Chapter 15: Money Creation

T/F: Checkable deposits are bank debts

True

If Johnson Bank has actual reserves of $200,000 and $200,000 in demand deposits with a reserve ratio $10%, what is the amount of excess reserves

$180,000

If the reserve ratio is 10% and a bank accepts $50,000 in demand deposits from the public, then it would have to keep ___ as reserves

$5000

What statements are true about the multiple deposit expansion of money when there is a 20% required reserve ratio and a 100$ deposit?

A money multiplier of 5 permits the creation of $400 in new checkable deposits and a $500 increase in the total supply of money AN amount of $80 becomes excess reserves The initial deposit of $100 creates new reserves of an equal amount

What are two basic functions of commercial banks?

Accepting deposits and making loans

Who can create money through lending?

Banks

What are true statements about the process of creating a bank?

Citizens decide their community needs a bank, sell equity shares of stock, secure a state or national charter

If D equals the maximum amount of new demand-deposit money that can be created by the banking system on the basis of any given amount of excess reserves; E equals the amount of excess reserves; and m is the monetary multiplier, then

D = E * m

The formula for the maximum checkable deposit is illustrated as

D = E*m

What best explains the situation that existed prior to the implementation of deposit insurance?

Depositors would "run" on their banks to withdraw funds Rumors about banks about to go bankrupt would circulate Rumors were usually totally unfounded

Where are places that a bank can keep its reserves?

In its own vault or at the vault of the Federal Reserve Bank in its district

What are the two methods by which commercial banks create money?

Making loans to the public Purchasing gov't bonds from the public

What best explains how the loss of reserves and deposits lead to the existence of the monetary multiplier?

Reserves and deposits lost by one bank become reserves of another bank and magnify available excess reserves to be loaned

What insures individuals' deposits in commercial banks?

The Federal Deposit Insurance Corporation

What are true statements about the history of the fractional banking system?

The gold receipts were accepted as a medium of exchange, goldsmiths issued paper receipts in excess of the amt of gold held and into circulation by making loans, the reserves in the bank vault were a fraction of the total money supply, traders would deposit their gold with goldsmiths

T/F: A withdrawal of cash can decrease the bank's checkable deposit liabilities but not change the total supply of money

True

An increase in a bank's checkable deposits due to a cash deposit will have what effect on the total money supply?

The total money supply will not change

What are statements regarding the main purpose of required reserves?

To help the Fed control the lending ability of commercial banks To help the economy avoid business flucuations

What is a statement of assets and claims on assets of a commercial bank at a given time?

a balance sheet

A bank's excess reserves equal the bank's ___ reserves minus its required reserves

actual reserves

Reserves deposited by commercial bank into the federal Reserve Bank are ________ to the commercial bank

assets

balance sheet formula

assets = liabilities + net worth

On a balance sheet, the value of ___ must equal the ___ against those assets

assets; claims

the federal funds rate is the interest rate that

banks charge each other to borrow money overnight

___ deposit money is destroyed when loans are paid off

checkable deposit money

A balance sheet of a commercial bank is a statement of assets and ___ on assets, which summarize the financial position of the bank at a certain time

claims

The lending process is what allows banks to

create money

Checkable deposits are commercial bank ___ that is promises to pay "on demand"

debts

When a deposited check is drawn against another bank, the collection of that check will _________ the reserves and reduce the checkable deposits of the bank from which it was drawn.

decrease

A single commercial bank can lend only an amount equal to its ___ reserves

excess

Maximum checkable-deposit expansion in the banking system is equal to

excess reserves times the monetary multiplier.

The spending- income multiplier exists because the _____ of one household become the income of another household.

expenditures

Reserve requirements are less than 100%, which means they are ___

fractional

A banking system in which only a portion of checkable deposits are backed up by cash in bank vaults or deposits in the central bank is called a ___ ___ banking system

fractional reserve

Banks operate on the basis of ___ are vulnerable to panics or bank runs

fractional reserves

By law, all commercial banks and thrift institutions that provide checkable deposits are required to

keep an amount of funds equal to a specified percentage of the bank's own deposit liabilities with the Federal Reserve Bank

The commercial banking system is capable of increasing money by an amount ___ its excess reserves

greater than

Deposit ___ helps prevent banks runs by guaranteeing depositors that they will always get their money

insurance

A higher reserve ratio means a ___ monetary multiplier and ___ creation of checkable deposit money through loans

lower; less

money multiplier formula

monetary multiplier = 1/the required reserve ratio

The claims of the owners of the firm against the firms assets are called ___ ___

net worth

A single transaction that deposits the money into a bank will increase checkable deposits for the bank, which will result in an increase in the bank's liabilities and assuming no loans are dispersed, ___ in the nation's total supply of money

no change

Liabilities are claims against a bank's assets by ___ of the bank

nonowners

What deposits are ignored when determining required reserves?

nonpersonal savings and time deposits

A smaller ___ ___ means a higher monetary multiplier and greater creation of checkable deposits money through loans

reserve ratio

Dividing a commercial bank's required reserves by its checkable deposit liabilities produces the ___ ___

reserve ratio

In the US, runs on banks are prevented because

the Federal Deposit Insurance Corporation guarantees bank accounts

What agency has the authority to establish and vary the reserve ratio

the Federal Reserve

The multiple by which the commercial banking system can expand the supply of money is equal to the reciprocal of

the reserve ratio