Chapter 16, Assignment 3

A

We can say that loans are funded by deposits because deposits give banks financial capital, which can be loaned out so banks can make a profit. A) True B) False

D

A higher required reserve ratio _____________ the value of the simple deposit multiplier. A) eliminates B) increases C) leaves unchanged D) decreases

D

An increase in the amount of excess reserves that banks keep _____________ the value of the real-world deposit multiplier. A) eliminates B) leaves unchanged C) increases D) decreases

B

An initial increase in a bank's reserves will increase checkable deposits A) by an amount equal to the increase in reserves. B) by an amount greater than the increase in reserves. C) by an amount less than the increase in reserves. D) an initial increase in reserves will decrease checkable deposits.

A

Briefly explain whether you agree or disagree with the following statement: "Assets are things of value that people own. Liabilities are debts. Therefore, a bank will always consider a checking account deposit to be an asset and a car loan to be a liability." A) Disagree. Checking accounts represent something that the bank owes to the owner of the account. It is a bank liability. B) Agree. Loans are debts and therefore more bank liabilities. C) Disagree. Both checking accounts and car loans represent bank liabilities. D) Agree. Checking accounts are something of value that is in the bank. Therefore, they are a bank asset.

C

In 2008, the required reserve ratio for a bank's first $9.3 million in checking deposits was zero. It was 3 percent in deposits between $9.3 million and $43.9 million, and 10 percent on deposits above $43.0 million. In most cases, and for simplicity, we assume that the required reserve ratio is 10 percent on all deposits. Therefore, the simple deposit multiplier is 10. Is the real-world deposit multiplier greater than, less than, or equal to the simple deposit multiplier? A) Equal. There is no difference between the two. B) Greater. Inflation plays a large role in the increase in checkable deposits. C) Less. The simple deposit multiplier is a model with assumptions that keep it higher than the real-world multiplier. D) None of the above. They are very different concepts.

D

Evaluate the following statement: Banks use deposits to make consumer loans to households and commercial loans to businesses. Banks will loan out every penny of their deposits in order to make a profit. A) True. Any money that is left over after a bank loans money to businesses and households will be loaned to other banks. B) True. Deposits that sit in a bank as vault cash earn no interest. C) False. In reality, banks are rarely able to find borrowers for all of their deposits. D) False. Banks must hold a fraction of their deposits as vault cash or with the Federal Reserve.

D

Excess reserves A) are the deposits that banks do not use to make loans. B) are reserves banks keep to meet the reserve requirement. C) are loans made at above market interest rates. D) are reserves banks keep above the legal requirement.

C

How do the banks "create money"? A) Banks buy bonds in the open market and gain reserves; this excess reserve holding increases the money supply. B) When there is a decrease in checking account deposits, banks lose reserves and reduce their loans, and the money supply expands. C) When there is an increase in checking account deposits, banks gain reserves and make new loans, and the money supply expands. D) Banks sell bonds in the open market and lose reserves; the excess cash holding by households increases the money supply.

100,000

If the required reserve ratio is 0.15, the maximum increase in checking account deposits that will result from an increase in bank reserves of $15,000 is $___________.

D

In a newspaper column, author Delia Ephron described a conversation with a friend who had a large balance in her credit card on which the friend was being charged an interest rate of 18 percent per year. The friend was worried about ever being able to pay off the debt. Ephron was earning only 0.4 percent interest on her bank certificate of deposit (CD). She considered withdrawing the money from her CD and using it to make a loan to her friend so her friend could pay off her credit card balance: "So I was thinking that all of us earning 0.4 percent could instead loan money to our friends at 0.5 percent... [M]y friend would get out of debt [and] I would earn $5 a month instead of $4." Why don't more people use their savings to make loans rather than keeping the funds in bank accounts that earn very low rates of interest? A) Bankers would object. B) The government taxes gains made on loans. C) People are basically selfish. D) There is a risk that the borrower won't pay the money back.

B

The following is from an article on community banks: "Their commercial-lending businesses, funded by their stable deposit bases, make them steady earners." What is commercial lending? A) This is when firms make loans to other firms. B) This is when banks make loans to businesses. C) This is when firms make loans to banks. D) None of the above.

B

Suppose American Bank has $500 in deposits and $200 in reserves and that the required reserve ratio is 10 percent. In the situation, American Bank has A) $50 in excess reserves. B) $50 in required reserves. C) $200 in required reserves. D) $200 in excess reserves.

B

Suppose the reserve requirement is 15%. What is the effect on total checkable deposits in the economy if bank reserves increase by $60 billion? A) $60 billion increase B) $400 billion increase C) $900 billion increase D) $4 billion increase

A

Suppose you decide to withdraw $100 in cash from your checking account. Which one of the following choices accurately shows the effect of this transaction on your bank's balance sheet. A) Your bank's balance sheet shows a decrease in reserves by $100 and a decrease in deposits by $100. B) Your bank's balance sheet shows an increase in reserves by $100 and a decrease in deposits by $100. C) Your bank's balance sheet shows a decrease in reserves by $100 and an increase in deposits by $100. D) Your bank's balance sheet shows an increase in reserves by $100 and an increase in deposits by $100.

5,200

Suppose you deposit $1,300 cash into your checking account. By how much will the total money supply increase as a result when the required reserve ratio is 0.20? The change in the money supply is: $_____________.

14,000

Suppose you deposit $1,400 cash into your checking account. By how much will checking deposit ms in the banking system increase as a result when the required reserve ratio is 0.10? The change in checking deposit ms is equal to: $_________________.

D

The formula for the simple deposit multiplier is A) Simple Deposit Multiplier = 1/1-RR. B) Simple Deposit Multiplier = -RR/1-RR. C) Simple Deposit Multiplier = (1-RR)/RR. D) Simple Deposit Multiplier = 1/RR.

D

The simple deposit multiplier equals A) the inverse, or reciprocal, of the required reserve ratio. B) the formula used to calculate the total increase in checking account deposits from an increase in bank reserves. C) the ratio of the amount of deposits created by banks to the amount of new reserves. D) all of the above.

C

What are the largest asset and the largest liability of a typical bank? A) Reserves are the largest asset and deposits are the largest liability of a typical bank. B) Cash in its vault is the largest asset and bonds are the largest liability of a typical bank. C) Loans are the largest asset and deposits are the largest liability of a typical bank. D) Loans are the largest liability and deposits are the largest asset of a typical bank.

D

Whenever banks gain reserves and make new loans, the money supply _________________; and whenever banks lose reserves, and reduce their loans, the money supply __________________. A) expands; expands B) contracts; expands C) contracts; contracts D) expands; contracts

B

Which of the following is the largest liability of a typical bank? A) reserves B) deposits C) Treasury bills D) loans

C

Which of the following refers to the minimum fraction of deposits banks that are required by law to keep as reserves? A) the cash to deposit ratio B) the quantity equation C) the required reserve ratio D) the simple deposit multiplier