Ch. 35 Money Creation
If the reserve ratio is 20% and a bank accepts $10,000 in demand deposits from the public, then it would have to keep __________ in reserves.
$2,000
If the reserve requirement is 10%, what amount of excess reserves does a bank acquire when a business deposits a $500 check drawn on another bank?
$450
Which of the following summarize the main purposes of required reserves?
- to help the economy avoid business fluctuations - to facilitate the collection or "clearing" of checks - to prevent the banks from over-extending or under-extending bank credit - to help the Fed control the lending ability of commercial banks
What is the formula for the money multiplier?
1/required reserve ration
If actual reserves in the banking system are $40,000, excess reserves are $10,000, and checkable deposits are $240,000, then the legal reserve requirement is:
12.5%
Which of the following is the correct formula for calculating excess reserves?
Excess reserves = actual reserves - required reserves
Which of the following is a statement of assets and claims on assets of a commercial bank at a given time?
a balance sheet
When a bank deposits it's reserves with the Federal Reserve Bank the reserves are a _________ to the bank and a ________ to the Federal Reserve Bank.
asset, liability
How is net worth calculated?
assets minus liabilities
On a balance sheet, the value of ________ must equal the _________ against those assets.
assets; claims
Reserves deposited by commercial bank into the federal Reserve Bank are ________ to the commercial bank and _________ to the Federal Reserve Bank.
assets; liabilities
A ______ panic or run is highly unlikely if reserves and lending policies are prudent.
bank
Securing a state or national charter is one step in the process of creating a commercial ________.
bank
A _____ _____ would occur when depositors rush on their banks, trying to be one of the lucky few to withdraw their monies while the banks still have any reserve left.
bank run
Who can create money through lending?
banks
Check-able deposits are commercial bank ______ that it promises to pay "on demand".
debts
Removing the incentive to withdraw one's deposit before anyone else can is the purpose of:
deposit insurance
Which one of the following is presently a major deterrent to bank panics in the U.S.?
deposit insurance
The two basic functions of commercial banks are to accept ________ and make ________.
deposits; loans
A single commercial bank can lend only an amount equal to it's _________ reserves.
excess
True of False: Banks operating on the basis of fractional reserves are not vulnerable to panics or runs.
false
True or False: Banks create money solely by selling U.S. gov. bonds to the public.
false
The _________ ________ rate is the interest rate banks change on overnight loans to each other.
federal funds
Reserve requirements are _________, meaning they are less than 100%
fractional
A banking system in which only a portion of check-able deposits are backed up by cash in bank vaults or deposits in the central bank is called a:
fractional reserve banking system
Banks operating on the basis of ________ are vulnerable to panics or bank runs.
fractional reserves
A smaller reserve ration means a _______ monetary multiplier and ________ creation of check-able deposit money through loans.
higher; greater
The U.S. has a system of deposit __________ that was established, in part, to prevent "bank runs".
insurance
When customers pay off loans they owe to banks, what is the effect on check-able deposit money?
it is destroyed
Refer to the accompanying table of information for the Moolah Bank. Assume that the listed amounts constitute this bank's complete set of accounts. Moolah's:
liabilities are $1,000
A higher reserve ratio means a ________ monetary multiplier and _________ creation of check-able deposit money through loans.
lower, less
According to McConnell, the formula for the maximum check-able deposit creation can be illustrated simply by D = E x _____
m
The claim of the owner of a firm against the firm's assets are called:
net worth
Liabilities are claims against a bank's assets by _________ of the bank.
non-owners
The formula for the money multiplier is 1 divided by the required __________ ratio.
reserve
What terms refers to the amount of reserves that a commercial bank must keep that is a percentage of the bank's check-able deposit liabilities?
reserve ratio
Which of the following statements best explains the loss of reserves and deposits lead to the existence of the money multiplier?
reserves and deposits lost by one bank become reserves of another bank and magnify available excess reserves to be loaned
When a bank has a check drawn and cleared against it,
the amount of required reserves the bank must have will fall.
Which statement best describes why household expenditures lead to the expenditures multiplier?
the expenditures of one household become some other household's income.
Which of the following insures individuals' deposits in commercial banks?
the federal deposit insurance corporation
An increase in a bank's check-able deposits due to a cash deposit will have what effect on the total money supply?
the total money supply will not change
A withdrawal of cash will decrease the bank's check-able deposit liabilities but not change the total supply of money.
true
True or False: Commercial banks can create money by a multiple of it's excess reserves.
true
True or False: banks keep a portion of their reserves in their own vaults.
true
