Chapter 15 - Money Creation

Assume that a bank initially has no excess reserves. If it receives $5,000 in cash from a depositor and the bank finds that it can safely lend out $4,500, the reserve requirement must be A. zero. B. 10 percent. C. 20 percent. D. 25 percent.

4,500/5,000 = 0.9 1 - 0.9 = 0.1 0.1 * 100 = 10% B. 10 percent.

A bank temporarily short of required reserves may be able to remedy this situation by A. borrowing funds in the federal funds market. B. granting new loans. C. shifting some of its vault cash to its reserve account at the Federal Reserve. D. buying bonds from the public.

A. borrowing funds in the federal funds market.

The multiple by which the commercial banking system can expand the supply of money on the basis of excess reserves A. is larger, the smaller the required reserve ratio. B. is the reciprocal of the bank's actual reserves. C. is directly or positively related to the size of the required reserve ratio. D. will be zero when the required reserve ratio is 100 percent.

A. is larger, the smaller the required reserve ratio.

The basic reason why the commercial banking system can increase its checkable deposits by a multiple of its excess reserves is that A. reserves lost by any particular bank will be gained by some other bank. B. the central banks follow policies that prevent reserves from falling below the level required by law. C. the MPC of borrowers is greater than zero but less than 1. D. the banking system must keep reserves equal to 100 percent of its checkable-deposit liabilities.

A. reserves lost by any particular bank will be gained by some other bank.

A bank that has assets of $85 billion and a net worth of $10 billion must have A. liabilities of $75 billion. B. excess reserves of $10 billion. C. liabilities of $10 billion. D. excess reserves of $75 billion.

Assets = Liabilities = Net Worth 85 billion = ? + 10 billion (subtract 10 billion) A. liabilities of $75 billion.

Which of the following statements is correct? A. The actual reserves of a commercial bank equal its excess reserves minus its required reserves. B. A bank's liabilities plus its net worth equal its assets. C. When borrowers repay bank loans, the supply of money increases. D. A single commercial bank can safely lend a multiple amount of its excess reserves.

B. A bank's liabilities plus its net worth equal its assets.

The primary purpose of the legal reserve requirement is to A. prevent banks from hoarding too much vault cash. B. provide a means by which the monetary authorities can influence the lending ability of commercial banks. C. prevent commercial banks from earning excess profits. D. provide a dependable source of interest income for commercial banks.

B. provide a means by which the monetary authorities can influence the lending ability of commercial banks.

In a fractional reserve banking system, A. bank panics cannot occur. B. the monetary system must be backed by gold. C. banks can create money through the lending process. D. the Federal Reserve has no control over the amount of money in circulation.

C. banks can create money through the lending process.

The claims of the owners of a firm against the firm's assets are called A. working capital. B. assets. C. net worth. D. liabilities.

C. net worth.

Which of the following is correct? A. Required reserves minus actual reserves equal excess reserves. B. Required reserves equal excess reserves minus actual reserves. C. Required reserves equal actual reserves plus excess reserves. D. Actual reserves minus required reserves equal excess reserves.

D. Actual reserves minus required reserves equal excess reserves.

Which one of the following is presently a major deterrent to bank panics in the United States? A. the legal reserve requirement B. the fractional reserve system C. the gold standard D. deposit insurance

D. deposit insurance

The goldsmith's ability to create money was based on the fact that A. withdrawals of gold tended to exceed deposits of gold in any given time period. B. consumers and merchants preferred to use gold for transactions, rather than paper money. C. the goldsmith was required to keep 100 percent gold reserves. D. paper money in the form of gold receipts was rarely redeemed for gold.

D. paper money in the form of gold receipts was rarely redeemed for gold.

When a bank has a check drawn and cleared against it, A. excess reserves in the banking system decline. B. the nation's total money supply falls. C. the bank's balance sheet does not change. D. the amount of required reserves the bank must have will fall.

D. the amount of required reserves the bank must have will fall.

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 A. $90,000 in outstanding loans and $35,000 in reserves. B. $90,000 in checkable deposit liabilities and $32,000 in reserves. C. $20,000 in checkable deposit liabilities and $10,000 in reserves. D. $90,000 in checkable deposit liabilities and $35,000 in reserves.

Guess and check: 90 x 0.3 = 27,000 27,000 + 5,000 = 32,000 The $5,000 in excess reserves is included in "reserves". B. $90,000 in checkable deposit liabilities and $32,000 in reserves.

If the reserve ratio is 15 percent and commercial bankers decide to hold additional excess reserves equal to 5 percent of any newly acquired checkable deposits, then the relevant monetary multiplier for the banking system will be A. 3½. B. 4. C. 5. D. 6.67.

Multiplier = 1/R R = 0.15 + 0.05 = 0.2 Multiplier = 1/.2 C. 5.

Assume Company X deposits $100,000 in cash in commercial Bank A. If no excess reserves exist at the time this deposit is made and the reserve ratio is 20 percent, Bank A can increase the money supply by a maximum of A. $50,000. B. $180,000. C. $80,000. D. $500,000.

Req. Res = Res. Ratio x Ch. Deposits 20,000 = .2 x 100,000 Excess Res. = Actual Res. - Req. Res. 80,000 = 100,000 - 20,000 C. $80,000

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 A. are $1,000,000. B. are $10,000. C. are $20,000. D. cannot be determined from the given information.

Req. Res. = Res. Ratio x Ch. Deposits 10,000 = .1 x 100,000 Required Reserves = $10,000 Excess Reserves = $10,000 Actual Reserves = Req. Res. + Excess Res. 20,000 = 10,000 + 10,000 C. are $20,000.

When a check is drawn and cleared, the A. reserves and deposits of both the bank against which the check is cleared and the bank receiving the check are unchanged by this transaction. B. bank against which the check is cleared loses reserves and deposits equal to the amount of the check. C. bank receiving the check loses reserves and deposits equal to the amount of the check. D. bank against which the check is cleared acquires reserves and deposits equal to the amount of the check

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

The reserves of a commercial bank consist of A. the amount of money market funds it holds. B. deposits at the Federal Reserve Bank and vault cash. C. government securities that the bank holds. D. the bank's net worth.

B. deposits at the Federal Reserve Bank and vault cash.