Question 1

A check for $10,000 drawn on Bank A and deposited at Bank B will increase the excess reserves in Bank B by $10,000.

Accepted Answer

A) True 
 B)False

Question 2

A commercial bank sells a $10,000 government bond to a securities dealer.The dealer pays for the bond in cash, which the bank adds to its vault cash.The money supply has

Accepted Answer

A) decreased by $10,000 multiplied by the reciprocal of the required reserve ratio. 
B) decreased by $10,000. 
C) increased by $10,000. 
D) not been affected. 
A) decreased by $10,000 multiplied by the reciprocal of the required reserve ratio. 
B) decreased by $10,000. 
C) increased by $10,000. 
D) not been affected.

Question 3

The commercial banking system, because of a recent change in the required reserve ratio from 8 percent to 10 percent, finds that it is $50 million short of reserves.If it is unable to obtain anyadditional reserves, it mustreduce deposits andmoney supply by

Accepted Answer

A) $250 million. 
B) $625 million. 
C) $500 million. 
D) $50 million. 
A) $250 million. 
B) $625 million. 
C) $500 million. 
D) $50 million.

Question 4

Commercial banks monetize claims when they sell securities to Federal Reserve Banks.

Accepted Answer

A) True 
 B)False

Question 5

Suppose the reserve requirement is 20 percent.If a bank has checkable deposits of $4 million and actual reserves of $1 million, it can safely lend out

Accepted Answer

A) $1 million. 
B) $1.2 million. 
C) $200,000. 
D) $800,000. 
A) $1 million. 
B) $1.2 million. 
C) $200,000. 
D) $800,000.

Question 6

The multiple by which the commercial banking system can expand the supply of money is equal to

Accepted Answer

A) the ratio of actual reserves to required reserves. 
B) the reciprocal of the federal funds rate. 
C) the reciprocal of the reserve ratio. 
D) the ratio of required reserves to actual reserves. 
A) the ratio of actual reserves to required reserves. 
B) the reciprocal of the federal funds rate. 
C) the reciprocal of the reserve ratio. 
D) the ratio of required reserves to actual reserves.

Question 7

When a commercial bank buys government (Treasury) bonds from the general public, money is created.

Accepted Answer

A) True 
 B)False

Question 8

Checkable deposits are a liability on a bank's balance sheet.

Accepted Answer

A) True 
 B)False

Question 9

An individual bank can safely lend out a multiple of its excess reserves, but the banking system can safely lend out only an amount equal to the excess reserves in the banking system.

Accepted Answer

A) True 
 B)False

Question 10

(Last Word) Leverage in the financial system

Accepted Answer

A) magnifies profits but reduces losses. 
B) magnifies both profits and losses. 
C) reduces profits but magnifies losses. 
D) reduces both profits and losses. 
A) magnifies profits but reduces losses. 
B) magnifies both profits and losses. 
C) reduces profits but magnifies losses. 
D) reduces both profits and losses.

Question 11

When cash is deposited in a checkable-deposit account at a bank, there is

Accepted Answer

A) a decrease in the money supply M1. 
B) an increase in the money supply M1. 
C) an increase in the bank's net worth. 
D) an increase in the bank's liabilities. 
A) a decrease in the money supply M1. 
B) an increase in the money supply M1. 
C) an increase in the bank's net worth. 
D) an increase in the bank's liabilities.

Question 12

While the withdrawal of cash from banks does not affect money supply immediately, it will affect the banking system's lending capacity, which will eventually lead to a contraction in money supply.

Accepted Answer

A) True 
 B)False

Question 13

A commercial bank has checkable-deposit liabilities of $500,000, reserves of $150,000, and a required reserve ratio of 20 percent.The amount by which a single commercial bank and the amount by which the banking system can increase loans are

Accepted Answer

A) $30,000 and $150,000, respectively. 
B) $50,000 and $250,000, respectively. 
C) $50,000 and $500,000, respectively. 
D) $100,000 and $500,000, respectively. 
A) $30,000 and $150,000, respectively. 
B) $50,000 and $250,000, respectively. 
C) $50,000 and $500,000, respectively. 
D) $100,000 and $500,000, respectively.

Question 14

The monetary multiplier can also be called the spending multiplier.

Accepted Answer

A) True 
 B)False

Question 15

In prosperous times, commercial banks are likely to hold very small amounts of excess reserves because

Accepted Answer

A) the Fed forces commercial banks to increase the money supply during economic expansions. 
B) it is very costly to transfer funds between commercial banks and the central banks. 
C) Federal Reserve Banks pay lower rates of interest on bank reserves than could be earned by the commercial banks loaning out the reserves. 
D) Federal Reserve Banks want to minimize their interest payments on such deposits.Topic: Money-Creating Transactions of a Commercial Bank 
A) the Fed forces commercial banks to increase the money supply during economic expansions. 
B) it is very costly to transfer funds between commercial banks and the central banks. 
C) Federal Reserve Banks pay lower rates of interest on bank reserves than could be earned by the commercial banks loaning out the reserves. 
D) Federal Reserve Banks want to minimize their interest payments on such deposits.Topic: Money-Creating Transactions of a Commercial Bank

Question 16

A bank has reserves of $30,000 and deposits of $120,000.If the reserve ratio is 10 percent, then this bank can lend out a maximum of $12,000 in new loans.

Accepted Answer

A) True 
 B)False

Question 17

A single commercial bank must meet a 25 percent reserve requirement.If it initially has no excess reserves and then $2,000 in cash is deposited in the bank, it can increase its loans by a maximum of

Accepted Answer

A) $2,000. 
B) $1,500. 
C) $1,250. 
D) $1,750. 
A) $2,000. 
B) $1,500. 
C) $1,250. 
D) $1,750.

Question 18

Commercial banks increase the supply of money when they purchase either personal IOUs or government bonds from businesses and households.

Accepted Answer

A) True 
 B)False

Question 19

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 increases. 
A) money is created. 
B) money is destroyed. 
C) the assets of commercial banks increase. 
D) the net worth of commercial banks increases.

Question 20

Which of the following statements is correct?

Accepted Answer

A) When borrowers repay bank loans, the money supply is increased. 
B) When borrowers take out bank loans, the money supply is decreased. 
C) A single bank can legally lend an amount equal to its total reserves. 
D) A bank can grant loans to customers only if it has excess reserves. 
A) When borrowers repay bank loans, the money supply is increased. 
B) When borrowers take out bank loans, the money supply is decreased. 
C) A single bank can legally lend an amount equal to its total reserves. 
D) A bank can grant loans to customers only if it has excess reserves.

Exam 35: Money Creation

A check for $10,000 drawn on Bank A and deposited at Bank B will increase the excess reserves in Bank B by $10,000.

A commercial bank sells a $10,000 government bond to a securities dealer.The dealer pays for the bond in cash, which the bank adds to its vault cash.The money supply has

The commercial banking system, because of a recent change in the required reserve ratio from 8 percent to 10 percent, finds that it is $50 million short of reserves.If it is unable to obtain anyadditional reserves, it mustreduce deposits andmoney supply by

Commercial banks monetize claims when they sell securities to Federal Reserve Banks.

Suppose the reserve requirement is 20 percent.If a bank has checkable deposits of $4 million and actual reserves of $1 million, it can safely lend out

The multiple by which the commercial banking system can expand the supply of money is equal to

When a commercial bank buys government (Treasury) bonds from the general public, money is created.

Checkable deposits are a liability on a bank's balance sheet.

An individual bank can safely lend out a multiple of its excess reserves, but the banking system can safely lend out only an amount equal to the excess reserves in the banking system.

(Last Word) Leverage in the financial system

When cash is deposited in a checkable-deposit account at a bank, there is

While the withdrawal of cash from banks does not affect money supply immediately, it will affect the banking system's lending capacity, which will eventually lead to a contraction in money supply.

A commercial bank has checkable-deposit liabilities of $500,000, reserves of $150,000, and a required reserve ratio of 20 percent.The amount by which a single commercial bank and the amount by which the banking system can increase loans are

The monetary multiplier can also be called the spending multiplier.

In prosperous times, commercial banks are likely to hold very small amounts of excess reserves because

A bank has reserves of $30,000 and deposits of $120,000.If the reserve ratio is 10 percent, then this bank can lend out a maximum of $12,000 in new loans.

A single commercial bank must meet a 25 percent reserve requirement.If it initially has no excess reserves and then $2,000 in cash is deposited in the bank, it can increase its loans by a maximum of

Commercial banks increase the supply of money when they purchase either personal IOUs or government bonds from businesses and households.

When loans are repaid at commercial banks,

Which of the following statements is correct?

Limits, Alternatives, and Choices

The Market System and the Circular Flow

Demand, Supply, and Market Equilibrium

Market Failures: Public Goods and Externalities

Governments Role and Government Failure

Elasticity

Utility Maximization

Behavioral Economics

Businesses and the Costs of Production

Pure Competition in the Short Run

Pure Competition in the Long Run

Pure Monopoly

Monopolistic Competition

Oligopoly and Strategic Behavior

Technology, Rd, and Efficiency

The Demand for Resources

Wage Determination

Rent, Interest, and Profit

Natural Resource and Energy Economics

Public Finance: Expenditures and Taxes

Antitrust Policy and Regulation

Agriculture: Economics and Policy

Income Inequality, Poverty, and Discrimination

Health Care

Immigration

An Introduction to Macroeconomics

Measuring Domestic Output and National Income

Economic Growth

Business Cycles, Unemployment, and Inflation

Basic Macroeconomic Relationships

The Aggregate Expenditures Model

Aggregate Demand and Aggregate Supply

Fiscal Policy, Deficits, and Debt

Money, Banking, and Financial Institutions

Interest Rates and Monetary Policy

Financial Economics

Extending the Analysis of Aggregate Supply

Current Issues in Macro Theory and Policy

International Trade

The Balance of Payments, Exchange Rates, and Trade Deficits

The Economics of Developing Countries

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