Chapter 13-Money & Banks

Suppose a banking system has $100,000 in deposits, a required reserve ratio of 25 percent, and total bank reserves for the whole system of $25,000. Then the potential increase in deposit creation for the whole system is equal to

✓ $0. There can be no potential deposit creation because the banking system has lent out all excess reserves.

Suppose a banking system has $200 million in deposits, a required reserve ratio of 10 percent, and total bank reserves of $35 million. Then the potential increase in deposit creation for the whole banking system is equal to

✓ $150 million. The banking system in this scenario is required to hold $20 million in required reserves; it is currently holding $35 million. So, it could create an additional $150 million through the money multiplier process.

Suppose a bank has $2 million in deposits, a required reserve ratio of 10 percent, and total reserves of $500,000. Then it has excess reserves of

✓ $300,000. The bank is required to hold $200,000. So, the extra $300,000 counts as excess reserves.

ABC Bank Balance Sheet (Table 13.2) With total reserves of $80,000 and a required reserve ratio of 25 percent, ABC Bank could support maximum transactions account balances of

✓ $320,000. This bank is holding $30,000 in excess reserves that could be lent out because it would only need to keep $50,000 of its $200,000 transactions accounts balances. Assuming the bank kept all $80,000 as required reserves, we can solve for the maximum transactions account balances using the fact that Required Reserves = Required Reserve Ratio × Transactions Account Balances. Plugging in $80,000 for required reserves and 0.25 for the required reserve ratio, we can solve for the maximum transactions account balances.

A single bank with $10,000 of reserves and a reserve ratio of 25 percent could support total transactions account balances of at most

✓ $40,000. The money multiplier allows $10,000 in reserves to let this bank create (1 / required reserve ratio), which is $10,000 × (1 / 0.25), or $40,000.

ABC Bank Balance Sheet (Table 13.2) If ABC Bank has a required reserve ratio of 15 percent, it can legally make a onetime maximum loan of

✓ $50,000. The bank is required to hold $30,000. So, the bank is holding $50,000 in excess reserves that can be used to make new loans.

Suppose a bank has $500,000 in deposits and a required reserve ratio of 10 percent. Then required reserves are

✓ $50,000. The bank must hold the fraction set by the Federal Reserve. In this case, 10 percent of $500,000 is $50,000, which is not available for loans. The remaining $450,000 would be excess reserves available for loans.

XYZ Bank Balance Sheet (Table 13.1) With a required reserve ratio of 20 percent, XYZ Bank could support maximum transactions account balances of

✓ $500,000. This bank is holding $20,000 in excess reserves that could be lent out because it would only need to keep $80,000 of its $400,000 transactions accounts balances. Assuming the bank kept all $100,000 as required reserves, we can solve for the maximum transactions account balances using the fact that Required Reserves = Required Reserve Ratio × Transactions Account Balances. Plugging in $100,000 for required reserves and 0.20 for the required reserve ratio, we can solve for the maximum transactions account balances.

Suppose a banking system has a required reserve ratio of 0.15. How much can the money supply increase in response to a $1 billion increase in excess reserves for the whole banking system?

✓ $6.67 billion The money multiplier is 1 / (required reserve ratio), or 6.67. So, $1 billion in new excess reserves leads to a $6.67 billion increase in new loans.

Suppose a bank has $600,000 in deposits, a required reserve ratio of 5 percent, and bank reserves of $90,000. Then the bank can make new loans in the amount of

✓ $60,000 The bank is required to hold $30,000. So its excess reserves of $60,000 can be converted into new loans.

If the banking system has a required reserve ratio of 25 percent, the money multiplier is

✓ 4.0. The money multiplier is equal to 1 / (required reserve ratio), which is 1 / 0.25 = 4.

If the banking system has a required reserve ratio of 20 percent, the money multiplier is

✓ 5.0. The money multiplier is equal to 1 / (required reserve ratio), which is 1 / 0.2 = 5.

Which of the following is not a constraint on deposit creation?

✓ The interest rate falls, making borrowing less costly for businesses and consumers. Lower interest rates speed up the money creation process as loans are taken out at faster rates.

Ceteris paribus, the money supply becomes smaller when

✓ a loan is repaid to the banking system by a bank customer. . When a loan is repaid, deposits or currency in circulation decreases. So M1 and the other measures of the money supply decrease.

Which of the following is not included in transactions accounts?

✓ a money market mutual fund A money market mutual fund does not permit direct payment to a third party. Money in a money market mutual fund is a form of savings account and counts in the M2 money supply.

Farmer Brown wants some bacon for breakfast. He gets the bacon from Farmer Hernandez by giving her a dozen eggs. This type of transaction is referred to as

✓ barter. Barter involves trade of one good for another without the use of money.

Cash is included in

✓ both M1 and M2. NOW and ATS accounts are forms of transactions accounts, the most basic form of money, and as such are included in M1 and therefore M2.

Transactions accounts balances are included in

✓ both M1 and M2. Transactions accounts balances are included in both M1 and M2.

Which of the following is included in M1? currency in circulation currency in a bank's vault credit card balances Treasury bills

✓ currency in circulation The M1 money supply is all currency held by the public, plus balances in transactions accounts including traveler's checks.

On each U.S. dollar, you will find the statement "This note is legal tender for all debts, public and private." This statement establishes the dollar as a legal

✓ medium of exchange. This statement ensures that people must accept the dollar as a form of legal repayment for goods or services rendered.

Bradley digs out $50 from his cookie jar and deposits it in his checking account. The immediate result of this transaction is that M1 has

✓ not changed. Currency and checking account balances count in M1. So depositing currency into a checking account does not change M1.

Money does all of the following except -reduce the efficiency with which market exchanges take place. -serve as a mechanism for transforming current income into future purchases. -promote efficient division of labor. -facilitate the continuous series of exchanges that characterizes a market economy.

✓ reduce the efficiency with which market exchanges take place. Money increases the efficiency of market transactions when compared to barter.

Money is functioning as a store of value when you

✓ save your cash to pay for tuition next semester. When money is serving the purpose of being held for future purchases, this is known as the store of value function of money. Saving involves holding the money and potentially earning interest for later use.

Which of the following appears in M2 but not in M1?

✓ savings accounts Savings accounts can be readily accessed and used for purchases and so count in the M2 money supply but not in M1.

Which of the following sets the legal minimum reserve ratio?

✓ the Federal Reserve The Federal Reserve regulates the banking system, including setting the required reserve ratio.

Students Bank and Trust has zero excess reserves. Ceteris paribus, if the required reserve ratio decreases,

✓ the bank will be able to make additional loans. A decrease in the required reserve ratio will instantly create excess reserves, thereby allowing for more loans.

According to a World View article titled "Trading Chickens for Diapers," the Venezuelan economy turned to a barter system because

✓ the bolivar has become worthless. The citizens had to barter to get what they needed, resulting in less production because of the huge amounts of time needed to find trading partners.

When cash or coins are initially deposited into a bank,

✓ the composition of the money supply changes, but the size of the money supply does not change. When currency becomes deposits in a checking or saving account, M1 may be altered but not M2. However, the overall money supply remains the same.

If bank customers decide as a group to pay off their loans and to not take out any new loans, ceteris paribus,

✓ the money supply will decrease. The money supply will decrease when loans are paid off and not renewed.

Excess reserves are

✓ total reserves less required reserves. Excess reserves are reserves held above and beyond what is required by the Federal Reserve.

A bank account that permits direct payment to a third party is a

✓ transactions account. Transactions accounts allow the holder to write checks or use debit cards to pay for goods and services.

A bank account that permits direct payment to a third party is a

✓ transactions account. . Transactions accounts allow the holder to write checks or use debit cards to pay for goods and services.

Which of the following is not included in the narrowest definition of the money supply or M1?

✓ traveler's checks The narrowest definition of money includes currency in circulation, traveler's checks, and checking and other transactions account balances.

Money is functioning as a standard of value when you

✓ use it to compare two houses that are different prices. The standard of value function allows you to make a valid comparison of the relative values of two different goods.

The different components of the money supply reflect

✓ variations in liquidity and accessibility of assets. The most basic forms of money are the most liquid, with additional forms being less liquid.