Ch 15 Econ

A single commercial bank in a multibank banking system can lend only an amount equal to its initial preloan _________________.

Excess reserves

Consider the following statement: "Whenever currency is deposited into a commercial bank, cash goes out of circulation and, as a result, the supply of money is reduced." Is this statement true or false?

False because the M1 money supply consists of currency outside of the banks and checking account deposits of the public in the commercial banks.

Merchants accepted gold receipts as a means of payment even though the receipts were issued by goldsmiths, not the government, because By issuing loans in the form of gold receipts, there was additional risk because the

they knew that it could be exchanged for gold. goldsmith could issue more receipts than he had in gold and this could create a panic.

The bank panics of 1930 to 1933 produced a decline in the nation's money supply because Such panics are unlikely today because

with a fractional reserve banking system, a fall in bank reserves results in a multiple fall in demand deposit money deposits are insured by the Federal Deposit Insurance Corporation

A commercial bank has $100 million in checkable-deposit liabilities and $12 million in actual reserves. The required reserve ratio is 10 percent. How big are the bank's excess reserves?

2 million

A goldsmith has $2 million of gold in his vaults. He issues $5 million in gold receipts. His gold holdings are what fraction of the paper money (gold receipts) he has issued?

2/5

An asset on a bank's balance sheet is something

owned by the bank, whereas a liability is something owed by the bank.

The Federal Reserve requires that commercial banks have reserves because

reserves provide the Fed a means of controlling the money supply.

Suppose that the Fed has set the reserve ratio at 10 percent and that banks collectively have $2 billion in excess reserves. What is the maximum amount of new checkable-deposit money that can be created by the banking system?

$20 billion

Suppose that Third National Bank has reserves of $20,000 and checkable deposits of $100,000. The reserve ratio is 20 percent. The bank sells $5,000 in securities to the Federal Reserve Bank in its district, receiving a $5,000 increase in reserves in return. Instructions: Enter your answer as a whole number. What level of excess reserves does the bank now have?

5000

Net worth is equal to

Assets - Liabilities

A balance sheet must always balance because the sum of

assets must equal the sum of liabilities plus net worth.

Excess reserves are equal to

actual reserves minus required reserves.

Suppose that Big Bucks Bank has the simplified balance sheet shown below. The reserve ratio is 20 percent. Instructions: Enter your answers as whole numbers. a. What is the maximum amount of new loans that Big Bucks Bank can make? $ 2000 Correct . Show in columns 1 and 1' how the bank's balance sheet will appear after the bank has lent this additional amount. Assets Liabilities and net worth (1) (2) (1' ) (2' ) Reserves $22,000 22000 $ 20000 20000 Correct Checkable deposits $100,000 $ 102000 $ 100000 Securities 38,000 38000 38000 Loans 40,000 42000 42000 b. By how much has the supply of money changed? $ 2000 c. How will the bank's balance sheet appear after checks drawn for the entire amount of the new loans have been cleared against the bank? Show the new balance sheet in columns 2 and 2'. d. Using the original figures, revisit questions a, b, and c based on the assumption that the reserve ratio is 15 percent. What is the maximum amount of new loans that this bank can make? $ 7000 . Show in columns 3 and 3' (below) how the bank's balance sheet will appear after the bank has lent this additional amount. By how much has the supply of money changed? $ 7000 How will the bank's balance sheet appear after checks drawn for the entire amount of the new loans have been cleared against the bank? Show this new balance sheet in columns 4 and 4'. Asets Liabilities and net worth (3) (4) (3' ) (4' ) Reserves $22,000 $ 22000 $ 15000 Checkable deposits $100,000 $ 107000 $ 100000 Securities 38,000 38000 38000 Loans 40,000 47000 47000

answers are within question

Suppose that Mountain Star Bank discovers that its reserves will temporarily fall slightly below those legally required. It can temporarily remedy this situation by Assume Mountain Star Bank finds that its reserves will be substantially and permanently deficient. To remedy this situation, Mountain Star Bank can

borrowing funds from other banks in the Federal funds market. reduce the amount of loans outstanding.

Excess reserves

can be lent out, increasing the money supply.

Suppose that the banking system in Canada has a required reserve ratio of 10 percent while the banking system in the United States has a required reserve ratio of 20 percent. In which country would $100 of initial excess reserves be able to cause a larger total amount of money creation?

Canada

Suppose that last year $30 billion in new loans were extended by banks while $50 billion in old loans were paid off by borrowers. What happened to the money supply?

Decreased

The two conflicting goals facing commercial banks are:

Profit and liquidity

The actual reason that banks must hold required reserves is:

To give the Fed control over the lending ability of commercial banks.

The banking system in the United States is referred to as a fractional reserve bank system because In a fractional reserve system, deposit insurance

banks hold a fraction of deposits on reserve. guarantees that depositors will always get their money, avoiding bank runs.

Consider the following statement: "When a commercial bank makes loans, it creates money; when loans are repaid, money is destroyed." This statement is

correct because lending increases the money supply, and the repayment reduces checkable deposits, lowering the money supply.

The monetary multiplier is

inversely related to the reserve ratio.

The major assets on a commercial bank's balance sheet include The major claims on a commercial bank's balance sheet are

reserves, securities, loans, and vault cash. checkable deposits.

Reserves are an asset to commercial banks but a liability to the Federal Reserve Banks because

these funds are cash belonging to commercial banks, but they are a claim the commercial banks have against the Federal Reserve Bank