Exam 15: Money Creation

Maximum checkable-deposit expansion in the banking system is equal to:

Correct Answer
verified

An individual deposits $12,000 in a commercial bank. The bank is required to hold 10 percent of all deposits on reserve at the regional Federal Reserve Bank. The deposit increases the loan capacity of the bank by:

Correct Answer
verified

What is one significant consequence of fractional reserve banking?

Correct Answer
verified

If the Federal Reserve System sells $5 billion of government securities to commercial banks, the banks' reserves would:

Correct Answer
verified

If Bank A has excess reserves of $1 million and all other banks in the system do not have any excess reserves, then the amount of additional loans that can be made by the banking system will be:

Correct Answer
verified

The use of high leveraging by banks leads to the banking system's:

Correct Answer
verified

Correct Answer
verified

The amount of required reserves that a bank must hold is computed as a certain fraction of the bank's assets.

Correct Answer
verified

What is one significant characteristic of fractional reserve banking?

Correct Answer
verified

The primary reason commercial banks must keep required reserves on deposit at the Fed is to:

Correct Answer
verified

The federal funds rate is the interest rate that the Fed charges banks for its loans to them.

Correct Answer
verified

Answer the question based on the following consolidated balance sheet for the commercial banking system. Assume the required reserve ratio is 12 percent. All figures are in billions of dollars: Refer to the above data. The commercial banking system has excess reserves of:

Correct Answer
verified

One way to enhance the stability of the banking system is to:

Correct Answer
verified

Answer the question based on the following balance sheet for the First National Bank. Assume the reserve ratio is 15 percent: Refer to the above data. First National Bank can make new loans of up to:

Correct Answer
verified

Henry deposits $2,000 in currency in the First Street Bank. Later that same day Jane Harris negotiates a loan for $5,400 at the same bank. After these transactions, the supply of money has:

Correct Answer
verified

One bank can borrow reserves from another bank, and the interest on the loan is called the federal funds rate.

Correct Answer
verified

Suppose the Northwestern Bank has excess reserves of $12,000 and checkable deposits of $125,000. If the reserve requirement is 20 percent, what are the bank's actual reserves?

Correct Answer
verified

In an unregulated environment, the commercial banking system would tend to vary the supply of money in a way that:

Correct Answer
verified

In essence, which of the following groups "creates" money?

Correct Answer
verified

When loans are repaid at commercial banks:

Correct Answer
verified

Exam 15: Money Creation

Maximum checkable-deposit expansion in the banking system is equal to:

Correct AnswerverifiedShow Answer

An individual deposits $12,000 in a commercial bank. The bank is required to hold 10 percent of all deposits on reserve at the regional Federal Reserve Bank. The deposit increases the loan capacity of the bank by:

Correct AnswerverifiedShow Answer

What is one significant consequence of fractional reserve banking?

Correct AnswerverifiedShow Answer

If the Federal Reserve System sells $5 billion of government securities to commercial banks, the banks' reserves would:

Correct AnswerverifiedShow Answer

If Bank A has excess reserves of $1 million and all other banks in the system do not have any excess reserves, then the amount of additional loans that can be made by the banking system will be:

Correct AnswerverifiedShow Answer

The use of high leveraging by banks leads to the banking system's:

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

The amount of required reserves that a bank must hold is computed as a certain fraction of the bank's assets.

Correct AnswerverifiedShow Answer

What is one significant characteristic of fractional reserve banking?

Correct AnswerverifiedShow Answer

The primary reason commercial banks must keep required reserves on deposit at the Fed is to:

Correct AnswerverifiedShow Answer

The federal funds rate is the interest rate that the Fed charges banks for its loans to them.

Correct AnswerverifiedShow Answer

Answer the question based on the following consolidated balance sheet for the commercial banking system. Assume the required reserve ratio is 12 percent. All figures are in billions of dollars: Refer to the above data. The commercial banking system has excess reserves of:

Correct AnswerverifiedShow Answer

One way to enhance the stability of the banking system is to:

Correct AnswerverifiedShow Answer

Answer the question based on the following balance sheet for the First National Bank. Assume the reserve ratio is 15 percent: Refer to the above data. First National Bank can make new loans of up to:

Correct AnswerverifiedShow Answer

Henry deposits $2,000 in currency in the First Street Bank. Later that same day Jane Harris negotiates a loan for $5,400 at the same bank. After these transactions, the supply of money has:

Correct AnswerverifiedShow Answer

One bank can borrow reserves from another bank, and the interest on the loan is called the federal funds rate.

Correct AnswerverifiedShow Answer

Suppose the Northwestern Bank has excess reserves of $12,000 and checkable deposits of $125,000. If the reserve requirement is 20 percent, what are the bank's actual reserves?

Correct AnswerverifiedShow Answer

In an unregulated environment, the commercial banking system would tend to vary the supply of money in a way that:

Correct AnswerverifiedShow Answer

In essence, which of the following groups "creates" money?

Correct AnswerverifiedShow Answer

When loans are repaid at commercial banks:

Correct AnswerverifiedShow Answer

Correct Answer
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