Econ Chapter 15

A goldsmith has $2 million of gold in his vaults. He issues $5 million in gold receipts. His gold holdings are what fraction of the paper money (gold receipts) he has issued?

2/5

Suppose that Mountain Star Bank discovers that its reserves will temporarily fall slightly below those legally required. It can temporarily remedy this situation by

borrowing funds from other banks in the Federal funds market.

Suppose the assets of the Silver Lode Bank are $200,000 higher than on the previous day and its net worth is up $60,000. By how much and in what direction must its liabilities have changed from the day before?

$140,000

Third National Bank has reserves of $20,000 and checkable deposits of $200,000. The reserve ratio is 10 percent. Households deposit $5,000 in currency into the bank and that currency is added to reserves.

$15,000

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 $12,000 and checkable deposits of $150,000.

$42,000

Suppose that the banking system in Canada has a required reserve ratio of 10 percent while the banking system in the United States has a required reserve ratio of 20 percent. In which country would $100 of initial excess reserves be able to cause a larger total amount of money creation?

Canada

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

Excess Reserves

Consider the following statement: "Whenever currency is deposited into a commercial bank, cash goes out of circulation and, as a result, the supply of money is reduced." Is this statement true or false?

False because the M1 money supply consists of currency outside of the banks and checking account deposits of the public in the commercial banks.

The two conflicting goals facing commercial banks are:

Profit and liquidity

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 are equal to

actual reserves minus required reserves.

Excess reserves

can be lent out, increasing the money supply.

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

checkable deposits.

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.

Merchants accepted gold receipts as a means of payment even though the receipts were issued by goldsmiths, not the government, because

they knew that it could be exchanged for gold.

What is the monetary multiplier?

1 / reserve ratio

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

The actual reason that banks must hold required reserves is:

To give the Fed control over the lending ability of commercial banks.

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.

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

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

Such panics are unlikely today because

deposits are insured by the Federal Deposit Insurance Corporation.

By issuing loans in the form of gold receipts, there was additional risk because the

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

In a fractional reserve system, deposit insurance

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

The monetary multiplier is

inversely related to the 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

one bank loses reserves to other banks, but the system does not.

An asset on a bank's balance sheet is something

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

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.

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

reserves, securities, loans, and vault cash.

Reserves are an asset to commercial banks but a liability to the Federal Reserve Banks because

these funds are cash belonging to commercial banks, but they are a claim the commercial banks have against the Federal Reserve Bank.

The bank panics of 1930 to 1933 produced a decline in the nation's money supply because

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