Question 1

What is the effect on the money supply when a commercial bank sells government securities to the public?

Accepted Answer

The selling of government securities to

Question 2

$$\begin{array} { | l | c | } 
\hline { \text { Type of Deposit } } & \text { Reserve Requirement } \
\hline \text { Checkable Deposits } & \
\hline \$ 7.8 \text { - 48.3 Million } & 3 \% \
\hline \text { Over \$48.3 Million } & 10 \
\hline \text { Noncheckable personal savings and time deposits } & 0 \
\hline
\end{array}$$ Refer to the accompanying table. If a bank has checkable deposits of $45 million and reserves of $2 million, then its excess reserves are

Accepted Answer

A)  $0.35 million. 
B)  $0.65 million. 
C)  $1.35 million. 
D)  $1.65 million. 
A)  $0.35 million. 
B)  $0.65 million. 
C)  $1.35 million. 
D)  $1.65 million.

Question 3

When a commercial bank has excess reserves,

Accepted Answer

A)  it is in a position to make additional loans. 
B)  its actual reserves are less than its required reserves. 
C)  it is charging too high an interest rate on its loans. 
D)  its reserves exceed its assets. 
A)  it is in a position to make additional loans. 
B)  its actual reserves are less than its required reserves. 
C)  it is charging too high an interest rate on its loans. 
D)  its reserves exceed its assets.

Question 4

Refer to the accompanying consolidated balance sheet for the commercial banking system. Assume the required reserve ratio is 12 percent. All ﬁgures are in billions of dollars. The maximum amount by which the commercial
Banking system can expand the supply of money by lending is

Accepted Answer

A)  $250 billion. 
B)  $350 billion. 
C)  $450 billion. 
D)  $600 billion. 
A)  $250 billion. 
B)  $350 billion. 
C)  $450 billion. 
D)  $600 billion.

Question 5

How can money be "destroyed" in the same way that checkable deposits expand the money supply?

Accepted Answer

When loans are paid off, the m

Question 6

Assume that a bank initially has no excess reserves. If it receives $5,000 in cash from a depositor and the bank ﬁnds that it can safely lend out $4,500, the reserve requirement must be

Accepted Answer

A)  zero. 
B)  10 percent. 
C)  20 percent. 
D)  25 percent. 
A)  zero. 
B)  10 percent. 
C)  20 percent. 
D)  25 percent.

Question 7

Refer to the accompanying balance sheet for the First National Bank. Assume the reserve ratio is 15 percent. If the balance sheet was for the whole commercial banking system rather than a single bank, then loans and deposits
Could expand by a maximum of approximately

Accepted Answer

A)  $120,000. 
B)  $213,333. 
C)  $333,500. 
D)  $415,373. 
A)  $120,000. 
B)  $213,333. 
C)  $333,500. 
D)  $415,373.

Question 8

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

Accepted Answer

A) True 
 B)False

Question 9

The federal funds rate is the rate that banks pay for loans from

Accepted Answer

A)  the Fed. 
B)  the U.S. Treasury. 
C)  other banks. 
D)  large corporations. 
A)  the Fed. 
B)  the U.S. Treasury. 
C)  other banks. 
D)  large corporations.

Question 10

During a recession, when banks tend to increase their excess reserves, the money supply M1 decreases.

Accepted Answer

A) True 
 B)False

Question 11

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 12

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

Accepted Answer

A) True 
 B)False

Question 13

In a fractional reserve banking system,

Accepted Answer

A)  bank panics cannot occur. 
B)  the monetary system must be backed by gold. 
C)  banks can create money through the lending process. 
D)  the Federal Reserve has no control over the amount of money in circulation. 
A)  bank panics cannot occur. 
B)  the monetary system must be backed by gold. 
C)  banks can create money through the lending process. 
D)  the Federal Reserve has no control over the amount of money in circulation.

Question 14

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 15

Consider the following information about a banking system: new currency deposited in the system = $40 billion, legal reserve ratio = 0.20, excess reserves prior to the currency deposit = $0. The $40 billion deposit of currency
Into checking accounts will initially create

Accepted Answer

A)  $8 billion of new checkable deposits. 
B)  $10 billion of new checkable deposits. 
C)  $40 billion of new checkable deposits. 
D)  $200 billion of new checkable deposits. 
A)  $8 billion of new checkable deposits. 
B)  $10 billion of new checkable deposits. 
C)  $40 billion of new checkable deposits. 
D)  $200 billion of new checkable deposits.

Question 16

cess reserves refer to the

Accepted Answer

A)  difference between a bank's vault cash and its reserves deposited at the Federal Reserve Bank. 
B)  minimum amount of actual reserves a bank must keep on hand to back up its customers deposits. 
C)  difference between actual reserves and loans. 
D)  difference between actual reserves and required reserves. 
A)  difference between a bank's vault cash and its reserves deposited at the Federal Reserve Bank. 
B)  minimum amount of actual reserves a bank must keep on hand to back up its customers deposits. 
C)  difference between actual reserves and loans. 
D)  difference between actual reserves and required reserves.

Question 17

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 18

Refer to the accompanying balance sheet for the First National Bank of Bunco. All ﬁgures are in millions. If this bank has excess reserves of $6 million, the legal reserve ratio must be

Accepted Answer

A)  10 percent. 
B)  12 percent. 
C)  14 percent. 
D)  20 percent. 
A)  10 percent. 
B)  12 percent. 
C)  14 percent. 
D)  20 percent.

Question 19

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

Accepted Answer

A) True 
 B)False

Question 20

Which of the following statements is correct?

Accepted Answer

A)  The actual reserves of a commercial bank equal its excess reserves minus its required reserves. 
B)  A bank's liabilities plus its net worth equal its assets. 
C)  When borrowers repay bank loans, the supply of money increases. 
D)  A single commercial bank can safely lend a multiple amount of its excess reserves. 
A)  The actual reserves of a commercial bank equal its excess reserves minus its required reserves. 
B)  A bank's liabilities plus its net worth equal its assets. 
C)  When borrowers repay bank loans, the supply of money increases. 
D)  A single commercial bank can safely lend a multiple amount of its excess reserves.

Exam 15: Money Creation

What is the effect on the money supply when a commercial bank sells government securities to the public?

Type of Deposit Reserve Requirement Checkable Deposits \ 7.8 - 48.3 Million 3\% Over \4 8.3 Million 10 Noncheckable personal savings and time deposits 0 Refer to the accompanying table. If a bank has checkable deposits of $45 million and reserves of $2 million, then its excess reserves are

When a commercial bank has excess reserves,

Refer to the accompanying consolidated balance sheet for the commercial banking system. Assume the required reserve ratio is 12 percent. All ﬁgures are in billions of dollars. The maximum amount by which the commercial Banking system can expand the supply of money by lending is

How can money be "destroyed" in the same way that checkable deposits expand the money supply?

Assume that a bank initially has no excess reserves. If it receives $5,000 in cash from a depositor and the bank ﬁnds that it can safely lend out $4,500, the reserve requirement must be

Refer to the accompanying balance sheet for the First National Bank. Assume the reserve ratio is 15 percent. If the balance sheet was for the whole commercial banking system rather than a single bank, then loans and deposits Could expand by a maximum of approximately

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

The federal funds rate is the rate that banks pay for loans from

During a recession, when banks tend to increase their excess reserves, the money supply M1 decreases.

When loans are repaid at commercial banks,

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

In a fractional reserve banking system,

The fractional reserve system of banking started when goldsmiths began

Consider the following information about a banking system: new currency deposited in the system = $40 billion, legal reserve ratio = 0.20, excess reserves prior to the currency deposit = $0. The $40 billion deposit of currency Into checking accounts will initially create

cess reserves refer to the

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

Refer to the accompanying balance sheet for the First National Bank of Bunco. All ﬁgures are in millions. If this bank has excess reserves of $6 million, the legal reserve ratio must be

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

Which of the following statements is correct?

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Aggregate Demand and Aggregate Supply

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The Balance of Payments, Exchange Rates, and Trade Deficits

The Economics of Developing Countries

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