Econ 105 - Chapter 15 (Money Creation)

Joe deposits $100 into his checking account. If the reserve ratio is 50%, how much in new checkable deposits would be created?

$100

Abe recieves 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 of the statements that are part of the check clearing process.

Bank B reduces Bea's checkable deposits by the amount of the check; total reserves in the banking system remain unchanged; bank B decreases its reserves at the federal reserve bank by the amount of the check; bank A increases Abe's checkable deposits by the amount of the check; Bank A increases its reserves at the Federal Reserve Bank by the amount of the check

Which of the following insures individuals deposits in commercial banks?

The Federal Deposit Insurance Corporation

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

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

accepting deposits; making loans

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

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

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

Reserves deposited by a commercial bank into the Federal Reserve Bank are ___ to the commercial bank and ___ to the Federal Reserve Bank.

assets; liability

What are the two significant characteristics of fractional reserve banking?

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

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

be equal to

When a bank grants a loan, it creates ___ ___ (a liability) to "pay" for this asset.

checkable deposits

Which of the following statements best summarizes the process of creating a bank?

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

Checkable deposits are commercial bank ___ that it promises to pay "on demand."

debts

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

excess reserves = actual reserves - required reserves

The multiplier exists because the expenditures of one household becomes the income of another household.

expenditures

The ___ ___ rate is the interest rate banks charge on overnight loans to each other.

federal; funds

Banks operating on the basis of ___ are vulnerable to panics or bank runs.

fractional reserves

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 reserve system.

fractional; reserve

Which of the following statements best summarizes the history of the fractional banking system?

goldsmiths put the paper receipts into circulation by making loans; the gold receipts were accepted as a medium of exchange; the reserves in the bank vault were a fraction of the total money supply; traders would deposit their gold with goldsmiths; goldsmiths issues paper receipts in excess of the amount of gold held

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

increase

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

it is destroyed

A withdrawal of cash will ___ the bank's checkable deposit liabilities but not change the total supply of money.

reduce

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

reduces the supply of money

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

reserve ratio

Which of the following best explain the situation that existed prior to the implementation of deposit insurance?

rumors were usually unfounded; too many customers withdrawing funds simultaneously would cause banks to run out of funds; rumors about banks about to go bankrupt would circulate; depositors would "run" on their banks to withdraw funds

Which of the following deposits are ignored when determining required reserves?

savings; time deposits

In the United States, runs on banks are prevented because

the Federal Deposit Insurance Corporation guarantees bank accounts.

Which of the following summarize the main purpose of required reserves?

to prevent the banks from over-extending or under-extending bank credit; to help the economy avoid business fluctuations; to facilitate the collection or "clearing" of checks; to help the Fed control the lending ability of commercial banks