macro 29

The maximum increase in the money supply possible from a deposit of $D into the banking system where R is the reserve requirement is a. (1/R)(D − R). b. R × D. c. (1/R)(1 − R)D. d. (1/R)D.

(1/R)(1 − R)D.

Which of the following was true regarding sub-prime mortgages that were popular in 2005-2006? a. More than 90% of these loans were made by regulated banks. b. Bankers expected higher default rates on these loans. c. They were generally fixed rate loans. d. all of the above

Bankers expected higher default rates on these loans.

217. The banking system of the United States is a fractional reserve system. What dangers does this pose for the safety of the banking system?

Fractional reserve banking means that each individual bank only keeps a fraction of its deposit liabilities on hand as cash in the vault or easily accessible reserves. Therefore, every individual bank is vulnerable to a bank run, a situation where many depositors attempt to withdraw all of their deposits in cash at the same time. If the situation were to spread from bank to bank, the entire banking system could be subject to collapse. This possibility of bank runs means that bankers have to perform something of a balancing act in weighing the benefits to the bank of the profits from loans against the need for prudent levels of reserves to handle depositors' withdrawal demands. In the United States today, the probability of bank runs has been substantially reduced by government regulation and supervision of banks along with the existence of federal deposit insurance.

An increase in the reserve ratio would tend to a. increase excess reserves and raise the money multiplier. b. decrease excess reserves and decrease the money multiplier. c. increase excess reserves and decrease the money multiplier. d. decrease excess reserves and raise the money multiplier.

decrease excess reserves and decrease the money multiplier.

67. Liquidity refers to the

ease with which an asset can be converted into cash.

Banking under a system of fractional reserves is a(n) a. inherently risky business that is unsafe regardless of bank management. b. inherently risky business that is relatively safe under prudent management. c. fairly safe business unless management is irresponsible. d. fairly safe business with no unusual risks.

inherently risky business that is relatively safe under prudent management.

It is necessary for the Federal Reserve to regulate the money supply because a. banks tend to act in a counter-cyclical manner with regard to the money supply. b. banks are not profit-oriented, and tend to be unresponsive to the needs of business. c. left to itself, the banking system will create a gyrating money supply that will be destabilizing. d. left to itself, the banking system will not be able to increase or decrease the money supply.

left to itself, the banking system will create a gyrating money supply that will be destabilizing.

Banks that are managed in a very safe and conservative manner can be expected to earn a. high, steady profits. b. high but volatile profits. c. low and consistent profits. d. low profits with occasional major losses.

low and consistent profits.

Which of the following are not included in the M1 definition of the money supply? a. cash and currency b. checkable deposits c. money market deposit accounts d. All of the above are included.

money market deposit accounts

In which of the following monetary aggregates are Treasury Bills included? a. M1 only b. M2 only c. both M1 and M2 d. neither M1 nor M2

neither M1 nor M2

The occurrence of bank failures in the United States a. ended after 1933 and the creation of the FDIC. b. increased dramatically during the Clinton administration. c. reappeared in intensity in the late 1990s and early 2000s. d. reappeared in the 1980s and early 1990s and again in 2006.

reappeared in the 1980s and early 1990s and again in 2006.

The money creation process generated by an injection of reserves stops when a. people deposit their loans into other banks. b. reserve requirements are raised. c. the increase in required reserves equals the size of the injection. d. bankers begin to fear runs and stop making loans.

the increase in required reserves equals the size of the injection.