Exam 35: Money Creation

A commercial bank buys a $50,000 government security from a securities dealer.The bank pays the dealer by increasing the dealer's checkable deposit balance by $50,000.The money supply has

The greater the required reserve ratio, the

If a bank has excess reserves of $100,000, then it can lend out only up to $100,000; but if the banking system has excess reserves of $100,000, then the system can make additional loans totaling more than $100,000.

If the reserve requirement is 20 percent, the monetary multiplier will be 4.

Most modern banking systems are based on

Banks' borrowed funds come mostly from

If actual reserves in the banking system are $40,000, excess reserves are $10,000, and checkable deposits are $240,000, then the legal reserve requirement is

The commercial banking system can lend by a multiple of its excess reserves primarily because

A depositor places $5,000 in cash in a commercial bank, and the reserve ratio is 20 percent; the bank sends the $5,000 to the Federal Reserve Bank.As a result, the reserves and excess reserves of the bank have been increased by

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

The primary purpose of the reserve requirements for banks is not really to ensure liquidity to meet withdrawals, but rather to allow the Fed some control over the money supply.

The amount that a commercial bank can lend is determined by its

The maximum deposit creation that can be made in the banking system is equal to the excess reserves divided by the required reserve ratio.

Fractional reserve banking refers to a system where banks

When a check is drawn and cleared, the

If the monetary authorities want to reduce the monetary multiplier, they should

(Last Word) The greater the leverage in the financial system, all else equal,

"Leverage" in finance refers to the

A commercial bank's reserves are

Which of the following factors can contribute to a reduction in the money supply?