CH 33 ECON

The fractional reserve system of banking started when goldsmiths began

issuing paper money in excess of the amount of gold stored with them

A bank that has a check drawn and collected against it will

lose to the recipient bank both reserves and deposits

The buying of government securities by commercial banks is most similar to the

making of loans by banks because both actions increase the money supply

If the required reserve ratio were 12.5%, the value of the monetary multiplier would be

8

A commercial bank has deposit liabilities of $100,000, reserves of $37,000, and a required reserve ratio of 25%. The amount by which a single commercial bank and the amount by which the banking system can increase loans are, respectively,

$12,000 and $48,000

The commercial banking system, because of a recent change in the required reserve ratio from 20% to 30%, finds that it is $60 million short of reserves. If it is unable to obtain any additional reserves, it must decrease the money supply by

$200 million

A commercial bank has actual reserves of $9,000 and liabilities of $30,000, and the required reserve ratio is 20%. The excess reserves of the bank are

$3,000

A commercial bank has excess reserves of $500 and a required reserve ratio of 20%; it grants a loan of $1,000 to a borrower. If the borrower writes a check for $1,000 that is deposited in another commercial bank, the first bank will be short of reserves, after the check has been cleared, in the amount of

$500

Hassan deposits $50,000 in a commercial bank that is required to retain 20% in reserve. The deposit increases the lending capacity of the bank by:

40,000 The bank must retain $10,000 (20% of the deposit) in reserves. The remaining $40,000 is available for lending.

Only one commercial bank in the banking system has an excess reserve, and its excess reserve is $100,000. This bank makes a new loan of $80,000 and keeps an excess reserve of $20,000. If the required reserve ratio for all banks is 20%, the potential expansion of the money supply from this $80,000 loan is

400,000

When cash is deposited in a checkable-deposit account in a commercial bank, there is

a change in the composition of the money supply

Reserves that a commercial bank deposits at a Federal Reserve Bank are

an asset of the commercial bank and a liability of the Federal Reserve Bank

Money is created when:

banks make additional loans Feedback: In return for a signed agreement to repay, banks make loans by creating a deposit in the accounts of the business or individual to whom they lend. These deposits are counted as part of the money supply.

If the dollar amount of loans made in some period is less than the dollar amount of loans paid off, checkable deposits will

contract and the money supply will decrease

A commercial bank sells a $1,000 government security to a securities dealer. The dealer pays for the bond in cash, which the bank adds to its vault cash. The money supply has

decreased by $1,000

A single bank can safely increase its total loans by an amount equal to its:

excess reserves Feedback: A bank's excess reserves are those reserves above what it is legally required to hold. These funds are available to be invested in loans or other assets.

Suppose the required reserve ratio is 10% and the banking system initially has no excess reserves. If $20 billion in new currency is deposited into the system, these new deposits will initially create excess reserves of:

$18 billion Feedback: With a required reserve ratio of 10%, $2 billion will be required to remain in reserve. The remaining $18 billion is excess reserves and can be loaned out or used to acquire other assets.

A depositor places $750 in cash in a commercial bank, and the reserve ratio is 33.33%; the bank sends the $750 to the Federal Reserve Bank. As a result, the actual reserves and the excess reserves of the bank have been increased, respectively, by

$750 and $500

The commercial banking system has excess reserves of $700, makes new loans of $2,100, and is just meeting its reserve requirements. The required reserve ratio is

33.33%

Suppose a bank has checkable deposits of $1,000,000 and the legal reserve ratio is 5 percent. If the institution has excess reserves of $5,000, then its actual reserves are:

55,000 Feedback: The bank's required reserves are 5% of $1,000,000, or $50,000. Its actual reserves are its required reserves plus its excess reserves, for a total of $55,000.

Sam draws a $100 check on his account at Bank A which is then deposited in Bank B. When this check is cleared:

Bank A loses reserves and deposits equal to $100 Feedback: Sam's account diminishes by $100 and his bank loses an equal amount of reserves. These reserves are credited to Bank B to balance their new deposit.

The monetary multiplier is equal to:

the inverse of the required reserve ratio Feedback: Every dollar of required reserves can support total deposits of 1/R, where R is the required reserve ratio. For example, if R = 10%, every dollar of required reserves can support total deposits of ten times (1/.10) this amount.

Assume that SIC, Inc. writes a $50,000 check on its account at Metro National Bank to repay the balance on a loan issued by this bank. The initial result of this transaction is that:

the money supply declines by $50,000 Feedback: Total checkable deposits are reduced by $50,000 when the loan is retired. This amount is no longer counted as part of the money supply.

A bank temporarily short of required reserves may remedy the situation by borrowing reserves:

in the Federal funds market Feedback: Banks borrow readily available reserve balances in the Federal funds market and pay an interest rate known as the Federal funds rate.

A commercial bank has no excess reserves until a depositor places $600 in cash in the bank. The bank then adds the $600 to its reserves by sending it to the Federal Reserve Bank. The commercial bank then lends $300 to a borrower. As a consequence of these transactions, the size of the money supply has

increased by $300

The claims of the owners of the bank against the bank's assets is the bank's

net worth

The primary reason commercial banks must keep required reserves on deposit at Federal Reserve Banks is to

provide the Fed with a means of controlling the lending ability of the commercial bank

Assume the banking system has no excess reserves with a reserve requirement of 20%. The reserve requirement is then dropped to 10%. As a result of this reduction:

the money supply will likely increase Feedback: The decrease in the required reserve ratio will provide banks with excess reserves that they can use to increase loans or acquire other financial assets. This will increase the money supply.