ECON202: CH15

If the required reserve ratio is 2.5 percent, what is the monetary multiplier?

40

A decrease in the reserve requirement causes the size of the monetary multiplier to

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

The Federal Reserve requires commercial banks to have reserves because

reserves provide the Fed a means of controlling the money supply.

Excess reserves

can be lent out, thereby increasing the money supply.

The major claim on a commercial bank's balance sheet is

checkable deposits.

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

excess reserves

Lowering leverage would make the financial system __________ stable.

more

A single commercial bank can safely lend only an amount equal to its excess reserves, but the commercial banking system as a whole can lend by a multiple of its excess reserves because

one bank loses reserves to other banks, but the banking system as a whole 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.

The two conflicting goals facing commercial banks are:

profit and liquidity.

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

reserves, securities, loans, and vault cash.

A balance sheet must always balance because

the sum of assets must equal the sum of liabilities plus net worth.

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 that commercial banks have against the Federal Reserve Banks.

Suppose that Third National Bank has reserves of $10,000 and checkable deposits of $100,000. The reserve ratio is 10 percent. The bank sells $10,000 in securities to the Federal Reserve Bank in its district, receiving a $10,000 increase in reserves in return. What amount of excess reserves does the bank now have?

$10000

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. If the reserve ratio is 20 percent, how much does the bank hold in actual reserves?

$42000

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 the bank adds that currency to its reserves. What amount of excess reserves does the bank now have?

$4500

The monetary multiplier is defined as

1/R, where R is the required reserve ratio.

If the monetary multiplier is 5, what is the required reserve ratio?

20

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

Suppose the assets of the Silver Lode Bank are $150,000 higher than on the previous day and its net worth is up $20,000. By how much and in what direction must its liabilities have changed from the day before?

Liabilities increased by $130000 .

Net worth is equal to

assets - liabilities

The banking system in the United States is referred to as a fractional reserve banking system because

banks hold a fraction of deposits in reserve.

True or False. Leverage increases the total size of the gain or loss from an investment, not just the percentage rate of return on the part of the investment amount that was not borrowed.

false

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

goldsmiths could issue more receipts than they had in gold and this could create a panic.

In a fractional reserve system, deposit insurance

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

The monetary multiplier is

inversely related to the reserve ratio.

The isolated nation of Islandia does not trade with other countries. Its banking system consists of four commercial banks—these banks deal with consumers and businesses—and one central bank that deals exclusively with the commercial banks. The central bank has set a reserve requirement of 20 percent. The banks are creatively named First Bank, Second Bank, Third Bank, and Fourth Bank. All of the commercial banks, except for First Bank, have used their excess reserves to issue loans to consumers and businesses. First Bank is holding $180,000 in excess reserves. Suppose First Bank loans all of its excess reserves to a customer to buy a custom-built house. The home builder deposits all of the money it receives for building the house into Second Bank, which then lends all its excess reserves to a customer to buy machines for her factory. The machine manufacturer deposits all of the money received into Third Bank, which lends all its excess reserves to a clothing maker to buy textiles. The textile manufacturer deposits all of the money received into Fourth Bank, which then lends all its excess reserves to a rancher to buy more cattle. By how much have these rounds of lending increased the money supply in Islandia?

$531,360

True or False. "Whenever currency is deposited in a commercial bank, cash goes out of circulation and, as a result, the supply of money is reduced."

False, because a checkable deposit in a commercial bank is also part of the money supply.

True or False. "When a commercial bank makes loans, it creates money; when loans are repaid, money is destroyed."

True, lending increases the money supply, but repayment reduces checkable deposits, which lowers the money supply.

Excess reserves are equal to

actual reserves - required reserves.

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

they knew that the gold receipts could be exchanged for gold.

The actual reason that banks must hold required reserves is:

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