Macro - Ch. 35

1a. Merchants accepted gold receipts as a means of payment even though the receipts were issued by goldsmiths, not the government. This is because A. the government's currency could not be trusted. B. gold receipts were the only type of payment offered. C. they knew that the gold receipts could be exchanged for gold. D. goldsmiths issued a gold receipt to the depositor. b. By issuing loans in the form of gold receipts, there was additional risk because A. receipts could be copied. B. the government could demand all the gold. C. gold could be stolen. D. goldsmiths could issue more receipts than they had in gold and this could create a panic.

C. they knew that the gold receipts could be exchanged for gold. D. goldsmiths could issue more receipts than they had in gold and this could create a panic.

10. 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? A. 1/10 B. 1/5 C. 2/5 D. 5/5

C. 2/5

17. 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? A. Stayed the same B. Decreased C. Increased

B. Decreased

9. LAST WORD Answer the following questions: a. 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. A. True B. False b. Lowering leverage would make the financial system __________ stable. A. more B. less C. equally

B. False A. more

6. True or False. "When a commercial bank makes loans, it creates money; when loans are repaid, money is destroyed." A. True, lending decreases the money supply and repayment reduces checkable deposits, which raises the money supply. B. False, lending decreases the money supply and repayment reduces checkable deposits, which raises the money supply. C. True, lending increases the money supply, but repayment reduces checkable deposits, which lowers the money supply. D. False, lending increases the money supply, but repayment reduces checkable deposits, which lowers the money supply.

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

13. A single commercial bank in a multibank banking system can lend only an amount equal to its initial preloan __________. A. excess deposits B. total deposits C. excess reserves D. total reserves

C. excess reserves

12. The actual reason that banks must hold required reserves is: A. to enhance liquidity and deter bank runs. B. to help increase the number of bank loans. C. to help fund the Federal Deposit Insurance Corporation, which insures bank deposits. D. to give the Fed control over the lending ability of commercial banks.

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

11. 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? A. $2 million B. $100 million C. $88 million D. $12 million

A. $2 million

15. 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? A. Canada B. United States

A. Canada

5. 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." A. False, because a checkable deposit in a commercial bank is also part of the money supply. B. True, because the deposit in a commercial bank decreases M1. C. True, because the M1 money supply consists of currency outside of the banks and checking account deposits of the public in the commercial banks. D. False, because the deposit in a commercial bank reduces cash, which reduces M1.

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

2a. The banking system in the United States is referred to as a fractional reserve banking system because A. banks hold a fraction of deposit in reserve. B. a fraction of the money is lent out. C. a fraction of all monetary assets are held in banks. D. banks keep a fraction of reserves available. b. In a fractional reserve system, deposit insurance A. is absolutely necessary or the banking system would collapse. B. raises the fraction of deposits that banks must keep available. C. guarantees that depositors will always get their money, thus avoiding most bank runs. D. provides additional funds that can be lent out.

A. banks hold a fraction of deposit in reserve. C. guarantees that depositors will always get their money, thus avoiding most bank runs.

8. A decrease in the reserve requirement causes the size of the monetary multiplier to A. increase, the amount of excess reserves in the banking system to increase, and the money supply to increase. B. decrease, the amount of excess reserves in the banking system to increase, and the money supply to increase. C. decrease, the amount of excess reserves in the banking system to increase, and the money supply to decrease. D. increase, the amount of excess reserves in the banking system to increase, and the money supply to decrease.

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

14. The two conflicting goals facing commercial banks are: A. profit and liquidity. B. deposits and withdrawals. C. assets and liabilities. D. profit and loss.

A. profit and liquidity.

4a. The Federal Reserve requires commercial banks to have reserves because A. reserves provide the Fed a means of controlling the money supply. B. reserves are a claim that commercial banks have against the Federal Reserve Banks. C. reserves are needed for banks to earn money. D. this is the way the Fed monitors bank solvency. b. Reserves are an asset to commercial banks but a liability to the Federal Reserve Banks because A. commercial banks and the Federal Reserve Banks do not use the same accounting system. B. these funds are cash belonging to commercial banks, but they are a claim that commercial banks have against the Federal Reserve Banks. C. they must be equal to determine net worth. D. these funds are cash belonging to the Federal Reserve Banks, but they are a claim that the Federal Reserve Banks have against commercial banks. c. Excess reserves are equal to A. required reserves - actual reserves. B. actual reserves - required reserves. C. total reserves - total deposits. D. actual reserves + required reserves. d. Excess reserves A. can be lent out, thereby increasing the money supply. B. must be borrowed, thereby decreasing the money supply. C. must be borrowed, thereby increasing the money supply. D. can be lent out, thereby decreasing the money supply.

A. reserves provide the Fed a means of controlling the money supply. B. these funds are cash belonging to commercial banks, but they are a claim that commercial banks have against the Federal Reserve Banks. B. actual reserves - required reserves. A. can be lent out, thereby increasing the money supply.

3a. An asset on a bank's balance sheet is something A. created by the bank, whereas a liability is something sold by the bank. B. owed by the bank, whereas a liability is something owned by the bank. C. owned by the bank, whereas a liability is something owed by the bank. D. sold by the bank, whereas a liability is something bought by the bank. b. Net worth is equal to A. (assets + liabilities)/assets. B. liabilities - assets. C. assets - liabilities. D. assets + liabilities. c. A balance sheet must always balance because A. the sum of net worth must equal the sum of liabilities plus assets. B. the sum of assets must equal the sum of liabilities plus net worth. C. the sum of assets must equal the difference of liabilities minus net worth. D. the sum of liabilities must equal the sum of assets plus net worth. d. The major assets on a commercial bank's balance sheet include A. reserves, securities, loans, and vault cash. B. reserves, securities, loans, and checkable deposits. C. checkable deposits, securities, loans, and vault cash. D. reserves, checkable deposits, loans, and vault cash. e. The major claim on a commercial bank's balance sheet is A. vault cash. B. checkable deposits. C. loans. D. reserves.

C. owned by the bank, whereas a liability is something owed by the bank. C. assets - liabilities. B. the sum of assets must equal the sum of liabilities plus net worth. A. reserves, securities, loans, and vault cash. B. checkable deposits.

16. 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? A. $2 billion B. $0 C. $200 million D. $20 billion

D. $20 billion

7a. 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 A. one bank gains reserves, but the banking system as a whole loses these reserves. B. the banking system as a whole has more funds than any single commercial bank. C. this is a legal restriction placed on banks, but it does not apply to the banking system as a whole. D. one bank loses reserves to other banks, but the banking system as a whole does not. b. The monetary multiplier is defined as A. R − 1, where R is the required reserve ratio. B. 1 + R, where R is the required reserve ratio. C. 1 − R, where R is the required reserve ratio. D. 1/R, where R is the required reserve ratio. c. The monetary multiplier is A. directly related to the reserve ratio. B. equal to 1 plus the required reserve ratio. C. inversely related to the reserve ratio. D. equal to 1 minus the required reserve ratio.

D. one bank loses reserves to other banks, but the banking system as a whole does not. D. 1/R, where R is the required reserve ratio. C. inversely related to the reserve ratio.