Chapter 15: Quiz Review

Excess reserves are equal to

actual reserves minus required reserves.

The major claims on a commercial bank's balance sheet are

checkable deposits.

In a fractional reserve system, deposit insurance

guarantees that depositors will always get their money, avoiding bank runs.

If you deposit a $50 bill in a commercial bank that has a 10 percent legal reserve requirement, the bank will:

have $45 of additional excess reserves.

A bank that has assets of $85 billion and a net worth of $10 billion must have:

liabilities of $75 billion.

Suppose that Third National Bank has reserves of $20,000 and checkable deposits of $200,000. The reserve ratio is 10 percent. The bank sells $10,000 in securities to the Federal Reserve Bank in its district, receiving a $10,000 increase in reserves in return. What level of excess reserves does the bank now have?

$10,000 Calculate checkable deposits: (200,000 + 0 = 200,000) *(Liabilities didn't change) Calculate Required Reserves: (.10 x 200,000 = 20,000) Calculate Actual Reserves: (20,000 + 10,000 = 30,000) Calculate Excess Reserves: AR - RR = ER 30,000 - 20,000 = 10,000

A commercial bank has $100 million in checkable-deposit liabilities and $12 million in actual reserves. The required reserve ratio is 10 percent. How big are the bank's excess reserves?

$2 million

Suppose that the Fed has set the reserve ratio at 10 percent and that banks collectively have $2 billion in excess reserves. What is the maximum amount of new checkable-deposit money that can be created by the banking system?

$20 billion

Suppose that Serendipity Bank has excess reserves of $8,000 and checkable deposits of $150,000. If the reserve ratio is 20 percent, what is the size of the bank's actual reserves?

$38,000 (.20 x 150,000 = 30,000) = Required reserves Excess reserves + Required reserves = Actual Reserves (8,000 + 30,000 = 38,000)

Use the following balance sheet for the ABC National Bank in answering the question. Assume the required reserve ratio is 20 percent. Refer to the data. This commercial bank has excess reserves of:

$5,000.

Assume the Continental National Bank's balance statement is as follows: Reserves = $40,000 Loans = $25,000 Securities = $110,000 Checkable Deposits = $130,000 Stock Shares = $45,000 Assuming a legal reserve ratio of 20 percent, how much in excess reserves would this bank have after a check for $10,000 was drawn and cleared against it?

$6,000.

Third National Bank has reserves of $20,000 and checkable deposits of $100,000. The reserve ratio is 20 percent. Households deposit $10,000 in currency into the bank and that currency is added to reserves. What level of excess reserves does the bank now have?

$8,000 Calculate checkable deposits: (100,000 + 10,000 = 110,000) Calculate Required Reserves: ( .20 x 110,000 = 22,000) Calculate Actual Reserves: ( 20,000 + 10,000 = 30,000) Calculate Excess Reserves: AR - RR = ER 30,000 - 22,000 = 8,000

The ABC Commercial Bank has $5,000 in excess reserves and the reserve ratio is 30 percent. This information is consistent with the bank having:

$90,000 in checkable deposit liabilities and $32,000 in reserves.

If the required reserve ratio is 25 percent, what is the monetary multiplier?

(1 / .25) = 4

If the monetary multiplier is 50, what is the required reserve ratio?

(1 / .5) = 2

What is the monetary multiplier?

1 / reserve ratio

Answer the question on the basis of the following table for a commercial bank or thrift: Refer to row 1 in the table. The number appropriate for space W is:

10.

If actual reserves in the banking system are $50,000, excess reserves are $5,000, and checkable deposits are $225,000, then the monetary multiplier is:

5.

Suppose that Big Bucks Bank has the simplified balance sheet shown below. The reserve ratio is 10 percent. What is the maximum amount of new loans that Big Bucks Bank can make? By how much has the supply of money changed? How will the bank's balance sheet appear after checks drawn for the entire amount of the new loans have been cleared against the bank? Show the new balance sheet in columns 2 and 2'. Using the original figures, revisit questions a, b, and c based on the assumption that the reserve ratio is now 5 percent. What is the maximum amount of new loans that this bank can make? By how much has the supply of money changed?

Checkable deposits: 100,000 Calculate Required Reserves: (.10 x 100,000 = 10,000) Actual Reserves: 25,000 Calculate Excess Reserves: AR - RR = ER (25,000 - 10,000 = 15,000) What is the maximum amount of new loans that Big Bucks Bank can make? $15,000 By how much has the supply of money changed? $15,000 Checkable deposits: 100,000 Calculate Required Reserves: (.05 x 100,000 = 5,000) Actual Reserves: 25,000 Calculate Excess Reserves: AR - RR = ER (25,000 - 5,000 = 20,000) What is the maximum amount of new loans that this bank can make? $20,000 By how much has the supply of money changed? $20,000

Suppose that last year $30 billion in new loans were extended by banks while $50 billion in old loans were paid off by borrowers. What happened to the money supply?

Decreased.

A single commercial bank in a multibank banking system can lend only an amount equal to its initial preloan _________________.

Excess reserves

Which of the following is correct?

Granting a bank loan creates money; repaying a bank loan destroys money.

Suppose the assets of the Silver Lode Bank are $250,000 higher than on the previous day and its net worth is up $40,000. By how much and in what direction must its liabilities have changed from the day before?

Liabilities increased by $210,000 (250,000 - 40,000)

Which of the following are all assets to a commercial bank?

Vault cash, property, and reserves.

Suppose a commercial bank has checkable deposits of $100,000 and the legal reserve ratio is 10 percent. If the bank's required and excess reserves are equal, then its actual reserves:

are $20,000.

Net worth is equal to

assets minus liabilities.

A balance sheet must always balance because the sum of

assets must equal the sum of liabilities plus net worth.

A commercial bank's reserves are:

assets to the commercial bank and liabilities to the Federal Reserve Bank holding them.

When a check is drawn and cleared, the

bank against which the check is cleared loses reserves and deposits equal to the amount of the check.

The banking system in the United States is referred to as a fractional reserve bank system because

banks hold a fraction of deposits on reserve.

Excess reserves

can be lent out, increasing the money supply.

Suppose the reserve requirement is 10 percent. If a bank has $5 million of checkable deposits and actual reserves of $500,000, the bank:

cannot safely lend out more money.

Consider the following statement: "When a commercial bank makes loans, it creates money; when loans are repaid, money is destroyed."

correct because lending increases the money supply, and the repayment reduces checkable deposits, lowering the money supply.

The reserves of a commercial bank consist of:

deposits at the Federal Reserve Bank and vault cash.

Most modern banking systems are based on:

fractional reserves.

A decrease in the reserve requirement causes the size of the money multiplier to

increase, the amount of excess reserves in the banking system to rise, and the money supply to increase.

If m equals the maximum number of new dollars that can be created for a single dollar of excess reserves and R equals the required reserve ratio, then for the banking system:

m = 1/R.

An asset on a bank's balance sheet is something

owned by the bank, whereas a liability is something owed by the bank.

The major assets on a commercial bank's balance sheet include

reserves, securities, loans, and vault cash.