ECON 101 Chapter 15 learn smart

If Johnson Bank has actual reserves of $200,000 and $200,000 in demand deposits with a reserve ratio is 10%, what is the amount of excess reserves?

$180,000.

If the reserve ratio is 20% and a bank accepts $10,000 in demand deposits from the public, then it would have to keep ______ in reserves.

$2,000.

Suppose the reserve ratio is 20%. If John deposits $500 into his checking account, the banking system creates ______ of checkable deposits through making loans.

$2000

If a bank has actual reserves of $110,000, checkable deposits of $100,000, and a reserve ratio of 20%, its excess reserves are ______.

$90,000.

What is the money multiplier?

1 divided by required reserve ratio.

Which of the following is equal to the monetary multiplier?

1 divided by the required reserve ratio.

If the reserve ratio is 10% and a bank accepts $50,000 in demand deposits from the public, then it would have to keep $______ as reserves.

5,000

According to the limits set by Congress, the Fed may require a bank that has checkable deposits worth more than $125 million to maintain a reserve of ______ of these deposits.

8% to 14%

What is the statement of the assets, liabilities, and net worth of a firm or individual at some given time called?

A balance sheet.

Which statement best illustrates the history of the fractional banking system?

A goldsmith accepts deposits of gold and issues paper receipts in excess of the amount of gold held; reserves are a fraction of the money supply.

Which statements are true about the multiple deposit expansion of money when there is a 20% required reserve ratio and a $100 deposit?

A money multiplier of 5 permits the creation of $400 in new checkable deposits and a $500 increase in the total supply of money. An amount of $80 becomes excess reserves. The initial deposit of $100 creates new reserves of an equal amount.

Which of the following are the two basic functions of commercial banks?

Accepting deposits and making loans.

Where are places that a bank can keep its reserves?

As cash in its own vault. With the Federal Reserve Bank in its district.

What is the balance sheet formula?

Assets = Liabilities + Net worth

How is net worth calculated?

Assets minus liabilities.

Abe receives a check from Bea for fixing Bea's car. Bea's bank is Bank B. Abe deposits the check into his bank, Bank A. Select all the statements that correct describe the check-clearing process.

Bank A increases Abe's checkable deposits by the amount of the check. Total reserves in the banking system remain unchanged.

What are the two significant characteristics of fractional reserve banking?

Banks can create money through lending. Banks operating on the basis of fractional reserves are vulnerable to "panics" or "runs."

Which statement best summarizes the pursuit of a bank's two conflicting goals?

Banks seek profit through assets that earn high interest but also seek safety through highly liquid assets that earn no interest.

Which of the following are reasons that a real-world bank would not deposit all of its cash in the Federal Reserve Bank?

Cash that banks retain in their vaults can be counted as reserves without sending it to the Federal Reserve. Banks as a rule keep 1.5% or 2% of their assets as cash in the vault.

______ deposit money is destroyed when loans are paid off.

Checkable

What are true statements about the process of creating a bank?

Citizens sell equity shares of stock. Citizens secure a state or national charter. Citizens decide their community needs a bank.

What are checkable deposits?

Claims that depositors have against the assets of the bank.

Which entity creates money by making loans and purchasing government bonds?

Commercial banks.

Which of the following is the correct formula for calculating excess reserves?

Excess reserves = actual reserves - required reserves

True or false: Checkable-deposit money created through lending by banks is not part of the money supply.

False

What are true statements about the history of the fractional banking system?

Goldsmiths put the paper receipts into circulation by making loans. Traders would deposit their gold with goldsmiths. Goldsmiths issued paper receipts in excess of the amount of gold held.

When a commercial bank grants a loan, what happens?

It creates an asset.

When customers pay off loans they owe to banks, what is the effect on checkable deposit money?

It is destroyed.

Which statement best summarizes the action of a bank that anticipates that its holdings of checkable deposits will grow in the future?

It will send an extra amount of reserves to the Federal Reserve Bank.

What are outcomes of a higher reserve ratio?

Lower monetary multipliers and less checkable deposit money.

The formula for the maximum checkable deposit creation can be illustrated simply by D = E x ______.

M.

What are the two methods by which commercial banks create money?

Making loans to the public. Purchasing government bonds from the public.

What term refers to the amount of reserves that a commercial bank must keep that is a percentage of the bank's checkable deposit liabilities?

Reserve ratio.

Which of the following statements best explains how the loss of reserves and deposits lead to the existence of the monetary multiplier?

Reserves and deposits lost by one bank become reserves of another bank and magnify available excess reserves to be loaned.

Which of the following agencies has the authority to establish and vary the reserve ratio?

The Fed.

Which body sets limits by law on how much the reserve ratio can be varied?

The U.S. Congress.

Jen deposit $100 into the bank. Who has liability in this scenario?

The bank.

What are true statements about commercial banks and individual banks?

The commercial banking system can lend by a multiple of its collective excess reserves. An individual bank can lend an amount equal to its excess reserves.

What are true statements about a commercial bank's buying government securities from the public?

The securities earn interest. New money is created.

An increase in a bank's checkable deposits due to a cash deposit will have what effect on the total money supply?

The total money supply will not change.

Before 2008, what was the incentive for banks with excess reserves to lend money overnight to banks short of required reserves?

To earn some interest.

Which are true statements about the main purpose of required reserves?

To help the economy avoid business fluctuations. To help the Fed control the lending ability of commercial banks.

True or false: A withdrawal of cash can decrease the bank's checkable deposit liabilities but not change the total supply of money.

True

True or false: Banks keep a portion of their reserves in their own vaults.

True

True or false: Commercial banks can create money by a multiple of its excess reserves.

True

True or false: The two types of claims shown on a balance sheet are the claims of depositors and others against the firm's assets and the claims of the owners of the firm against the firm's assets.

True

Every $1 change in liabilities + net worth must be offset by:

a $1 change in assets.

A bank's excess reserves equals the bank's ______ reserves minus its required reserves.

actual

When a bank buys government securities, they will appear on its balance sheet as a(n) ______ called "Securities."

asset

When a bank deposits its reserves with the Federal Reserve Bank the reserves are a(n) ______ to the bank and a(n) ______ to the Federal Reserve Bank.

asset, liability

The cash that a commercial bank receives as deposits from individuals and businesses is a bank ______.

asset.

Money deposited as checkable deposits at a commercial bank is a(n) ______ to the depositor and a(n) ______ to the bank.

asset; liability

If the founders of a bank have sold $100,000 worth of shares of stock, some to themselves and some to other people, the balance sheet will read:

assets (Cash) = $100,000 and Liabilities and Net worth (stock shares) = $100,000.

A bank has stock shares of $100,000, property assets of $90,000, and cash of $10,000. If households and businesses decide to deposit $50,000 in the bank as checkable deposits, the balance sheet will be ______.

assets-cash = $60,000, property assets = $90,000, liabilities and net worth - checkable deposits = $50,000, and stock shares = $100,000.

On a balance sheet, the value of ______ must equal the ______ against those assets.

assets; claims

Securing a state or national charter is one step in the process of creating a commercial ______.

bank.

An individual bank can safely lend an amount equal to its excess reserves, but a commercial banking system can lend ______.

by a multiple of its collective excess reserves.

If a bank uses $100,000 to purchase a building for $80,000 and equipment for $10,000, the balance sheet at the end of the transactions will be ______.

cash = $10,000, property assets = $90,000, and stock shares = $100,000.

When a bank grants a loan, it creates ______ deposits that are money.

checkable

A balance sheet of a commercial bank is a statement of assets and ______ on assets, which summarize the financial position of the bank at a certain time.

claims

The purpose of required reserves is to allow the Fed to ______ the ability of commercial banks to make loans.

control

When a deposited check is drawn against another bank, the collection of that check will ______ the reserves and the checkable deposits of the bank from which it was drawn.

decrease

The two basic functions of commercial banks are to accept ______ and make ______.

deposits; loans.

A bank that has just opened should have assets ______ its liabilities and net worth.

equal to

On a balance sheet, the value of assets must be ______ the amount of claims on those assets.

equal to

A single commercial bank can lend only an amount equal to its ______ reserves.

excess

The formula for maximum checkable deposit creation is ______ multiplied by the monetary multiplier.

excess reserves

The maximum amount of money that a single commercial bank can lend is equal to its ______.

excess reserves.

Banks operating on the basis of ______ reserves are vulnerable to "panics" or "runs."

fractional

A banking system in which only a portion of checkable deposits are backed up by cash in bank vaults or deposits in the central bank is called a ______.

fractional reserve banking system.

Reserve requirements are less than 100%, which means they are ______.

fractional.

A banking system in which only a portion of checkable deposits are backed up by cash in bank vaults or deposits in the central bank is called a(n) ______ ______ banking system.

fractional; reserve

The commercial banking system is capable of increasing money by an amount ______ its excess reserves.

greater than

A smaller reserve ratio means a ______ monetary multiplier and ______ creation of checkable deposit money through loans.

higher; greater

Bond purchases from the public by commercial banks ______ the money supply.

increase

When a commercial bank grants a loan, the assets on its balance sheet at the time of the loan will ______ by the amount of the loan.

increase

Deposits ______ helps prevent banks runs by guaranteeing depositors that they will always get their money.

insurance

By law, all commercial banks and thrift institutions that provide checkable deposits are required to ______.

keep an amount of funds equal to a specified percentage of the bank's own deposit liabilities with the Federal Reserve Bank.

One way banks can partly reconcile profit and liquidity goals is to:

lend temporary excess reserves held at Federal Reserve Banks to other commercial banks overnight to earn interest.

Nonowner claims against the assets of a bank are called:

liabilities.

A higher reserve ratio means a ______ monetary multiplier and ______ creation of checkable deposit money through loans.

lower, less

The ______ magnifies excess reserves into the larger creation of checkable deposit money.

monetary multiplier

The claims of the owners of the firm against the firm's assets are called _____ _____.

net worth.

A single transaction that deposits money into a bank will increase checkable deposits for the bank, which will result in an increase in the bank's liabilities and assuming no loans are dispersed, ______ in the nation's total supply of money.

no change

Liabilities are claims against a bank's assets by ______ of the bank.

non-owners

A withdrawal of cash from a bank that does not put the bank's reserves below the level of required reserves will ______.

reduce the bank's checkable deposits but not change the total money supply.

When a bank sells government bonds to the public, the process ______.

reduces the supply of money.

Banks that borrow in the federal funds market do so because they are temporarily short of ______ reserves.

required

The fraction of deposits that a bank is required by law to hold and not lend out is called its ______.

required reserves.

The money multiplier is the reciprocal of required ______ ratio.

reserve

A smaller ______ means a higher monetary multiplier and greater creation of checkable deposit money through loans.

reserve ratio

Dividing a commercial bank's required reserves by its checkable deposit liabilities produces the:

reserve ratio.

A bank ______ occurs when depositors hear a rumor that their bank is going bankrupt and rush to withdraw their monies while the bank still has reserves.

run

After a new company purchases a building and pays for office supplies, its balance sheet will ______.

still balance.

The formula for the money multiplier is the monetary multiplier = 1 divided by ______.

the required reserve ratio.