Question 1

Which of the following appears on the asset side of a bank's balance sheet?

Accepted Answer

A) Excess reserves. 
B) Loans. 
C) Required reserves. 
D) All of the above. 
A) Excess reserves. 
B) Loans. 
C) Required reserves. 
D) All of the above.

Question 2

The market where banks borrow from other banks for short periods of time is the:

Accepted Answer

A) discount market. 
B) federal funds market. 
C) inter-bank loan market. 
D) national bank market. 
E) liquidity market. 
A) discount market. 
B) federal funds market. 
C) inter-bank loan market. 
D) national bank market. 
E) liquidity market.

Question 3

The amount of assets that a bank must hold at all times is determined by the:

Accepted Answer

A) banks' actual reserves. 
B) required reserve ratio. 
C) actual reserve requirement. 
D) fractional reserve requirement. 
E) excess reserve requirement. 
A) banks' actual reserves. 
B) required reserve ratio. 
C) actual reserve requirement. 
D) fractional reserve requirement. 
E) excess reserve requirement.

Question 4

Describe the three basic tools used by the Fed to change the money supply. Which of these tools is most relied on in practice? Least relied on? Why?

Accepted Answer

The Fed can use open market operations,

Question 5

When the Fed decreases the required reserve ratio, then the:

Accepted Answer

A) ability of banks to make loans is restricted. 
B) ability of banks to make loans is enhanced. 
C) ability of banks to make loans is unaffected. 
D) interest rate that banks pay to the Fed to borrow money is reduced. 
E) interest rate that banks pay other banks to borrow money is decreased. 
A) ability of banks to make loans is restricted. 
B) ability of banks to make loans is enhanced. 
C) ability of banks to make loans is unaffected. 
D) interest rate that banks pay to the Fed to borrow money is reduced. 
E) interest rate that banks pay other banks to borrow money is decreased.

Question 6

The federal funds rate is the interest rate charged by:

Accepted Answer

A) banks for loans to other banks. 
B) the Fed for overnight loans. 
C) the Fed for borrowed reserves. 
D) the federal government on loans to member banks. 
A) banks for loans to other banks. 
B) the Fed for overnight loans. 
C) the Fed for borrowed reserves. 
D) the federal government on loans to member banks.

Question 7

A bank that has $10,000 in excess reserves can extend new loans up to a maximum of:

Accepted Answer

A) $1,000. 
B) $9,000. 
C) $10,000. 
D) $100,000. 
A) $1,000. 
B) $9,000. 
C) $10,000. 
D) $100,000.

Question 8

If there is a recession, the Fed would most likely:

Accepted Answer

A) encourage banks to provide loans by lowering the discount rate. 
B) encourage banks to provide loans by raising the discount rate. 
C) restrict bank lending by lowering the discount rate. 
D) restrict bank lending by raising the discount rate. 
E) restrict bank lending by lowering the federal funds rate. 
A) encourage banks to provide loans by lowering the discount rate. 
B) encourage banks to provide loans by raising the discount rate. 
C) restrict bank lending by lowering the discount rate. 
D) restrict bank lending by raising the discount rate. 
E) restrict bank lending by lowering the federal funds rate.

Question 9

If there is no one who is interested in borrowing from a bank:

Accepted Answer

A) the bank's excess reserves will be zero. 
B) there will be no process of money creation. 
C) the required reserve ratio must be equal to zero. 
D) the required reserve ratio must be equal to 100 percent. 
A) the bank's excess reserves will be zero. 
B) there will be no process of money creation. 
C) the required reserve ratio must be equal to zero. 
D) the required reserve ratio must be equal to 100 percent.

Question 10

The federal funds market is the market where:

Accepted Answer

A) the federal government raises funds to cover its budget deficit. 
B) the Federal Reserve System makes loans to commercial banks. 
C) commercial banks with excess reserves make loans to commercial banks seeking reserves. 
D) commercial banks make loans to the Federal Reserve. 
A) the federal government raises funds to cover its budget deficit. 
B) the Federal Reserve System makes loans to commercial banks. 
C) commercial banks with excess reserves make loans to commercial banks seeking reserves. 
D) commercial banks make loans to the Federal Reserve.

Question 11

A decrease in the required reserve ratio will increase banks' excess reserves and decrease the money multiplier.

Accepted Answer

A) True 
 B)False

Question 12

A bank currently has checkable deposits of $100,000, total reserves of $30,000, and loans of $70,000. If the required reserve ratio is lowered from 20 percent to 15 percent, this bank can increase its loans by:

Accepted Answer

A) $10,000. 
B) $15,000. 
C) $75,000. 
D) $5,000. 
E) $0. 
A) $10,000. 
B) $15,000. 
C) $75,000. 
D) $5,000. 
E) $0.

Question 13

An open-market purchase by the Federal Reserve withdraws excess reserves from the banking system and causes the money supply to contract.

Accepted Answer

A) True 
 B)False

Question 14

Exhibit 15-7 Lower Walloon National Bank   In Exhibit 15-7, if Mr. Brown pays out all of the proceeds of the loan to Mr. John White who is going to make the renovations of the restaurant, the Lower Walloon National bank will now have:

Accepted Answer

A) $6,000 in reserves, $4,000 in loans, and $10,000 in checkable deposits. 
B) $2,000 in reserves, $4,000 in loans, and $10,000 in checkable deposits. 
C) $2,000 in reserves, $8,000 in loans, and $10,000 in checkable deposits. 
D) $0 in reserves, $8,000 in loans, and $10,000 in checkable deposits. 
E) $10,000 in reserves, $8,000 in loans, and $2,000 in checkable deposits. 
A) $6,000 in reserves, $4,000 in loans, and $10,000 in checkable deposits. 
B) $2,000 in reserves, $4,000 in loans, and $10,000 in checkable deposits. 
C) $2,000 in reserves, $8,000 in loans, and $10,000 in checkable deposits. 
D) $0 in reserves, $8,000 in loans, and $10,000 in checkable deposits. 
E) $10,000 in reserves, $8,000 in loans, and $2,000 in checkable deposits.

Question 15

Discuss how a single bank creates money. What is the limit to which a single bank can add to the money supply? By how much can an entire banking system add to the money supply?

Accepted Answer

A single bank is limited in its money cr

Question 16

If the Fed wanted to use all three of its major monetary control tools to decrease the money supply, it would:

Accepted Answer

A) buy bonds, reduce the discount rate, and reduce reserve requirements. 
B) sell bonds, reduce the discount rate, and reduce reserve requirements. 
C) sell bonds, increase the discount rate, and increase reserve requirements. 
D) buy bonds, increase the discount rate, and increase reserve requirements. 
A) buy bonds, reduce the discount rate, and reduce reserve requirements. 
B) sell bonds, reduce the discount rate, and reduce reserve requirements. 
C) sell bonds, increase the discount rate, and increase reserve requirements. 
D) buy bonds, increase the discount rate, and increase reserve requirements.

Question 17

An individual bank can lend out at most its:

Accepted Answer

A) actual reserves. 
B) fractional reserves. 
C) legal reserves. 
D) checkable deposits. 
E) excess reserves. 
A) actual reserves. 
B) fractional reserves. 
C) legal reserves. 
D) checkable deposits. 
E) excess reserves.

Question 18

If loans are $300,000, checkable deposits are $600,000, and the required reserve ratio is 40 percent, then excess reserves are:

Accepted Answer

A) $360,000. 
B) $240,000. 
C) $120,000. 
D) $60,000. 
E) $30,000. 
A) $360,000. 
B) $240,000. 
C) $120,000. 
D) $60,000. 
E) $30,000.

Question 19

Jeff Kaufman decides to bank with Paris First National Bank (PFN). He opens a checking account by depositing $1,000. According to the PFN balance sheet, after this initial $1,000 checkable deposit, there are $1,000 in:

Accepted Answer

A) reserves and $1,000 in checkable deposits. 
B) liabilities and $2,000 in checkable deposits. 
C) checkable deposits and $0 in assets. 
D) assets and $0 in liabilities. 
E) reserves and $0 in liabilities. 
A) reserves and $1,000 in checkable deposits. 
B) liabilities and $2,000 in checkable deposits. 
C) checkable deposits and $0 in assets. 
D) assets and $0 in liabilities. 
E) reserves and $0 in liabilities.

Question 20

The discount rate is the interest rate charged by:

Accepted Answer

A) major banks to their best customers. 
B) banks for overnight loans to other banks. 
C) the Fed on loans of reserves to banks. 
D) banks for loans of less than 24 hours. 
A) major banks to their best customers. 
B) banks for overnight loans to other banks. 
C) the Fed on loans of reserves to banks. 
D) banks for loans of less than 24 hours.

Exam 15: Money Creation

Which of the following appears on the asset side of a bank's balance sheet?

The market where banks borrow from other banks for short periods of time is the:

The amount of assets that a bank must hold at all times is determined by the:

Describe the three basic tools used by the Fed to change the money supply. Which of these tools is most relied on in practice? Least relied on? Why?

When the Fed decreases the required reserve ratio, then the:

The federal funds rate is the interest rate charged by:

A bank that has $10,000 in excess reserves can extend new loans up to a maximum of:

If there is a recession, the Fed would most likely:

If there is no one who is interested in borrowing from a bank:

The federal funds market is the market where:

A decrease in the required reserve ratio will increase banks' excess reserves and decrease the money multiplier.

A bank currently has checkable deposits of $100,000, total reserves of $30,000, and loans of $70,000. If the required reserve ratio is lowered from 20 percent to 15 percent, this bank can increase its loans by:

An open-market purchase by the Federal Reserve withdraws excess reserves from the banking system and causes the money supply to contract.

Exhibit 15-7 Lower Walloon National Bank In Exhibit 15-7, if Mr. Brown pays out all of the proceeds of the loan to Mr. John White who is going to make the renovations of the restaurant, the Lower Walloon National bank will now have:

Discuss how a single bank creates money. What is the limit to which a single bank can add to the money supply? By how much can an entire banking system add to the money supply?

If the Fed wanted to use all three of its major monetary control tools to decrease the money supply, it would:

An individual bank can lend out at most its:

If loans are $300,000, checkable deposits are $600,000, and the required reserve ratio is 40 percent, then excess reserves are:

Jeff Kaufman decides to bank with Paris First National Bank (PFN). He opens a checking account by depositing $1,000. According to the PFN balance sheet, after this initial $1,000 checkable deposit, there are $1,000 in:

The discount rate is the interest rate charged by:

Introducing the Economic Way of Thinking

Production Possibilities, Opportunity Cost, and Economic Growth

Market Demand and Supply

Markets in Action

Gross Domestic Product

Business Cycles and Unemployment

Inflation

The Keynesian Model

The Keynesian Model in Action

Aggregate Demand and Supply

Fiscal Policy

The Public Sector

Federal Deficits, Surpluses, and the National Debt

Money and the Federal Reserve System

Monetary Policy

The Phillips Curve and Expectations Theory

International Trade and Finance

Economies in Transition

Growth and the Less-Developed Countries

Applying Graphs to Economics

Consumer Surplus, Producer Surplus, and Market Efficiency

the Self-Correcting Aggregate Demand and Supply Model

Policy Disputes Using the Self-Correcting Aggregate Demand and Supply Model

Filters