Introduction to fractional reserve banking/Required reserves, excess reserves, and bank behavior/The money multiplier and the expansion of the money supply

The following is the balance sheet for Cricetinae Federal Bank which is one of many banks in Hamsterville. The reserve requirement in Hamsterville is 10%. How much in new loans can this bank make?

$15,000 **If a bank has $100,000 in deposits and a reserve requirement of 10% then the bank must keep $10,000 in reserve. This bank has $25,000 in reserves, so it has $15,000 in excess reserves that it can loan out.

The reserve requirement in Westeros is 25%. Assume that banks keep no excess reserves and there are no other monetary leakages. What is the maximum possible increase in the money supply if an additional $500 is added to the monetary base?

$2,000 **The maximum increase in the money supply from an increase in the monetary base is the money multiplier times the amount of the increase in the monetary base.

Pancake Bank has $10,000 in required reserves and $50,000 in excess reserves. The bank is required to keep 20% of all deposits in reserve. If Chinhui deposits $5,000 into Pancake Bank, how much in new loans can the bank make as a result of the deposit?

$54,000

The current balance sheet of the Iron Bank is given below. The reserve requirement is 20%.If Cersei deposits $100 in the Iron Bank, what will be the dollar value of new loans that the Iron Bank can make?

$80

The First Bank of Cloud City has total reserves of $1000 excess reserves of $800 and required reserves of $200.What is the dollar value of new loans that this bank can make?

$800 **A bank's reserves are divided into required reserves and excess reserves. The bank can make loans out of excess reserves.

The current balance sheet for the Third Bank of Westeros is shown below. The reserve requirement in Westeros is 10%.Ygritte deposits $1,000 into her account at the Third Bank of Westeros. What is the maximum dollar amount of new loans that can be created throughout the banking system as a result of Ygritte's deposit?

$9,000

Milton deposits $100,000 in the First Bank of the Shire. Which of the following best describes the initial impact this deposit will have on the bank's balance sheet?

Assets will increase; liabilities will increase **Assets increase by $100,000 because there is now $100,000 in the bank's possession that it did not have before. Liabilities increase by $100,000 because the bank is obligated to give Milton his money whenever he feels like using it.

Which of the following best describes why the expansion of the money supply might be different than is predicted by the simple money multiplier?

Banks may choose to keep excess reserves instead of making loans **The money creation process occurs when banks make loans out of excess reserves. If they choose to keep those reserves instead of making loans, then the money creation process stops.

Mitoocents Bank's balance sheet is shown below. The central bank currently has a reserve requirement of 50%.If the central bank lowers the reserve requirement to 25%, which of the following is the most likely outcome?

Excess reserves increase by $50,000

Banks in Hamsterville have been required to keep 25% of all checkable deposits on reserve, but now the central bank has changed the reserve requirement to 10%.What immediate effect does this have on banks' balance sheets?

Excess reserves increase. **If a bank is required to keep less money on hand, its excess reserves increase which opens up more money for banks to loan out. This is why the reserve requirement is a tool of monetary policy.

Cersei deposited $5000in the bank. The bank kept $500 in its vault and loaned out $4500. Which of the following best describes what the bank is doing?

Fractional reserve banking **Fractional reserve banking is when a bank keeps a certain percentage of all money deposited in the bank in reserve and puts the rest to use. In this scenario, the bank is keeping reserves of 10% because $500 is 10% of the initial deposit of $5000.

First Bank has a reserve requirement of 25%. One of its customers, Gendry, found $10,000 buried in a pit inside his blacksmith shop and deposited it into First Bank.What happens to First Bank's required reserves and excess reserves as a result of this deposit?

Required reserves increase $2,500, excess reserves increase $7,500. **Required reserves increase by the amount deposited multiplied by the required reserve ratio: $10,000×25%=$2,500 Excess reserves increase by the difference between the deposit and required reserves: $10,0000−$2,500=$7,500

The reserve requirement is 20%. Excellence Bank's balance sheet is shown below. If Jianyu withdraws $5,000 from his bank account, which of the following is true?

The bank has no excess reserves.

The central bank of Mordor has a 25% reserve requirement. Rose deposits $10,000 into her local, commercial bank in Mordor. How much will required reserves increase as a result of this deposit?

The bank is required to keep 25% of the $10,000 in reserve. 25% of $10,000 is $2,500: Amount of reserves required​=0.25x$10,000=$2,500​

Which of the following is true about excess reserves held by a bank?

They form the basis of the expansion of the money supply. **New money is created when banks make loans. Banks make loans out of excess reserves. Therefore, when banks make loans out of excess reserves, the money supply increases.v

A defining characteristic of a fractional reserve banking system is

the fact that banks do not keep all deposits on reserve. **Fractional reserve banking means that banks keep some portion of deposits on reserve, either within the bank or at a central bank, rather than using that money to make loans or purchase assets.

Required reserves are best described by which of the following statements?

the proportion of checkable deposits that a bank must keep on hand **Checkable deposits are part of a bank's liabilities because they represent an obligation to pay. In most fractional reserve banking systems a regulatory body, such as a central bank, requires banks to keep a certain percentage of each liability on hand in case people want to withdraw some of those funds.