Question 1

The amount of checkable deposits in an economy cannot exceed the amount of currency that the government has issued.

Accepted Answer

A) True 
 B)False

Question 2

Exhibit 19-4  Balance sheet of Tucker National Bank   In Exhibit 19-4, the bank could make:

Accepted Answer

A)  $1,000 in new loans. 
B)  $4,000 in new loans. 
C)  $16,000 in new loans. 
D)  $20,000 in new loans. 
A)  $1,000 in new loans. 
B)  $4,000 in new loans. 
C)  $16,000 in new loans. 
D)  $20,000 in new loans.

Question 3

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 4

Which of the following policy actions by the Fed would cause the money supply to decrease?

Accepted Answer

A)  An open-market purchase. 
B)  A decrease in required reserve ratios. 
C)  A decrease in the discount rate. 
D)  None of the above. 
A)  An open-market purchase. 
B)  A decrease in required reserve ratios. 
C)  A decrease in the discount rate. 
D)  None of the above.

Question 5

Which of the following would be classified as a liability for a bank?

Accepted Answer

A)  Required reserves. 
B)  Excess reserves. 
C)  Loans. 
D)  Checkable deposits. 
A)  Required reserves. 
B)  Excess reserves. 
C)  Loans. 
D)  Checkable deposits.

Question 6

The interest rate on loans made by banks in the market in which they lend and borrow reserves from each other for very short periods of time is known as the:

Accepted Answer

A)  discount rate. 
B)  legal reserve rate. 
C)  federal funds rate. 
D)  open market rate. 
E)  margin rate. 
A)  discount rate. 
B)  legal reserve rate. 
C)  federal funds rate. 
D)  open market rate. 
E)  margin rate.

Question 7

Assume a simplified banking system in which all banks are subject to a uniform reserve requirement of 20 percent and checkable deposits are the only from of money. A bank that received a new checkable deposit of $10,000 would be able to extend new loans up to a maximum of:

Accepted Answer

A)  $2,000. 
B)  $8,000. 
C)  $9,000. 
D)  $10,000. 
A)  $2,000. 
B)  $8,000. 
C)  $9,000. 
D)  $10,000.

Question 8

The quantity of reserves held by a bank in addition to the legally required amounts is known as:

Accepted Answer

A)  actual reserves. 
B)  excess reserves. 
C)  the required reserve ratio. 
D)  the money multiplier. 
E)  the monetary base. 
A)  actual reserves. 
B)  excess reserves. 
C)  the required reserve ratio. 
D)  the money multiplier. 
E)  the monetary base.

Question 9

If a bank receives a new checkable deposit of $10,000, and the required reserve ratio is 20 percent, then the bank can lend out:

Accepted Answer

A)  $2,000. 
B)  $10,000. 
C)  $40,000. 
D)  $8,000. 
E)  $0. 
A)  $2,000. 
B)  $10,000. 
C)  $40,000. 
D)  $8,000. 
E)  $0.

Question 10

Banks create money when they make loans.

Accepted Answer

A) True 
 B)False

Question 11

Exhibit 19-3  Balance sheet of Tucker National Bank   Assume the Fed purchases a government security from a private dealer and pays with a Fed check of $100,000. If this check is deposited by the dealer in the bank shown in Exhibit 19-3, the bank can extend new loans in the amount of:

Accepted Answer

A)  $20,000. 
B)  $80,000. 
C)  $100,000. 
D)  $120,000. 
A)  $20,000. 
B)  $80,000. 
C)  $100,000. 
D)  $120,000.

Question 12

If a bank has actual reserves of $40,000 and a 20 percent reserve requirement, then the maximum amount of checkable deposits the bank can have if excess reserves are zero is:

Accepted Answer

A)  $100,000. 
B)  $80,000. 
C)  $300,000. 
D)  $20,000. 
E)  $200,000. 
A)  $100,000. 
B)  $80,000. 
C)  $300,000. 
D)  $20,000. 
E)  $200,000.

Question 13

An increase in the required reserve ratio by the Federal Reserve would:

Accepted Answer

A)  cause M1 to contract. 
B)  cause M1 to expand. 
C)  have no effect on M1 or M2. 
D)  affect only M2, not M1. 
A)  cause M1 to contract. 
B)  cause M1 to expand. 
C)  have no effect on M1 or M2. 
D)  affect only M2, not M1.

Question 14

The required reserve ratio is the:

Accepted Answer

A)  actual amount of reserves that banks must hold. 
B)  excess amount of reserves that a bank must hold. 
C)  minimum amount of reserves the Fed requires a bank to hold. 
D)  total amount of reserves that banks hold at all times. 
E)  maximum amount of reserves that banks can hold to remain liquid. 
A)  actual amount of reserves that banks must hold. 
B)  excess amount of reserves that a bank must hold. 
C)  minimum amount of reserves the Fed requires a bank to hold. 
D)  total amount of reserves that banks hold at all times. 
E)  maximum amount of reserves that banks can hold to remain liquid.

Question 15

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 16

Which of the following appears on the liability side of the Fed's balance sheet?

Accepted Answer

A)  Federal Reserve notes. 
B)  U.S. government securities. 
C)  Loans to banks. 
D)  All of the above. 
A)  Federal Reserve notes. 
B)  U.S. government securities. 
C)  Loans to banks. 
D)  All of the above.

Question 17

Which of the following statements is true ?

Accepted Answer

A)  The simple money multiplier equals the reciprocal of the required reserve ratio. 
B)  Required reserves is the minimum balance that the Fed requires a bank to hold in vault cash or on deposit with the Fed. 
C)  The Discount rate is the interest rate charged banks for loans from the Fed. 
D)  Excess reserves equal total reserves minus required reserves. 
E)  All of the above. 
A)  The simple money multiplier equals the reciprocal of the required reserve ratio. 
B)  Required reserves is the minimum balance that the Fed requires a bank to hold in vault cash or on deposit with the Fed. 
C)  The Discount rate is the interest rate charged banks for loans from the Fed. 
D)  Excess reserves equal total reserves minus required reserves. 
E)  All of the above.

Question 18

Suppose a bank has checkable deposits of $100,000 and the required reserve ratio is 20 percent. If the bank currently has $100,000 in reserves, it could expand the money supply by as much as:

Accepted Answer

A)  $100,000. 
B)  $400,000. 
C)  $0. 
D)  $20,000. 
E)  $80,000. 
A)  $100,000. 
B)  $400,000. 
C)  $0. 
D)  $20,000. 
E)  $80,000.

Question 19

If the Federal Reserve wants to increase the availability of money and credit, it can:

Accepted Answer

A)  lower the discount rate. 
B)  raise the reserve requirements. 
C)  sell U.S. government bonds to the public. 
D)  encourage banks to increase their prime lending rate. 
A)  lower the discount rate. 
B)  raise the reserve requirements. 
C)  sell U.S. government bonds to the public. 
D)  encourage banks to increase their prime lending rate.

Question 20

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

Exam 19: Money Creation

The amount of checkable deposits in an economy cannot exceed the amount of currency that the government has issued.

Exhibit 19-4 Balance sheet of Tucker National Bank In Exhibit 19-4, the bank could make:

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

Which of the following policy actions by the Fed would cause the money supply to decrease?

Which of the following would be classified as a liability for a bank?

The interest rate on loans made by banks in the market in which they lend and borrow reserves from each other for very short periods of time is known as the:

Assume a simplified banking system in which all banks are subject to a uniform reserve requirement of 20 percent and checkable deposits are the only from of money. A bank that received a new checkable deposit of $10,000 would be able to extend new loans up to a maximum of:

The quantity of reserves held by a bank in addition to the legally required amounts is known as:

If a bank receives a new checkable deposit of $10,000, and the required reserve ratio is 20 percent, then the bank can lend out:

Banks create money when they make loans.

Exhibit 19-3 Balance sheet of Tucker National Bank Assume the Fed purchases a government security from a private dealer and pays with a Fed check of $100,000. If this check is deposited by the dealer in the bank shown in Exhibit 19-3, the bank can extend new loans in the amount of:

If a bank has actual reserves of $40,000 and a 20 percent reserve requirement, then the maximum amount of checkable deposits the bank can have if excess reserves are zero is:

An increase in the required reserve ratio by the Federal Reserve would:

The required reserve ratio is the:

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

Which of the following appears on the liability side of the Fed's balance sheet?

Which of the following statements is true ?

Suppose a bank has checkable deposits of $100,000 and the required reserve ratio is 20 percent. If the bank currently has $100,000 in reserves, it could expand the money supply by as much as:

If the Federal Reserve wants to increase the availability of money and credit, it can:

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?

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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