Question 1

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 its 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 its deposits 
C)  Banks hold a portion of their deposits in gold 
D)  Banks can serve the withdrawals of all their depositors

Question 2

Maximum checkable-deposit expansion in the banking system is equal to:

Accepted Answer

A)  Actual reserves minus required reserves 
B)  Assets plus net worth and liabilities 
C)  Excess reserves times the monetary multiplier 
D)  Excess reserves divided by the monetary multiplier 
A)  Actual reserves minus required reserves 
B)  Assets plus net worth and liabilities 
C)  Excess reserves times the monetary multiplier 
D)  Excess reserves divided by the monetary multiplier

Question 3

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 4

The amount of required reserves that a bank must hold is computed as a certain fraction of the bank's assets.

Accepted Answer

A) True 
 B)False

Question 5

In an unregulated environment, the commercial banking system would tend to vary the supply of money in a way that:

Accepted Answer

A)  Increased the money supply to the maximum at all times 
B)  Decreased the money supply to the minimum at all times 
C)  Emphasized the use of currency over demand deposits 
D)  Reinforced cyclical variations in the economy 
A)  Increased the money supply to the maximum at all times 
B)  Decreased the money supply to the minimum at all times 
C)  Emphasized the use of currency over demand deposits 
D)  Reinforced cyclical variations in the economy

Question 6

One bank can borrow reserves from another bank, and the interest on the loan is called the federal funds rate.

Accepted Answer

A) True 
 B)False

Question 7

The primary reason commercial banks must keep required reserves on deposit at the Fed is to:

Accepted Answer

A)  Add to the liquidity of the commercial bank 
B)  Allow the Fed to control the amount of bank lending 
C)  Protect the deposits in the commercial bank against losses 
D)  Ensure that depositors can withdraw their money if they wish to 
A)  Add to the liquidity of the commercial bank 
B)  Allow the Fed to control the amount of bank lending 
C)  Protect the deposits in the commercial bank against losses 
D)  Ensure that depositors can withdraw their money if they wish to

Question 8

Answer the question based on the following consolidated balance sheet for the commercial banking system. Assume the required reserve ratio is 12 percent. All figures are in billions of dollars:   Refer to the above data. The commercial banking system has excess reserves of:

Accepted Answer

A)  $32 billion 
B)  $36 billion 
C)  $42 billion 
D)  $60 billion 
A)  $32 billion 
B)  $36 billion 
C)  $42 billion 
D)  $60 billion

Question 9

Henry deposits $2,000 in currency in the First Street Bank. Later that same day Jane Harris negotiates a loan for $5,400 at the same bank. After these transactions, the supply of money has:

Accepted Answer

A)  Increased by $2,100 
B)  Increased by $3,300 
C)  Increased by $5,400 
D)  Decreased by $3,300 
A)  Increased by $2,100 
B)  Increased by $3,300 
C)  Increased by $5,400 
D)  Decreased by $3,300

Question 10

In essence, which of the following groups "creates" money?

Accepted Answer

A)  Banks' loan officers when they grant loans 
B)  Consumers when they go shopping 
C)  Depositors when they deposit or withdraw money from their banks 
D)  Firms when they pay workers their wages and salaries 
A)  Banks' loan officers when they grant loans 
B)  Consumers when they go shopping 
C)  Depositors when they deposit or withdraw money from their banks 
D)  Firms when they pay workers their wages and salaries

Question 11

The federal funds rate is the interest rate that the Fed charges banks for its loans to them.

Accepted Answer

A) True 
 B)False

Question 12

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 13

One way to enhance the stability of the banking system is to:

Accepted Answer

A)  Require higher bank capitalization or net worth 
B)  Increase the federal funds rate 
C)  Reduce the required-reserve ratio 
D)  Require more leveraging by banks 
A)  Require higher bank capitalization or net worth 
B)  Increase the federal funds rate 
C)  Reduce the required-reserve ratio 
D)  Require more leveraging by banks

Question 14

The following table is the consolidated balance sheet for the commercial banking system. All figures are in billions. Assume that the required reserve ratio is 10 percent:   Refer to the above information. The maximum amount by which this commercial banking system can expand the supply of money by lending is:

Accepted Answer

A)  $120,000 billion 
B)  $300,000 billion 
C)  $600,000 billion 
D)  $900,000 billion 
A)  $120,000 billion 
B)  $300,000 billion 
C)  $600,000 billion 
D)  $900,000 billion

Question 15

The use of high leveraging by banks leads to the banking system's:

Accepted Answer

A)  Competitiveness 
B)  Instability 
C)  Vital role in the economy 
D)  Monopoly power 
A)  Competitiveness 
B)  Instability 
C)  Vital role in the economy 
D)  Monopoly power

Question 16

If Bank A has excess reserves of $1 million and all other banks in the system do not have any excess reserves, then the amount of additional loans that can be made by the banking system will be:

Accepted Answer

A)  $1 million also 
B)  A fraction of $1 million 
C)  A multiple of $1 million 
D)  $1 million times the required-reserve ratio 
A)  $1 million also 
B)  A fraction of $1 million 
C)  A multiple of $1 million 
D)  $1 million times the required-reserve ratio

Question 17

If the Federal Reserve System sells $5 billion of government securities to commercial banks, the banks' reserves would:

Accepted Answer

A)  Increase by $5 billion 
B)  Decrease by $5 billion 
C)  Be added to net worth 
D)  Remain the same 
A)  Increase by $5 billion 
B)  Decrease by $5 billion 
C)  Be added to net worth 
D)  Remain the same

Question 18

Answer the question based on the following balance sheet for the First National Bank. Assume the reserve ratio is 15 percent:   Refer to the above data. First National Bank can make new loans of up to:

Accepted Answer

A)  $50,000 
B)  $41,000 
C)  $32,000 
D)  $27,000 
A)  $50,000 
B)  $41,000 
C)  $32,000 
D)  $27,000

Question 19

Suppose the Northwestern Bank has excess reserves of $12,000 and checkable deposits of $125,000. If the reserve requirement is 20 percent, what are the bank's actual reserves?

Accepted Answer

A)  $25,000 
B)  $37,000 
C)  $44,000 
D)  $47,000 
A)  $25,000 
B)  $37,000 
C)  $44,000 
D)  $47,000

Question 20

What is one significant characteristic of fractional reserve banking?

Accepted Answer

A)  Banks hold a fraction of their loans in reserve 
B)  Banks use deposit insurance for loans to customers 
C)  Bank loans will be equal to the amount of gold on deposit 
D)  Banks can create money through lending their reserves 
A)  Banks hold a fraction of their loans in reserve 
B)  Banks use deposit insurance for loans to customers 
C)  Bank loans will be equal to the amount of gold on deposit 
D)  Banks can create money through lending their reserves

Exam 15: Money Creation

What is one significant consequence of fractional reserve banking?

Maximum checkable-deposit expansion in the banking system is equal to:

When loans are repaid at commercial banks:

The amount of required reserves that a bank must hold is computed as a certain fraction of the bank's assets.

In an unregulated environment, the commercial banking system would tend to vary the supply of money in a way that:

One bank can borrow reserves from another bank, and the interest on the loan is called the federal funds rate.

The primary reason commercial banks must keep required reserves on deposit at the Fed is to:

Answer the question based on the following consolidated balance sheet for the commercial banking system. Assume the required reserve ratio is 12 percent. All figures are in billions of dollars: Refer to the above data. The commercial banking system has excess reserves of:

Henry deposits $2,000 in currency in the First Street Bank. Later that same day Jane Harris negotiates a loan for $5,400 at the same bank. After these transactions, the supply of money has:

In essence, which of the following groups "creates" money?

The federal funds rate is the interest rate that the Fed charges banks for its loans to them.

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:

One way to enhance the stability of the banking system is to:

The use of high leveraging by banks leads to the banking system's:

If Bank A has excess reserves of $1 million and all other banks in the system do not have any excess reserves, then the amount of additional loans that can be made by the banking system will be:

If the Federal Reserve System sells $5 billion of government securities to commercial banks, the banks' reserves would:

Answer the question based on the following balance sheet for the First National Bank. Assume the reserve ratio is 15 percent: Refer to the above data. First National Bank can make new loans of up to:

Suppose the Northwestern Bank has excess reserves of $12,000 and checkable deposits of $125,000. If the reserve requirement is 20 percent, what are the bank's actual reserves?

What is one significant characteristic of fractional reserve banking?

Limits, Alternatives, and Choices

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Demand, Supply, and Market Equilibrium

Market Failures: Public Goods and Externalities

Governments Role 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

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