Eco 202 A15

In a fractional reserve system, deposit insurance is absolutely necessary or the system would collapse. provides additional funds that can be lent out. guarantees that depositors will always get their money, avoiding bank runs. raises the fraction of deposits that a bank must keep available.

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

What is the monetary multiplier? 1 / reserve ratio 1 + reserve ratio reserve ratio - 1 1- reserve ratio

1/reserve ratio

A single commercial bank can safely lend only an amount equal to its excess reserves, but the commercial banking system can lend by a multiple of its excess reserves because the system has more funds than any single bank. one bank gains reserves, but the system looses these reserves. one bank loses reserves to other banks, but the system does not. this is the legal restriction on banks, but it does not apply to the system

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Excess reserves must be borrowed, decreasing the money supply. must be borrowed, increasing the money supply. can be lent out, decreasing the money supply. can be lent out, increasing the money supply

can be lent out, increasing the money supply

Net worth is equal to assets minus liabilities. assets plus liabilities. (assets plus liabilities)/assets. liabilities minus assets.

assets minus liabilities

A balance sheet must always balance because the sum of assets must equal the sum of liabilities plus net worth. net worth must equal the sum of liabilities plus assets. liabilities must equal the sum of assets plus net worth. assets must equal the difference of liabilities minus net worth.

assets must equal the sum of liabilities plus net worth

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. banks keep a fraction of reserves available. a fraction of all monetary assets are in banks. a fraction of the money is lent out.

banks hold a fraction of deposits on reserve.

Suppose that Mountain Star Bank discovers that its reserves will temporarily fall slightly below those legally required. It can temporarily remedy this situation by suspending operations until reserves increase. borrowing funds from other banks in the Federal funds market. borrowing funds from large firms in the Federal funds market. lowering its deposit levels.

borrowing funds from other banks in the Federal funds market.

Such panics are unlikely today because deposits are insured by the Federal Reserve. the Federal Reserve prevents them. deposits are insured by the Federal Deposit Insurance Corporation. the banking system is not a multiple reserve system.

deposits are insured by the Federal Deposit Insurance Corporation.

By issuing loans in the form of gold receipts, there was additional risk because the gold could be stolen. government could demand all the gold. receipts could be copied. goldsmith could issue more receipts than he had in gold and this could create a panic.

goldsmith could issue more receipts than he had in gold and this could create a panic.

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

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

An asset on a bank's balance sheet is something owed by the bank, whereas a liability is something owned by the bank. owned by the bank, whereas a liability is something owed by the bank. created by the bank, whereas a liability is something sold by the bank. sold by the bank, whereas a liability is something bought by the bank.

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

Assume Mountain Star Bank finds that its reserves will be substantially and permanently deficient. To remedy this situation, Mountain Star Bank can suspend operations. borrow funds from large firms in the Federal funds market. buy securities to permanently increase its reserves. reduce the amount of loans outstanding.

reduce the amount of loans outstanding.

The Federal Reserve requires that commercial banks have reserves because reserves provide the Fed a means of controlling the money supply. reserves are needed for the bank to earn money. reserves are a claim the commercial banks have against the Federal Reserve Bank. this is the way the Fed monitors bank solvency.

reserves provide the Fed a means of controlling the money supply

Merchants accepted gold receipts as a means of payment even though the receipts were issued by goldsmiths, not the government, because it was the only type of payment offered. they knew that it could be exchanged for gold. the government's currency could not be trusted. the goldsmith would issue a receipt to the depositor.

they knew that it could be exchanged for gold.

The bank panics of 1930 to 1933 produced a decline in the nation's money supply because no one wanted to borrow any money. with a fractional reserve banking system, a fall in bank reserves results in a multiple fall in demand deposit money. with a fractional reserve banking system, a fall in bank reserves results in a fractional fall in demand deposit money. the Fed pulled money out of the system.

with a fractional reserve banking system, a fall in bank reserves results in a multiple fall in demand deposit money.