Chapter 35 Graded Assignment

b. In a fractional reserve system, deposit insurance

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

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.

b. Lowering leverage would make the financial system __________ stable.

more

a. 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.

a. 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.

a. The Federal Reserve requires commercial banks to have reserves because

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

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

reserves, securities, loans, and vault cash.

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

b. The monetary multiplier is defined as

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

Suppose that Serendipity Bank has excess reserves of $14,000 and checkable deposits of $200,000. If the reserve ratio is 10 percent, how much does the bank hold in actual reserves?

34,000 The first step is to calculate the required reserves for the bank. This equals the product of the required reserve ratio (decimal form) and checkable deposits. Required reserves = 0.10 × $20,000 = $20,000. The second step is to calculate actual reserves. This is the sum of required reserves and excess reserves. Actual reserves = required reserves + excess reserves = $20,000 + $14,000 = $34,000. 20,000*.10=20,000 20,000+14000=34000

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.

Suppose the assets of the Silver Lode Bank are $100,000 higher than on the previous day and its net worth is up $60,000. By how much and in what direction must its liabilities have changed from the day before?

Liabilities increased by 40,000. By definition (balance-sheet approach) the total amount of assets must equal liabilities plus net worth. Assets = liabilities + net worth. We can extend this logic to changes. That is, the change in assets must equal the change in liabilities plus the change in net worth. Δ Assets = Δ liabilities + Δ net worth.

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.

a. If the required reserve ratio is 5 percent, what is the monetary multiplier? b. If the monetary multiplier is 2, what is the required reserve ratio?

a. 20 b. 50 With a required reserve ratio of 5 percent, the money multiplier is 1/.05 = 20. If First National lends out its excess reserves of $75,000, the money supply will eventually increase by $75,000 x 20 = $1,500,000 1/0.2 = 50

a. Merchants accepted gold receipts as a means of payment even though the receipts were issued by goldsmiths, not the government. This is because b. By issuing loans in the form of gold receipts, there was additional risk because

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

c. Excess reserves are equal to

actual reserves - required reserves.

b. Net worth is equal to

assets - liabilities.

a. 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.

d. Excess reserves

can be lent out, thereby increasing the money supply.

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

checkable deposits.

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.

false

c. The monetary multiplier is

inversely related to the reserve ratio.

c. A balance sheet must always balance because

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

b. 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.

The actual reason that banks must hold required reserves is:

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