Question 1

Banks pursue two conﬂicting goals. Explain what they are and why the conﬂict.

Accepted Answer

The two goals are proﬁtability and safet

Question 2

The primary purpose of the legal reserve requirement is to

Accepted Answer

A)  prevent banks from hoarding too much vault cash. 
B)  provide a means by which the monetary authorities can inﬂuence the lending ability of commercial banks. 
C)  prevent commercial banks from earning excess proﬁts. 
D)  provide a dependable source of interest income for commercial banks. 
A)  prevent banks from hoarding too much vault cash. 
B)  provide a means by which the monetary authorities can inﬂuence the lending ability of commercial banks. 
C)  prevent commercial banks from earning excess proﬁts. 
D)  provide a dependable source of interest income for commercial banks.

Question 3

(Last Word) The term "leverage" refers to

Accepted Answer

A)  using borrowed money in an attempt to increase proﬁts. 
B)  the Fed's ability to control money creation through the reserve ratio. 
C)  investing in stocks from multiple companies in an effort to spread risk. 
D)  Fed sales and purchases of bonds to stabilize the money supply. 
A)  using borrowed money in an attempt to increase proﬁts. 
B)  the Fed's ability to control money creation through the reserve ratio. 
C)  investing in stocks from multiple companies in an effort to spread risk. 
D)  Fed sales and purchases of bonds to stabilize the money supply.

Question 4

The claims of depositors of a bank against the bank's assets are called

Accepted Answer

A)  loans. 
B)  net worth. 
C)  liabilities. 
D)  required reserves. 
A)  loans. 
B)  net worth. 
C)  liabilities. 
D)  required reserves.

Question 5

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)  $6,000. 
A)  $11,000. 
B)  $10,800. 
C)  $9,600. 
D)  $6,000.

Question 6

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

Accepted Answer

A) True 
 B)False

Question 7

If the reserve ratio is 15 percent and commercial bankers decide to hold additional excess reserves equal to 5 percent of any newly acquired checkable deposits, then the relevant monetary multiplier for the banking system
Will be

Accepted Answer

A)  3?. 
B)  4. 
C)  5. 
D)  6.67. 
A)  3?. 
B)  4. 
C)  5. 
D)  6.67.

Question 8

Bank panics

Accepted Answer

A)  occur frequently in fractional reserve banking systems. 
B)  are a risk of fractional reserve banking but are unlikely when banks are highly regulated and lend prudently. 
C)  cannot occur in a fractional reserve banking system. 
D)  occur more frequently when the monetary system is backed by gold. 
A)  occur frequently in fractional reserve banking systems. 
B)  are a risk of fractional reserve banking but are unlikely when banks are highly regulated and lend prudently. 
C)  cannot occur in a fractional reserve banking system. 
D)  occur more frequently when the monetary system is backed by gold.

Question 9

$$\begin{array} { | c | c | c | c | c | } 
\hline & \text { Reserve Requirement (\%) } & \text { Checkable Deposits } & \text { Actual Reserves } & \text { Excess Reserves } \
\hline ( 1 ) & \underline { W } & \$ 100,000 & \$ 10,000 & \$ 0 \
\hline ( 2 ) & 8 & \underline { X } & 20,000 & 12,000 \
\hline ( 3 ) & 12 & 200,000 & \underline { Y } & 8,000 \
\hline ( 4 ) & 20 & 300,000 & 70,000 & \underline { Z } \
\hline
\end{array}$$ The accompanying table gives data for a commercial bank or thrift. In row 4, the number appropriate for space Z is

Accepted Answer

A)  $10,000. 
B)  $70,000. 
C)  $48,000. 
D)  zero. 
A)  $10,000. 
B)  $70,000. 
C)  $48,000. 
D)  zero.

Question 10

Refer to the accompanying balance sheet for the ABC National Bank. Assume the required reserve ratio is 20 percent. Assuming the bank loans out all of its remaining excess reserves as a checkable deposit and has a check
Cleared against it for that amount, its reserves and checkable deposits will now be

Accepted Answer

A)  $25,000 and $122,000, respectively. 
B)  $22,000 and $110,000, respectively. 
C)  $32,000 and $115,000, respectively. 
D)  $22,000 and $105,000, respectively. 
A)  $25,000 and $122,000, respectively. 
B)  $22,000 and $110,000, respectively. 
C)  $32,000 and $115,000, respectively. 
D)  $22,000 and $105,000, respectively.

Question 11

$$\begin{array} { | c | c | c | } 
\hline \text { (1) } & \text { (2) } & \text { (3) } \
\hline \text { Legal Reserve Ratio (\%) } & \text { Checkable Deposits } & \text { Actual Reserves } \
\hline 10 & \$ 40,000 & \$ 10,000 \
\hline 20 & 40,000 & 10,000 \
\hline 25 & 40,000 & 10,000 \
\hline 30 & 40,000 & 10,000 \
\hline
\end{array}$$ The accompanying table gives data for a commercial bank or thrift. When the legal reserve ratio is 30 percent, the monetary multiplier is

Accepted Answer

A)  5. 
B)  4. 
C)  3.33. 
D)  2.5. 
A)  5. 
B)  4. 
C)  3.33. 
D)  2.5.

Question 12

If the required reserve ratio were 15 percent, the value of the monetary multiplier would be

Accepted Answer

A)  5.50. 
B)  6.67. 
C)  7.32. 
D)  8.54. 
A)  5.50. 
B)  6.67. 
C)  7.32. 
D)  8.54.

Question 13

The accompanying balance sheet is for the First Federal Bank. Assume the required reserve ratio is 20 percent. If the original bank balance sheet was for the whole commercial banking system rather than a single bank, loans
And deposits could have been expanded by a maximum of

Accepted Answer

A)  $40,000. 
B)  $100,000. 
C)  $200,000. 
D)  $300,000. 
A)  $40,000. 
B)  $100,000. 
C)  $200,000. 
D)  $300,000.

Question 14

The ABC Commercial Bank has $5,000 in excess reserves, and the reserve ratio is 30 percent. This information is consistent with the bank having

Accepted Answer

A)  $90,000 in outstanding loans and $35,000 in reserves. 
B)  $90,000 in checkable deposit liabilities and $32,000 in reserves. 
C)  $20,000 in checkable deposit liabilities and $10,000 in reserves. 
D)  $90,000 in checkable deposit liabilities and $35,000 in reserves. 
A)  $90,000 in outstanding loans and $35,000 in reserves. 
B)  $90,000 in checkable deposit liabilities and $32,000 in reserves. 
C)  $20,000 in checkable deposit liabilities and $10,000 in reserves. 
D)  $90,000 in checkable deposit liabilities and $35,000 in reserves.

Question 15

A bank's net worth is the

Accepted Answer

A)  measure of its proﬁtability. 
B)  value of its vault cash and loan portfolio. 
C)  claims of its owners against the bank's assets. 
D)  claims of its creditors against the bank's assets. 
A)  measure of its proﬁtability. 
B)  value of its vault cash and loan portfolio. 
C)  claims of its owners against the bank's assets. 
D)  claims of its creditors against the bank's assets.

Question 16

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

Accepted Answer

A) True 
 B)False

Question 17

A fractional reserve banking system

Accepted Answer

A)  is susceptible to bank "panics" or "runs." 
B)  prevents money creation through the lending process. 
C)  only tends to exist in developing economies. 
D)  prevents the Federal Reserve from inﬂuencing the money supply. 
A)  is susceptible to bank "panics" or "runs." 
B)  prevents money creation through the lending process. 
C)  only tends to exist in developing economies. 
D)  prevents the Federal Reserve from inﬂuencing the money supply.

Question 18

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

Question 19

If banks borrow from the Fed, the banking system's reserves will increase, but if banks borrow from one another,
the banking system's reserves will not change.

Accepted Answer

A) True 
 B)False

Question 20

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

Accepted Answer

A)  required reserves. 
B)  excess reserves. 
C)  outstanding loans. 
D)  outstanding checkable deposits. 
A)  required reserves. 
B)  excess reserves. 
C)  outstanding loans. 
D)  outstanding checkable deposits.

Banks pursue two conﬂicting goals. Explain what they are and why the conﬂict.

The primary purpose of the legal reserve requirement is to

(Last Word) The term "leverage" refers to

The claims of depositors of a bank against the bank's assets are called

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

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

If the reserve ratio is 15 percent and commercial bankers decide to hold additional excess reserves equal to 5 percent of any newly acquired checkable deposits, then the relevant monetary multiplier for the banking system Will be

Bank panics

Reserve Requirement (\%) Checkable Deposits Actual Reserves Excess Reserves (1) \ 100,000 \ 10,000 \ 0 (2) 8 20,000 12,000 (3) 12 200,000 8,000 (4) 20 300,000 70,000 The accompanying table gives data for a commercial bank or thrift. In row 4, the number appropriate for space Z is

(1) (2) (3) Legal Reserve Ratio (\%) Checkable Deposits Actual Reserves 10 \ 40,000 \ 10,000 20 40,000 10,000 25 40,000 10,000 30 40,000 10,000 The accompanying table gives data for a commercial bank or thrift. When the legal reserve ratio is 30 percent, the monetary multiplier is

If the required reserve ratio were 15 percent, the value of the monetary multiplier would be

The accompanying balance sheet is for the First Federal Bank. Assume the required reserve ratio is 20 percent. If the original bank balance sheet was for the whole commercial banking system rather than a single bank, loans And deposits could have been expanded by a maximum of

The ABC Commercial Bank has $5,000 in excess reserves, and the reserve ratio is 30 percent. This information is consistent with the bank having

A bank's net worth is the

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

A fractional reserve banking system

What is one signiﬁcant consequence of fractional reserve banking?

If banks borrow from the Fed, the banking system's reserves will increase, but if banks borrow from one another, the banking system's reserves will not change.

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

The Market System and the Circular Flow

Demand, Supply, and Market Equilibrium

Market Failures Caused by Externalities Asymmetric Information

Public Goods, Public Choice, and Government Failure

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

Filters

Exam 15: Money Creation

Banks pursue two conﬂicting goals. Explain what they are and why the conﬂict.

The primary purpose of the legal reserve requirement is to

(Last Word) The term "leverage" refers to

The claims of depositors of a bank against the bank's assets are called

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

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

If the reserve ratio is 15 percent and commercial bankers decide to hold additional excess reserves equal to 5 percent of any newly acquired checkable deposits, then the relevant monetary multiplier for the banking system Will be

Bank panics

Reserve Requirement (\%) Checkable Deposits Actual Reserves Excess Reserves (1) \ 100,000 \ 10,000 \ 0 (2) 8 20,000 12,000 (3) 12 200,000 8,000 (4) 20 300,000 70,000 The accompanying table gives data for a commercial bank or thrift. In row 4, the number appropriate for space Z is

(1) (2) (3) Legal Reserve Ratio (\%) Checkable Deposits Actual Reserves 10 \ 40,000 \ 10,000 20 40,000 10,000 25 40,000 10,000 30 40,000 10,000 The accompanying table gives data for a commercial bank or thrift. When the legal reserve ratio is 30 percent, the monetary multiplier is

If the required reserve ratio were 15 percent, the value of the monetary multiplier would be

The accompanying balance sheet is for the First Federal Bank. Assume the required reserve ratio is 20 percent. If the original bank balance sheet was for the whole commercial banking system rather than a single bank, loans And deposits could have been expanded by a maximum of

The ABC Commercial Bank has $5,000 in excess reserves, and the reserve ratio is 30 percent. This information is consistent with the bank having

A bank's net worth is the

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

A fractional reserve banking system

What is one signiﬁcant consequence of fractional reserve banking?

If banks borrow from the Fed, the banking system's reserves will increase, but if banks borrow from one another, the banking system's reserves will not change.

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

The Market System and the Circular Flow

Demand, Supply, and Market Equilibrium

Market Failures Caused by Externalities Asymmetric Information

Public Goods, Public Choice, and Government Failure

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

Filters