Question 1

Which of the following is not an interest-earning asset of commercial banks?

Accepted Answer

A)  Required reserves. 
B)  Securities. 
C)  Loans. 
D)  All of the above are interest-earning assets of commercial banks. 
A)  Required reserves. 
B)  Securities. 
C)  Loans. 
D)  All of the above are interest-earning assets of commercial banks. A

Question 2

Which of the following is a valid statement?

Accepted Answer

A)  Required reserve ratio = required reserves as a percentage to total deposits. 
B)  Required reserves = the maximum reserves required by the Fed. 
C)  Excess reserves = total reserves plus required reserves. 
D)  All of the above. 
A)  Required reserve ratio = required reserves as a percentage to total deposits. 
B)  Required reserves = the maximum reserves required by the Fed. 
C)  Excess reserves = total reserves plus required reserves. 
D)  All of the above. A

Question 3

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. B

Question 4

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)  None of the above. 
E)  All of the above. 
A)  Excess reserves. 
B)  Loans. 
C)  Required reserves. 
D)  None of the above. 
E)  All of the above.

Question 5

The cost to a member bank of borrowing from the Federal Reserve is called by the:

Accepted Answer

A)  reserve requirement. 
B)  price of securities in the open market. 
C)  discount rate. 
D)  yield on government bonds. 
A)  reserve requirement. 
B)  price of securities in the open market. 
C)  discount rate. 
D)  yield on government bonds.

Question 6

Imagine that Odyssey National is a brand new bank, and that its required reserve ratio is 10 percent. If it accepts a $1,000 cash deposit, then, excluding the $1,000 initial deposit, the banking system can increase the money supply by:

Accepted Answer

A)  $900. 
B)  $910. 
C)  $1,000. 
D)  $9,000. 
E)  $10,000. 
A)  $900. 
B)  $910. 
C)  $1,000. 
D)  $9,000. 
E)  $10,000.

Question 7

If the Federal Reserve wishes to increase the money supply it should decrease the discount rate and/or decrease the required reserve ratio and/or buy government securities on the open market.

Accepted Answer

A) True 
 B)False

Question 8

If the required reserve ratio is a uniform 25 percent on all deposits, the money multiplier will be:

Accepted Answer

A)  4.00. 
B)  2.50. 
C)  0.40. 
D)  0.25. 
A)  4.00. 
B)  2.50. 
C)  0.40. 
D)  0.25.

Question 9

The balance sheet for a commercial bank shows the bank's:

Accepted Answer

A)  required reserves as assets and excess reserves as liabilities. 
B)  loans as assets and required reserves as liabilities. 
C)  loans as assets and checkable deposits as liabilities. 
D)  checkable deposits as assets and loans as liabilities. 
E)  excess reserves as assets and required reserves as liabilities. 
A)  required reserves as assets and excess reserves as liabilities. 
B)  loans as assets and required reserves as liabilities. 
C)  loans as assets and checkable deposits as liabilities. 
D)  checkable deposits as assets and loans as liabilities. 
E)  excess reserves as assets and required reserves as liabilities.

Question 10

Suppose the required reserve ratio is 3 percent, and currency and reserves total $10 million. The maximum money supply that can be supported is:

Accepted Answer

A)  $13 million. 
B)  $30 million. 
C)  $97 million. 
D)  $333.3 million. 
A)  $13 million. 
B)  $30 million. 
C)  $97 million. 
D)  $333.3 million.

Question 11

Exhibit 19-1  Balance sheet of First Iliad State Bank   In Exhibit 19-1, if the required reserve ratio is lowered to 5 percent, First Iliad State will be able to make additional loans worth:

Accepted Answer

A)  $9,000,000. 
B)  $1,500,000. 
C)  $500,000. 
D)  $1,000,000. 
E)  $450,000. 
A)  $9,000,000. 
B)  $1,500,000. 
C)  $500,000. 
D)  $1,000,000. 
E)  $450,000.

Question 12

When reserve requirements are increased, the:

Accepted Answer

A)  excess reserves of commercial banks will decrease. 
B)  excess reserves of commercial banks will increase. 
C)  U.S. Treasury will have to borrow additional funds. 
D)  money supply will rise. 
A)  excess reserves of commercial banks will decrease. 
B)  excess reserves of commercial banks will increase. 
C)  U.S. Treasury will have to borrow additional funds. 
D)  money supply will rise.

Question 13

If the required reserve ratio is 10 percent, $1,000 cash deposited into a checkable deposit account will generate, assuming willing borrowers, an increase in the money supply of:

Accepted Answer

A)  $900. 
B)  $1,100. 
C)  $9,000. 
D)  $10,000. 
E)  $11,000. 
A)  $900. 
B)  $1,100. 
C)  $9,000. 
D)  $10,000. 
E)  $11,000.

Question 14

Assume that the Paris First National Bank's loan position contracted from $16 million to $12 million. If the required reserve ratio was increased from 20 percent to 40 percent, how much would the money supply shrink?

Accepted Answer

A)  $5 million. 
B)  $10 million. 
C)  $15 million. 
D)  $20 million. 
E)  $24 million. 
A)  $5 million. 
B)  $10 million. 
C)  $15 million. 
D)  $20 million. 
E)  $24 million.

Question 15

Exhibit 19-6  Balance sheet of Tucker National Bank   The required reserve ratio in Exhibit 19-6 is:

Accepted Answer

A)  10 percent. 
B)  20 percent. 
C)  80 percent. 
D)  100 percent. 
A)  10 percent. 
B)  20 percent. 
C)  80 percent. 
D)  100 percent.

Question 16

What interest rate does a bank pay when it borrows reserves from the Fed?

Accepted Answer

A)  The discount rate. 
B)  The prime rate. 
C)  The federal funds rate. 
D)  The required reserve rate. 
A)  The discount rate. 
B)  The prime rate. 
C)  The federal funds rate. 
D)  The required reserve rate.

Question 17

When the Fed raises the required reserve ratio, it:

Accepted Answer

A)  lowers the cost of borrowing from the Fed, encouraging banks to make loans to the general public. 
B)  raises the cost of borrowing from the Fed, discouraging banks from making loans to the general public. 
C)  increases the amount of excess reserves that banks hold, encouraging them to make loans to he general public. 
D)  increases the amount of excess reserves that banks hold, discouraging them from making loans to the general public. 
E)  decreases the amount of excess reserves that banks hold, discouraging them from making loans to the general public. 
A)  lowers the cost of borrowing from the Fed, encouraging banks to make loans to the general public. 
B)  raises the cost of borrowing from the Fed, discouraging banks from making loans to the general public. 
C)  increases the amount of excess reserves that banks hold, encouraging them to make loans to he general public. 
D)  increases the amount of excess reserves that banks hold, discouraging them from making loans to the general public. 
E)  decreases the amount of excess reserves that banks hold, discouraging them from making loans to the general public.

Question 18

Banks would be expected to minimize holding excess reserves because this practice is:

Accepted Answer

A)  illegal. 
B)  not profitable. 
C)  technically difficult. 
D)  subject to a stiff excess reserves tax. 
A)  illegal. 
B)  not profitable. 
C)  technically difficult. 
D)  subject to a stiff excess reserves tax.

Question 19

The interest rate in the federal funds market:

Accepted Answer

A)  is determined by the imposition of price controls imposed by the Fed. 
B)  rises when the quantity of funds demanded by banks seeking additional reserves exceeds the quantity supplied by banks with excess reserves. 
C)  will fall if the Fed sells bonds and, thereby, reduces the reserves available to banks. 
D)  is an interest rate that is largely unaffected by the policies of the Fed. 
A)  is determined by the imposition of price controls imposed by the Fed. 
B)  rises when the quantity of funds demanded by banks seeking additional reserves exceeds the quantity supplied by banks with excess reserves. 
C)  will fall if the Fed sells bonds and, thereby, reduces the reserves available to banks. 
D)  is an interest rate that is largely unaffected by the policies of the Fed.

Question 20

Assume we have a simplified banking system in balance-sheet equilibrium. Also assume that all banks are subject to a uniform 10 percent reserve requirement and demand deposits are the only form of money. A commercial bank receiving a new demand deposit of $100 would be able to extend new loans in the amount of:

Accepted Answer

A)  $10. 
B)  $90. 
C)  $100. 
D)  $1,000. 
A)  $10. 
B)  $90. 
C)  $100. 
D)  $1,000.

Exam 19: Money Creation

Which of the following is not an interest-earning asset of commercial banks?

Which of the following is a valid statement?

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

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

The cost to a member bank of borrowing from the Federal Reserve is called by the:

Imagine that Odyssey National is a brand new bank, and that its required reserve ratio is 10 percent. If it accepts a $1,000 cash deposit, then, excluding the $1,000 initial deposit, the banking system can increase the money supply by:

If the Federal Reserve wishes to increase the money supply it should decrease the discount rate and/or decrease the required reserve ratio and/or buy government securities on the open market.

If the required reserve ratio is a uniform 25 percent on all deposits, the money multiplier will be:

The balance sheet for a commercial bank shows the bank's:

Suppose the required reserve ratio is 3 percent, and currency and reserves total $10 million. The maximum money supply that can be supported is:

Exhibit 19-1 Balance sheet of First Iliad State Bank In Exhibit 19-1, if the required reserve ratio is lowered to 5 percent, First Iliad State will be able to make additional loans worth:

When reserve requirements are increased, the:

If the required reserve ratio is 10 percent, $1,000 cash deposited into a checkable deposit account will generate, assuming willing borrowers, an increase in the money supply of:

Assume that the Paris First National Bank's loan position contracted from $16 million to $12 million. If the required reserve ratio was increased from 20 percent to 40 percent, how much would the money supply shrink?

Exhibit 19-6 Balance sheet of Tucker National Bank The required reserve ratio in Exhibit 19-6 is:

What interest rate does a bank pay when it borrows reserves from the Fed?

When the Fed raises the required reserve ratio, it:

Banks would be expected to minimize holding excess reserves because this practice is:

The interest rate in the federal funds market:

Introducing the Economic Way of Thinking

Production Possibilities, Opportunity Cost, and Economic Growth

Market Demand and Supply

Markets in Action

Price Elasticity of Demand

Production Costs

Perfect Competition

Monopoly

Monopolistic Competition and Oligopoly

Labor Markets and Income Distribution

Gross Domestic Product

Business Cycles and Unemployment

Inflation

Aggregate Demand and Supply

Fiscal Policy

The Public Sector

Federal Deficits, Surpluses, and the National Debt

Money and the Federal Reserve System

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

International Trade and Finance

Economies in Transition

Growth and the Less-Developed Countries

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