Chapter 14

If the reserve requirement is 10 percent, what amount of excess reserves does a bank acquire when a business deposits a $500 check drawn on another bank? A. $450 B. $400 C. $5,000 D. $550

A. $450.

Suppose that a bank's actual reserves are $5 million, its checkable deposits are $5 million, and its excess reserves are $3 million. The reserve requirement must be: A. 40 percent. B. 20 percent. C. 10 percent. D. 5 percent.

A. 40 percent.

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. 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.

A. balance sheet will be unchanged.

A bank temporarily short of required reserved may be able to remedy this situation by: A. borrowing funds in the Federal funds market. B. granting new loans. C. shifting some of its vault cash to its reserve account at the Federal Reserve. D. buying bonds from the public.

A. borrowing funds in the Federal funds market.

A commercial bank can expand its excess reserves by: A. demanding and receiving payment on an overdue loan. B. buying bonds from a Federal Reserve Bank. C. buying bonds from the public. D. paying back money borrowed from a Federal Reserve Bank.

A. demanding and receiving payment on an overdue loan.

If you deposit a $50 dill in a commercial bank that has a 10 percent legal reserve requirement the bank will: A. have $45 of additional excess reserves. B. be capable of lending an additional $500. C. be capable of lending no more than an additional $50. D. have $50 of required reserves.

A. have $45 of additional excess reserves.

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. D. Federal Reserve Banks borrow from one another.

C. 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. D. the Federal Reserve has no control over the amount of money in circulation.

C. banks can create money through the lending process.

Banks create money when they: A. allow loans to mature. B. accept deposits of cash. C. buy government bonds from households. D. sell government bonds to households.

C. buy government bonds from households.

Commercial banks create money when they: A. accept cash deposits from the public. B. purchase government securities from the central banks. C. create checkable deposits in exchange for IOUs. D. raise their interest rates.

C. create checkable deposits in exchange for IOUs.

The amount of reserves that a commercial bank is required to hold is equal to: A. the amount of its checkable deposits. B. the sum of its checkable deposits and time deposits. C. its checkable deposits multiplied by the reserve requirement. D. its checkable deposits divided by its total assets.

C. its checkable deposits multiplied by the reserve requirements.

Money is destroyed when: A. loans are made. B. checks written on one bank are deposited in another bank. C. loans are repaid. D. the net worth of the banking system declines.

C. loans are repaid.

The greater the required reserve ratio, the: A. higher is the spending multiplier. B. lower is the spending multiplier. C. lower is the monetary multiplier. D. higher is the monetary multiplier.

C. lower is the monetary multiplier.

The claims of the owners of a firm against the firm's assets are called: A. working capital. B. assets. C. net worth. D. liabilities.

C. net worth

The multiple by which the commercial banking system can expand supply of money on the basis excess reserves: A. is larger the smaller the required reserve ratio. B. is the reciprocal of the bank's actual reserves. C. is directly or positively related to the size of the required reserve ratio. D. will be zero when the required reserve ratio is 100 percent.

A. is larger the smaller the required reserve ratio.

A fractional reserves banking systems: A. is susceptible to bank panics. B. prevents money creation through the lending process. C. only tends to exist in developing economies. D. prevents the Federal Reserve from influencing the money supply.

A. is susceptible to bank panics

When a commercial bank has excess reserves: A. it is in a position to make additional loans. B. its actual reserves are less than its required reserves. C. it is charging too high an interest rate on its loans. D. its reserves exceed its assets.

A. it is in a position to make additional loans.

A bank that has assets of $5 billion and a net worth of $10 billion must have: A. liabilities of $75 billion. B. excess reserves of $10 billion. C. liabilities of $10 billion. D. excess reserves of $75 billion.

A. liabilities of $75 billion.

When commercial banks use excess reserves to buy government securities from the public: A. new money is created. B. commercial bank reserves increase. C. the money supply falls. D. checkable deposits decline.

A. new money is created.

The basic reason why the commercial banking system can increase its checkable deposits by a multiple of its excess reserves is that: A. reserves lost by any particular bank will be gained by some other bank. B. the central banks follow policies that prevent reserves from falling below the level required by law. C. the MPC of borrowers is greater than zero, but less than 1. D. the banking system must keep reserves equal to 100 percent of its checkable-deposit liabilities.

A. reserves lost by any particular bank will be gained by some other bank.

The multiple by which the commercial banking system can increase the supply of money on the basis of each dollar of excess reserves is equal to: A. the reciprocal of the required reserve ratio. B. 1 minus the required reserve ratio. C. the reciprocal of the income velocity of money. D. 1/MPS.

A. the reciprocal of the required reserve ratio.

Assume the Standard Internet Company negotiates a loan for $5,000 from the Metro National Bank and receives a checkable deposit for that amount in exchange for its promissory note (IOU). As a result of this transaction: A. the supply of money is increased by $5,000. B. the supply of money declines by the amount of the loan. C. a claim has been "demonetized." D. the Metro Bank acquires reserves from other banks.

A. the supply of money is increased by $5,000.

(Last Word) The bank panics of 1930-1933 and the resulting failures of many banks were caused by: A. the widespread conversion of checkable deposits to cash by the public. B. the raising of the reserve requirement by the Board of Governors. C. a massive inflow of gold bullion to the United States. D. a massive inflow of cash into bank deposits by citizens who feared their money was losing its value.

A. the widespread conversion of checkable deposits to cash by the public.

If actual reserves in the banking system are $8,000, checkable deposits are $70,000, and the legal reserve ratio is 10 percent, then excess reserves are: A. zero. B. $1,000. C. $2,000. D. $500.

B. $1,000.

The ABC Commercial Bank has $5,000 in excess reserves and the reserve ratio is 30 percent. This information is consistent with the bank having: A. $90,000 in outstanding loans and $35,000 in reserves. B. $90,000 in checkable deposit liabilities and $32,000 in reserves. C. $20,000 in checkable deposit liabilities and $10,000 in reserves. D. $90,000 in checkable deposit liabilities and $35,000 in reserves.

B. $90,000 in checkable deposit liabilities and $32,000 in reserves.

If the reserve ratio is 100 percent, the value of the monetary multiplier is: A. 0. B. 1. C. 10. D. 100.

B. 1.

Assume that a bank initially has no excess reserves. If it receives $5,000 in cash from a depositor and the bank finds that it can safely lend out $4,500, the reserve requirement must be: A. zero. B. 10 percent. C. 20 percent. D. 25 percent.

B. 10 percent.

If actual reserves in the banking system are $40,000, excess reserves are $10,000, and checkable deposits are $240,000, then the legal reserve requirement is: A. 10 percent. B. 12.5 percent. C. 20 percent. D. 5 percent.

B. 12.5 percent

Which of the following statements is correct? A. The actual reserves of a commercial bank equal its excess reserves minus its required reserves. B. A bank's liabilities plus its net worth equal its assets. C. When borrowers repay bank loans, the supply of money increases. D. A single commercial bank can safely lend a multiple amount of its excess reserves.

B. a bank's liabilities plus its net worth equal its assets.

Bank panics: A. occur frequently in fractional reserve banking systems. B. are a risk of fractional reserve banking, but are unlikely when banks are highly regulated and lend prudently. C. cannot occur in a fractional reserve banking system. D. occur more frequently when the monetary system is backed by gold.

B. are a risk of fractional reserve banking, but are unlikely when banks are highly regulated and lend prudently.

When a check is drawn and cleared, the A. reserves and deposits of both the bank against which the check is cleared and the bank receiving the check are unchanged by this transaction. B. bank against which the check is cleared loses reserves and deposits equal to the amount of the check. C. bank receiving the check loses reserves and deposits equal to the amount of the check. D. bank against which the check is cleared acquires reserves and deposits equal to the amount of the check.

B. bank against which the check cleared loses reserves and deposits equal to the amount of the check.

The reserves of a commercial bank consist of: A. the amount of money market funds it holds. B. deposits at the Federal Reserve Bank and vault cash. C. government securities that the bank holds. D. the bank's net worth.

B. deposits at the Federal Reserve Bank and vault cash.

Given a 25 percent reserve ratio, assume the commercial banking system is loaned up. Now assume the reserve ratio is reduced to 20 percent. As a result of this reduction: A. we can expect bank lending and bank profits to decline. B. each dollar of bank reserves will now support a maximum of $5 of checkable deposits. C. the banking system must now reduce outstanding loans by 5 percent. D. the banking system can now increase lending by 5 percent.

B. each dollar of bank reserves will now support a maximum of $5 of checkable deposits.

The amount that a commercial bank can lend is determined by its: A. required reserves. B. excess reserves. C. outstanding loans. D. outstanding checkable deposits.

B. excess reserves.

When a bank loan is repaid the supply of money: A. is constant, but its composition will have changed. B. is decreased. C. is increased. D. may either increase or decrease.

B. is decreased

Commercial banks monetize claims when they: A. collect checks through the Federal Reserve System. B. make loans to the public. C. accept repayment of outstanding loans. D. borrow from the Federal Reserve Banks.

B. make loans to the public

The primary purpose of the legal reserve requirement is to: A. prevent banks from hoarding too much vault cash. B. provide a means by which the monetary authorities can influence the lending ability of commercial banks. C. prevent commercial banks from earning excess profits. D. provide a dependable source of interest income for commercial banks.

B. provide a means by which the monetary authorities can influence the lending ability of commercial banks

If the monetary authorities want to reduce the monetary multiplier, they should: A. lower the required reserve ratio. B. raise the required reserve ratio. C. increase bank reserves. D. lower interest rates.

B. raise the required reserve ratio.

Other things equal, if the required reserve ratio was lowered: A. banks would have to reduce their lending. B. the size of the monetary multiplier would increase. C. the actual reserves of banks would increase. D. the Federal funds interest rate would rise.

B. the size of the money multiplier would increase.

Which of the following are all assets to a commercial bank? A. demand deposits, stock shares, and reserves B. vault cash, property, and reserves C. vault cash, property, and stock shares D. vault cash, stock shares, and demand deposits

B. vault cash, property and reserves

Suppose the reserve requirement is 20 percent. If a bank has checkable deposits of $4 million and actual reserves of $1 million, it can safely lend out: A. $1 million. B. $1.2 million. C. $200,000. D. $800,000.

C. $200,000.

Suppose the ABC bank has excess reserves of $4,000 and outstanding checkable deposits of $80,000. If the reserve requirement is 25 percent, what is the size of the bank's actual reserves? A. $16,000 B. $84,000 C. $24,000 D. $20,000

C. $24,000

A reserve requirement of 20 percent means a bank must have $1,000 of reserves of its checkable deposits are: A. $100. B. $1,000. C. $5,000. D. $12,000.

C. $5,000.

Suppose a credit union has checkable deposits of $500,000 and the legal reserve ratio is 10 percent. If the institution has excess reserves of $4,000, then its actual reserves are: A. $46,000. B. $50,000. C. $54,000. D. $4,000.

C. $54,000.

Assume Company X deposits $100,000 in cash in commercial Bank A. If no excess reserves exist at the time this deposit is made and the reserve ratio is 20 percent, Bank A can increase the money supply by a maximum of: A. $50,000. B. $180,000. C. $80,000. D. $500,000.

C. $80,000.

If actual reserves in the banking system are $50,000, excess reserves are $5,000, and checkable deposits are $225,000, then the monetary multiplier is: A. 10. B. 4. C. 5. D. 2.

C. 5.

If the reserve ratio is 15 percent and commercial bankers decide to hold additional excess reserves equal to 5 percent of any newly acquired checkable deposits, then the relevant monetary multiplier for the banking system will be: A. 31/2. B. 4. C. 5. D. 10.

C. 5.

Which of the following describes the identity embodied in a balance sheet? A. Net worth plus assets equal liabilities B. Assets plus liabilities equal net worth C. Assets equal liabilities plus net worth D. Assets plus reserves equal net worth

C. Assets equals liabilities plus net worth

Which of the following would reduce the money supply? A. Commercial banks use excess reserves to buy government bonds from the public. B. Commercial banks loan out excess reserves. C. Commercial banks sell government bonds to the public. D. A check clears from Bank A to Bank B.

C. Commercial banks loan out excess reserves.

Overnight loans from one bank to another for reserve purposes entail an interest rated called: A. prime rate. B. discount rate. C. Federal funds rate. D. treasury bill rate.

C. Federal funds rate.

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. D. cannot be determined from the given information.

C. are $20,000

(Last Word) Which of the following represents a change in today's banking policies that should prevent a recurrence of the bank panics of 1930-1933? A. banks are more cautious lenders B. banks keep large amounts of excess reserves on hand C. the FDIC insures bank deposits and therefore depositors do not panic and rush to withdraw money when individual banks have financial problems D. the President now has the authority to close banks whenever panics occur

C. the FDIC insures bank deposits and therefore depositors do not panic and rush to withdraw

In prosperous times commercial banks are likely to hold very small amounts of excess reserves because: A. the Fed wants commercial banks to increase the money supply during economic expansions. B. it is very costly to transfer funds between commercial banks and the central banks. C. the Federal Reserve Banks pay lower rates of interest on bank reserves than could be earned by the commercial banks loaning out the reserves. D. the Federal Reserve Banks want to minimize their interest payments on such deposits.

C. the Federal Reserve Banks pay lower rates of interest on bank reserves than could be earned by the commercial banks loaning out the reserves.

When the receipts given by goldsmiths to depositors were used to make purchases: A. the gold standard was created. B. existing banking laws were violated. C. the receipts became in effect paper money. D. a fractional reserve banking system was created.

C. the receipts became in effect paper money.

A single commercial bank must meet a 25 percent reserve requirement. If the bank has no excess reserves initially and $5,000 of cash is deposited in the bank, it can increase its loans by a maximum of: A. $1,250. B. $120,000. C. $5,000. D. $3,750.

D. $3,750.

Suppose a commercial banking system has $100,000 of outstanding checkable deposits and actual reserves of $35,000. If the reserve ratio is 20 percent, the banking system can expand the supply of money by the maximum amount of: A. $122,000. B. $175,000. C. $300,000. D. $75,000.

D. $75,000.

(Last Word) A "national bank holiday" that closed all banks for a week and resulted in Federal deposit insurance occurred in the United States in: A. 2008, following the financial crisis that led to the Great Recession. B. 1987, following the collapse of numerous savings and loan associations. C. 1945, following the end of the Second World War. D. 1933, following the bank panics of 1930-1933.

D. 1933, following the bank panics of 1930-1933.

Which of the following is correct? A. Required reserves minus actual reserves equal excess reserves. B. Required reserves equal excess reserves minus actual reserves. C. Required reserves equal actual reserves plus excess reserves. D. Actual reserves minus required reserves equal excess reserves.

D. Actual reserved minus required reserves equal excess reserves

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: A. m = E/D. B. D = E ×m. C. D = E - 1/m. D. D = m/E.

D. D = m/E.

(Last Word) Which of the following resulted from the financial crisis of 2007-2008? A. A national bank holiday was declared that shut down banks for one week. B. The Fed raised reserve requirements to keep cash from flowing out of banks. C. The Fed raised interest rates to entice depositors to keep their money in banks. D. FDIC insurance was increased from $100,000 to $250,000 per account.

D. FDIC insurance was increased from $100,000 to $250,000 per account.

The market for immediately available reserve balances at the Federal Reserve is known as the: A. money market. B. long-term bond market. C. short-term bond market. D. Federal funds market.

D. Federal funds market.

Which of the following is correct? A. Both the granting and repaying of bank loans expand the aggregate money supply. B. Granting and repaying bank loans do not affect the money supply. C. Granting a bank loan destroys money; repaying a bank loan creates money. D. Granting a bank loan creates money; repaying a bank loan destroys money.

D. Granting a bank loan creates money; repaying a bank loan destroys money.

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.

D. 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.

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

Suppose the reserve requirement is 10 percent. If a bank has $5 million of checkable deposits and actual reserves of $500,000, the bank: A. can safely lend out $500,000. B. can safely lend out $5 million. C. can safely lend out $50,000. D. cannot safely lend out more money.

D. cannot safely lend out more money.

If a portion of the loans extended by commercial banks is taken as cash rather than as checkable deposits, the maximum money-creating potential of the commercial banking system will: A. be equal to twice the reciprocal of the reserve ratio. B. be unaffected. C. increase. D. decrease.

D. decrease.

Which one of the following is presently a major deterrent to bank panics in the United States? A. the legal reserve requirement B. the fractional reserve system C. the gold standard D. deposit insurance

D. deposit insurance

Excess reserves refer to the: A. difference between a bank's vault cash and its reserves deposited at the Federal Reserve Bank. B. minimum amount of actual reserves a bank must keep on hand to back up its customers deposits. C. difference between actual reserves and loans. D. difference between actual reserves and required reserves.

D. difference between actual reserves and required reserves.

Most modern banking systems are based on: A. money of intrinsic value. B. commodity money. C. 100 percent reserves. D. fractional reserves.

D. fractional reserves

Assume that Smith deposits $600 in currency into her checking account in the XYZ Bank. Later that same day Jones negotiates a loan for $1,200 at the same bank. In what direction and by what amount has the supply of money changed? A. decreased by $600 B. increased by $1,800 C. increased by $600 D. increased by $1,200

D. increased by $1,200

If m equals the maximum number of new dollars that can be created for a single dollar of excess reserves and R equals the required reserve ratio, then for the banking system: A. m = R - 1. B. R = m/1. C. R = m - 1. D. m = 1/R.

D. m = 1/R.

The goldsmith's ability to create money was based on the fact that: A. withdrawals of gold tended to exceed deposits of gold in any given time period. B. consumers and merchants preferred to use gold for transactions, rather than paper money. C. the goldsmith was required to keep 100 percent gold reserves. D. paper money in the form of gold receipts was rarely redeemed for gold.

D. paper money was in the form of gold receipts was rarely redeemed for gold.

The reserve ratio refers to the ratio of a bank's: A. reserves to its liabilities and net worth. B. capital stock to its total assets. C. checkable deposits to its total liabilities. D. required reserves to its checkable-deposit liabilities.

D. required reserves to its checkable-deposit liabilities.

The multiple by which the commercial banking system can expand the supply of money is equal to the reciprocal of: A. the MPS. B. its actual reserves. C. its excess reserves. D. the reserve ratio.

D. reserve ratio.

When a bank has a check drawn and cleared against it: A. excess reserves in the banking system decline. B. the nation's total money supply falls. C. the bank's balance sheet does not change. D. the amount of required reserves the bank must have will fall.

D. the amount of required reserves the bank must have will fall.