Question 1

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. If the commercial banking system actually loans out
The maximum amount it is able to lend, excess reserves will fall

Accepted Answer

A)  by $28 billion. 
B)  by $22 billion. 
C)  by $20 billion. 
D)  to zero.

Question 2

Describe "bank runs." How can "bank runs" be avoided?

Accepted Answer

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Question 3

If D equals the maximum amount of new demand-deposit money that can be created by the banking system on the basis of any given amount of excess reserves; E equals the amount of excess reserves; and m is the monetary
Multiplier, then

Accepted Answer

A)  $m = E / D$ 
B)  $D = E \times m$ 
C)  $D = E - 1 / m$ 
D)  $D = m / E$

Question 4

When commercial banks use excess reserves to buy government securities from the public,

Accepted Answer

A)  new money is created. 
B)  commercial bank reserves increase. 
C)  the money supply falls. 
D)  checkable deposits decline.

Question 5

Suppose the reserve requirement is 20 percent. If a bank has checkable deposits of $4 million and actual reserves of $1 million, it can safely lend out

Accepted Answer

A)  $1 million. 
B)  $1.2 million. 
C)  $200,000. 
D)  $800,000.

Question 6

A depositor places $10,000 in cash in a commercial bank, where the required reserve ratio is 10 percent. The
bank sends the $10,000 to its Federal Reserve Bank. As a result, the actual reserves, required reserves, andcess reserves of the bank have been increased by
A) $10,000, $9,000, and $1,000, respectively.
B) $10,000, $500, and $4,500, respectively.
C) $10,000, $1,000, and $9,000, respectively.
D) $1,000, $10,000, and $9,000, respectively.

Accepted Answer

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Question 7

Assume that the required reserve ratio is 20 percent. A business deposits a $50,000 check at Bank A; the check is drawn against Bank B. What happens to the reserves at Bank A and Bank B?

Accepted Answer

A)  increase by $10,000 at Bank A, and decrease by $10,000 at Bank B 
B)  increase by $10,000 at Bank A, and decrease by $50,000 at Bank B 
C)  Reserves stay the same in both banks. 
D)  increase by $50,000 at Bank A, and decrease by $50,000 at Bank B

Question 8

What is the effect on the money supply when a commercial bank buys government securities from the public?

Accepted Answer

The answer of What is the effect on the money...

Question 9

In prosperous times, commercial banks are likely to hold very small amounts of excess reserves because

Accepted Answer

A)  the Fed forces commercial banks to increase the money supply during economic expansions. 
B)  it is very costly to transfer funds between commercial banks and the central banks. 
C)  Federal Reserve Banks pay lower rates of interest on bank reserves than could be earned by the commercial banks loaning out the reserves. 
D)  Federal Reserve Banks want to minimize their interest payments on such deposits.

Question 10

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 11

A commercial bank can expand its excess reserves by

Accepted Answer

A)  demanding and receiving payment on an overdue loan. 
B)  buying bonds from a Federal Reserve Bank. 
C)  buying bonds from the public. 
D)  paying back money borrowed from a Federal Reserve Bank.

Question 12

Suppose the reserve requirement is 10 percent. If a bank has $5 million of checkable deposits and actual reserves of $500,000, the bank

Accepted Answer

A)  can safely lend out $500,000. 
B)  can safely lend out $5 million. 
C)  can safely lend out $50,000. 
D)  cannot safely lend out more money.

Question 13

$$\begin{array} { | l | c | } 
\hline \text { Reserves } & \$ 100 \
\hline \text { Checkable Deposits } & 1,000 \
\hline \text { Loans (to customers) } & 300 \
\hline \text { Property } & 400 \
\hline \text { Securities (owned) } & 300 \
\hline \text { Stock Shares } & 100 \
\hline
\end{array}$$ Refer to the accompanying table of information for the Moolah Bank. Assume that the listed amounts constitute this bank's complete set of accounts. Moolah's

Accepted Answer

A)  assets are $1,000. 
B)  liabilities are $1,000. 
C)  net worth is zero. 
D)  pro?t is $1,000.

Question 14

Only one commercial bank in the banking system has any excess reserves, and its excess reserves are $400,000. This bank makes a new loan of $300,000 and keeps excess reserves of $100,000. If the required reserve ratio for
All banks is 12.5 percent, the potential expansion of the money supply from this new loan is

Accepted Answer

A)  $37,500. 
B)  $300,000. 
C)  $2.4 million. 
D)  $3.2 million.

Question 15

Suppose a commercial bank has checkable deposits of $100,000 and the legal reserve ratio is 10 percent. If the bank's required and excess reserves are equal, then its actual reserves

Accepted Answer

A)  are $1,000,000. 
B)  are $10,000. 
C)  are $20,000. 
D)  cannot be determined from the given information.

Question 16

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 commercial banking system has excess
Reserves of

Accepted Answer

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

Question 17

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.

Question 18

When a bank sells capital stock (equity shares) in return for cash,

Accepted Answer

A)  the capital stock increases the assets side and the cash increases the liabilities side. 
B)  the capital stock decreases the liabilities and the cash increases the assets side. 
C)  the capital stock increases the net worth and the cash increases the liabilities. 
D)  the capital stock increases the net worth and the cash increases the assets side.

Question 19

The multiple by which the commercial banking system can expand the supply of money is equal to

Accepted Answer

A)  the ratio of actual reserves to required reserves. 
B)  the reciprocal of the federal funds rate. 
C)  the reciprocal of the reserve ratio. 
D)  the ratio of required reserves to actual reserves.

Question 20

(Last Word) Leverage in the ﬁnancial system

Accepted Answer

A)  magniﬁes proﬁts but reduces losses. 
B)  magniﬁes both proﬁts and losses. 
C)  reduces proﬁts but magniﬁes losses. 
D)  reduces both proﬁts and losses.

Exam 15: Money Creation

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. If the commercial banking system actually loans out The maximum amount it is able to lend, excess reserves will fall