MACRO - MOD 13 - PRACTICE QUIZ

Suppose a commercial bank has checkable deposits of $100,000 and the legal reserve ratio is 10 percent. If the bank's required and excess reserves are equal, then its actual reserves a) are $1,000,000. b) are $10,000. c) are $20,000. Correct d) cannot be determined from the given information.

are $20,000.

The two major income-earning assets of commercial banks are

loans and securities

When cash is withdrawn from a checkable-deposit account at a bank

the money supply M1 does not change, but its composition changes.

Refer to the accompanying consolidated balance sheet for the commercial banking system. Assume the required reserve ratio is 12 percent. All figures are in billions of dollars. Stock Shares = $135 The claims of owners in the commercial banking system are equal to $135

$135

Refer to the accompanying balance sheet for the First National Bank. Assume the reserve ratio is 15 percent. Reserves = 50,000 Loans = 75,000 Securities = 25,000 Property = 100,000 Checkable Deposits = 120,000 Stock Shares = 130,000 If a check for $20,000 is drawn and cleared against this bank, it will then have excess reserves of: $15,000

$15,000

Suppose that the reserve ratio is 6 percent, and applies only to checkable deposits. A bank has non-checkable time deposits of $300 million, checkable deposits of $100 million, and reserves of $8 million. What are the excess reserves of this bank? Explanation Step 1: Required reserves are a certain percentage of the Deposits of the bank which it is required to keep with itself in the form of reserves. Theses reserves cannot be used for lending. As the bank has checkable deposits of $100 million, the bank will keep 6% of this deposit as required reserves. So, REQUIRED RESERVES= Deposits x required reserve ratio REQUIRED RESERVES= $100 million x 6% REQUIRED RESERVES= $100 million x 6/100 REQUIRED RESERVES= $100 million x 0.06 REQUIRED RESERVES= $6 million Step 2: Excess reserves are the reserves which are over and above the required reserves. These reserves are used to extend loans and advances. From the given information we can see that the total reserves of the bank are $8 million whereas the required reserves are $6 million( as calculated above). As such, the total reserves are over and above the required reserves, called excess reserves. EXCESS RESERVES= total reserves - required reserves EXCESS RESERVES= $8 million - $6 million EXCESS RESERVES= $2 million hence, the EXCESS RESERVES of the bank are $2 million.

$2 million The Basic Math: .06 x 100 = $6 million $8 million - $6 million = $2 million Excess = $2 million

A bank has excess reserves of $5,000 and demand deposits of $50,000; the required reserve ratio is 20 percent. If the reserve ratio is raised to 25 percent, then this bank can lend a maximum of: Explanation The correct option is $2,500 Given information: Excess reserves = $5,000 Demand deposit = $50,000 Required reserve ratio = 20% Raised reserve ratio = 25 % The required reserve ratio is the proportion of reserves out of deposits that banks must hold. Total required reserve= 50,000 (0.20) = 10,000 Raised required reserve = 50,000(0.25) = 12,500 Excess reserves will be reduced by 2500(12500-10000) New excess reserves will be reduced to 2500(5000-2500) Hence, this bank can lend a maximum of $2,500

$2,500 Required reserve ratio is the proportion of reserves out of deposits that banks must hold.

Consider the following information about a banking system: new currency deposited in the system = $40 billion, legal reserve ratio = 0.20, excess reserves prior to the currency deposit = $0. The $40 billion deposit of new currency will support total checkable deposits of a) $160 billion. b) $200 billion. Correct c) $40 billion. d) $128 billion.

$200 billion

The figures in the table are for a single commercial bank. All figures are in thousands of dollars. If the required reserve ratio is 10 percent, the bank has excess reserves of $28,000. $22,000. Correct $18,000. $16,000. Explanation: Demand Deposits = $180 Reserve Ratio = 10% $180 x .10 = 18 Reserves = $40 $40 - $18 = $22 = $22,000

$22,000

A commercial bank has required reserves of $60 million and the reserve ratio is 20 percent. How much are the commercial bank's checkable-deposit liabilities? Explanation commercial banks checkable-deposit liabilities: = required reserves /the reserve ratio =60/0.2 =$300 million the commercial banks checkable-deposit liabilities are $300 million

$300 million

Refer to the accompanying consolidated balance sheet for the commercial banking system. Assume the required reserve ratio is 12 percent. All figures are in billions of dollars. Checkable Deposits = $150 Reserves = $60 Required = $18 60-18 = $42 The commercial banking system has excess reserves of

$42 billion

Reserves $100 Checkable Deposits 1,000 Loans (to customers) 300 Property 400 Securities (owned) 300 Stock Shares 100 Refer to the accompanying table of information for the Moolah Bank, and assume that Moolah bank is "loaned up." If it receives a $100 deposit of currency, it could safely expand its loans by

$90

Refer to the accompanying table of information for the Moolah Bank. Reserves $100 Checkable Deposits 1,000 Loans (to customers) 300 Property 400 Securities (owned) 300 Stock Shares 100 If Moolah Bank is legally "loaned up," the reserve requirement must be: 10 percent. Correct 15 percent. 20 percent. 25 percent.

10%

Money is destroyed when

Loans are repaid

A bank that has liabilities of $150 billion and a net worth of $20 billion must have a) excess reserves of $130 billion. b) assets of $150 billion. c) excess reserves of $150 billion. d) assets of $170 billion. Correct

assets of $170 billion

A commercial bank's reserves are a) liabilities to both the commercial bank and the Federal Reserve Bank holding them. b) liabilities to the commercial bank and assets to the Federal Reserve Bank holding them. c) assets to both the commercial bank and the Federal Reserve Bank holding them. d) assets to the commercial bank and liabilities to the Federal Reserve Bank holding them.

assets to the commercial bank and liabilities to the Federal Reserve Bank holding them

If we both have checking accounts in the same commercial bank and I write a check in your favor for $200, the bank's a) balance sheet will be unchanged. Correct b) reserves and checkable deposits will both decline by $200. c) liabilities will decline by $200, but its net worth will increase by $200. d) assets and liabilities will both decline by $200.

balance sheet will be unchanged

The federal funds market is the market in which a) banks borrow from the Federal Reserve Banks. b) U.S. securities are bought and sold. c) banks borrow reserves from one another on an overnight basis. Correct d) Federal Reserve Banks borrow from one another.

banks borrow reserves from one another on an overnight basis.

In a fractional reserve banking system, a) bank panics cannot occur. b) the monetary system must be backed by gold. c) banks can create money through the lending process. Correct d) the Federal Reserve has no control over the amount of money in circulation.

banks can create money through the lending process

Which of the following are liabilities to a bank?

demand and time deposits

Most modern banking systems are based on a) money of intrinsic value. b) commodity money. c) 100 percent reserves. d) fractional reserves.

fractional reserves

Reserves $100 Checkable Deposits 1,000 Loans (to customers) 300 Property 400 Securities (owned) 300 Stock Shares 100Refer to the accompanying table of information for the Moolah Bank. Assume that the listed amounts constitute this bank's complete set of accounts. Moolah's

liabilities are $1000

Refer to the accompanying table of information for the Moolah Bank. Assume that the listed amounts constitute this bank's complete set of accounts. Reserves: $100 Checkable Deposits: $1,000 Loans (to customers): $300 Property: $400 Securities: $300 Stock Shares: $100 Moolah's: a) assets are $1,000. b) liabilities are $300. c) net worth is $100. Correct d) annual profit is $200.

net worth is $100

One way to enhance the stability of the banking system is to

require higher bank capitalization, or net worth.

Cash held by a bank in its vault is a part of the bank's

reserves

The last transaction in the federal funds market occurred in 2008 because a) the Federal Reserve closed down the federal funds market. b) in response to the financial crisis, the Federal Reserve raised the reserve ratio to 100 percent. c) the federal funds rate has been set too high. d) since the financial crisis, nearly every bank has significant excess reserves.

since the financial crisis, nearly every bank has significant excess reserves.