Question 1

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 2

A bank's checkable deposits shrink from $40 million to $33 million.What happens to its required reserves if the required reserve ratio is 3 percent?

Accepted Answer

A) They fall by about $1.2 million. 
B) They fall by about $10 million. 
C) They fall by about $7 million. 
D) They fall by about $0.2 million. 
A) They fall by about $1.2 million. 
B) They fall by about $10 million. 
C) They fall by about $7 million. 
D) They fall by about $0.2 million.

Question 3

When a check is cleared against a bank, the bank will lose

Accepted Answer

A) cash and securities. 
B) checkable deposits and reserves. 
C) reserves and capital stock. 
D) loans and demand deposits. 
A) cash and securities. 
B) checkable deposits and reserves. 
C) reserves and capital stock. 
D) loans and demand deposits.

Question 4

Commercial bank reserves are an asset to commercial banks but a liability to the Federal Reserve Bank holding them.

Accepted Answer

A) True 
 B)False

Question 5

Money is destroyed when

Accepted Answer

A) loans are made. 
B) checks written on one bank are deposited in another bank. 
C) loans are repaid. 
D) the net worth of the banking system declines. 
A) loans are made. 
B) checks written on one bank are deposited in another bank. 
C) loans are repaid. 
D) the net worth of the banking system declines.

Question 6

When a bank grants a loan to a customer who then keeps the funds in her checking account at that bank, the bank's

Accepted Answer

A) actual reserves will increase. 
B) required reserves will increase. 
C) actual reserves will decrease. 
D) excess reserves will stay the same. 
A) actual reserves will increase. 
B) required reserves will increase. 
C) actual reserves will decrease. 
D) excess reserves will stay the same.

Question 7

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 8

Which of the following is correct?

Accepted Answer

A) Both the granting and repaying of bank loans expand the aggregate money supply. 
B) Granting and repaying bank loans do not affect the money supply. 
C) Granting a bank loan destroys money; repaying a bank loan creates money. 
D) Granting a bank loan creates money; repaying a bank loan destroys money. 
A) Both the granting and repaying of bank loans expand the aggregate money supply. 
B) Granting and repaying bank loans do not affect the money supply. 
C) Granting a bank loan destroys money; repaying a bank loan creates money. 
D) Granting a bank loan creates money; repaying a bank loan destroys money.

Question 9

In an uncontrolled or unregulated system, commercial bank lending will tend to intensify the business cycle.

Accepted Answer

A) True 
 B)False

Question 10

The federal funds market is the market in which

Accepted Answer

A) banks borrow from the Federal Reserve Banks. 
B) U.S.securities are bought and sold. 
C) banks borrow reserves from one another on an overnight basis. 
D) Federal Reserve Banks borrow from one another.Topic: Money-Creating Transactions of a Commercial Bank 
A) banks borrow from the Federal Reserve Banks. 
B) U.S.securities are bought and sold. 
C) banks borrow reserves from one another on an overnight basis. 
D) Federal Reserve Banks borrow from one another.Topic: Money-Creating Transactions of a Commercial Bank

Question 11

Assume that the reserve ratio is 20 percent and banks in the system are loaning out all their excess reserve.If people collectively cash out $10 billion from their checking accounts, then the lending ability of the banking system will be

Accepted Answer

A) increased by $10 billion. 
B) decreased by $10 billion. 
C) decreased by $40 billion. 
D) decreased by $50 billion. 
A) increased by $10 billion. 
B) decreased by $10 billion. 
C) decreased by $40 billion. 
D) decreased by $50 billion.

Question 12

A commercial bank has required reserves of $60 million and the reserve ratio is 20 percent.How much are the commercial bank's checkable-deposit liabilities?

Accepted Answer

A) $120 million 
B) $900 million 
C) $300 million 
D) $1,200 million 
A) $120 million 
B) $900 million 
C) $300 million 
D) $1,200 million

Question 13

Which of the following are liabilities to a bank?

Accepted Answer

A) capital stock and reserves 
B) property and capital stock 
C) vault cash and demand deposits 
D) demand and time deposits 
A) capital stock and reserves 
B) property and capital stock 
C) vault cash and demand deposits 
D) demand and time deposits

Question 14

Suppose a commercial banking system has $100,000 of outstanding checkable deposits and actual reserves of $35,000.If the reserve ratio is 20 percent, the banking system can expand the supply of money by the maximum amount of

Accepted Answer

A) $122,000. 
B) $175,000. 
C) $300,000. 
D) $75,000. 
A) $122,000. 
B) $175,000. 
C) $300,000. 
D) $75,000.

Question 15

A bank can grant loans up to the amount of its actual reserves.Topic: Money-Creating Transactions of a Commercial Bank

Accepted Answer

A) True 
 B)False

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 reserves. 
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 reserves.

Question 17

The banking system can lend by a multiple of its excess reserves because lending does not result in a loss of reserves to the banking system as a whole.

Accepted Answer

A) True 
 B)False

Question 18

The fractional reserve system of banking started when goldsmiths began

Accepted Answer

A) accepting deposits of gold for safe storage. 
B) charging people who deposited their gold. 
C) using deposited gold to produce products for sale to others. 
D) issuing paper receipts in excess of the amount of gold held. 
A) accepting deposits of gold for safe storage. 
B) charging people who deposited their gold. 
C) using deposited gold to produce products for sale to others. 
D) issuing paper receipts in excess of the amount of gold held.

Question 19

When banks borrow and lend reserves in the federal funds market,

Accepted Answer

A) the total reserves of the banking system increase. 
B) the total reserves of the banking system shrink. 
C) the total reserves of the banking system stay the same. 
D) the reserves of the banking system become part of M1. 
A) the total reserves of the banking system increase. 
B) the total reserves of the banking system shrink. 
C) the total reserves of the banking system stay the same. 
D) the reserves of the banking system become part of M1.

Question 20

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 ratio. 
A) $1 million also. 
B) a fraction of $1 million. 
C) a multiple of $1 million. 
D) $1 million times the required reserve ratio.

Exam 35: Money Creation

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

A bank's checkable deposits shrink from $40 million to $33 million.What happens to its required reserves if the required reserve ratio is 3 percent?

When a check is cleared against a bank, the bank will lose

Commercial bank reserves are an asset to commercial banks but a liability to the Federal Reserve Bank holding them.

Money is destroyed when

When a bank grants a loan to a customer who then keeps the funds in her checking account at that bank, the bank's

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

Which of the following is correct?

In an uncontrolled or unregulated system, commercial bank lending will tend to intensify the business cycle.

The federal funds market is the market in which

Assume that the reserve ratio is 20 percent and banks in the system are loaning out all their excess reserve.If people collectively cash out $10 billion from their checking accounts, then the lending ability of the banking system will be

A commercial bank has required reserves of $60 million and the reserve ratio is 20 percent.How much are the commercial bank's checkable-deposit liabilities?

Which of the following are liabilities to a bank?

Suppose a commercial banking system has $100,000 of outstanding checkable deposits and actual reserves of $35,000.If the reserve ratio is 20 percent, the banking system can expand the supply of money by the maximum amount of

A bank can grant loans up to the amount of its actual reserves.Topic: Money-Creating Transactions of a Commercial Bank

What is one significant characteristic of fractional reserve banking?

The banking system can lend by a multiple of its excess reserves because lending does not result in a loss of reserves to the banking system as a whole.

The fractional reserve system of banking started when goldsmiths began

When banks borrow and lend reserves in the federal funds market,

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

Limits, Alternatives, and Choices

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