Unit 4 AP MacroE

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Liabilities: Demand Deposits ; Assets: Actual reserves, loans Bank A:Actual Reserves: $1,000 ; Loans: $4,000 ; Demand deposits: $5,000 Bank B:Actual reserves: $100 ; Loans: $500 ; Demand deposits: $600 Bank C:Actual reserves: $10 ; Loans: $90 ; Demand deposits: $100 Based on the balance sheets above for three different banks, which of the following is true, if the reserve requirement is 10 percent? A) Bank A has no excess reserves B) Bank B has no excess reserves C) Bank B can increase its loans by $500 D) Bank B can increase its loans by $40 E) Bank C has excess reserves

D) Bank B can increase its loans by $40 To find the amount that needs to be in the actual reserves, you must take 10% of the demand deposits. This results in 0.1 * 600 = 60. Using this number, subtract from the amount in the actual reserves. This yields 100 - 60 = 40. This means that Bank B can increase its loans by $40

If businesses become optimistic about the profitability of investments in an economy, which of the following will happen in the loanable funds market in the short run? A. The supply and demand for loanable funds will increase. B. The supply and demand for loanable funds will decrease. C.The demand for loanable funds by the private sector will decrease. D.The real interest rate will increase. E.The real interest rate will decrease.

D.The real interest rate will increase. When businesses become more optimistic about the profitability of investments, it will primarily affect the demand for loanable funds, leading to an increase in demand. This increased demand for loanable funds would indeed cause the real interest rate to increase as lenders seek higher returns for supplying funds.

Banks expand the money supply when A.issuing credit cards B.printing money C.cashing checks D.making loans E.accepting deposits

D.making loans When banks make loans, they effectively increase the money supply by creating new money in the form of loaned funds. This process is one of the key mechanisms through which the money supply expands in an economy.

Commercial banks can create money by A. transferring depositors' accounts at the Federal Reserve for conversion to cash B. buying Treasury bills from the Federal Reserve C. sending vault cash to the Federal Reserve D. maintaining a 100 percent reserve requirement E. lending excess reserves to customers

E. lending excess reserves to customers Commercial banks can create money through the process of fractional reserve banking, where they only need to keep a fraction of their deposits as reserves. The rest of the deposits can be lent out to customers, effectively creating new money in the economy.

If aggregate demand is growing faster than long-run aggregate supply, the Federal Reserve is most likely to a. increase the interest rate on reserve balances b. increase bond prices c. increase income taxes d. decrease the discount rate e. decrease the required reserve ratio

a. increase the interest rate on reserve balances When aggregate demand is growing faster than long-run aggregate supply, it often leads to inflationary pressures in the economy. To counteract this, the Federal Reserve typically employs contractionary monetary policy measures to cool down the economy and stabilize prices. One such measure is to increase the interest rate on reserve balances. By raising interest rates, the Federal Reserve aims to reduce borrowing and spending, which can help moderate aggregate demand growth and alleviate inflationary pressures.

Assume that the reserve requirement is 20 percent. If a bank initially has no excess reserves and $10,000 cash is deposited in the bank, the maximum amount by which this bank may increase its loans is a. $2,000 b. $8,000 c. $10,000 d. $20,000 e. $50,000

b. $8,000 To determine the maximum amount by which the bank can increase its loans, we need to apply the reserve requirement, which is the percentage of deposits that banks are required to hold as reserves. Given that the reserve requirement is 20 percent and the bank initially has no excess reserves, it means the bank must keep 20% of the $10,000 deposit as reserves, which is: 0.20×$10,000=$2,000 This leaves the bank with $10,000 - $2,000 = $8,000 available for loans.

A commercial bank's ability to create money depends on which of the following? a. The existence of a central bank b. A fractional reserve banking system c. Gold or silver reserves backing up the currency d. A large national debt e. The existence of both checking accounts and savings accounts

b. A fractional reserve banking system Commercial banks create money through the process of fractional reserve banking, where they are required to keep only a fraction of their deposits as reserves and can lend out the rest. This process allows banks to create new money through the extension of loans and is a fundamental aspect of modern banking systems.

Which of the following accurately describes the federal funds rate? a. The interest rate that banks charge state governments b. The interest rate that banks charge other banks for overnight loans c. The interest rate that banks pay on long-term savings d. The interest rate on personal loans e. The interest rate on government bonds

b. The interest rate that banks charge other banks for overnight loans The federal funds rate is the interest rate at which depository institutions (banks) lend reserve balances to other depository institutions overnight on an uncollateralized basis. It's a crucial benchmark for setting various interest rates throughout the economy.

Assume that Atlantic National Bank has demand deposits of $100,000 and no excess reserves, and that the reserve requirement is 10 percent. A customer withdraws $5,000 from the bank. To meet the reserve requirement, the bank must increase its reserves by a. $500 b. $1,000 c. $2,000 d. $4,000 e. $4,500

e. $4,500


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