Deck 12: Money Creation and the Federal Reserve

Question 1

If the money multiplier is 4, what is the reserve requirement?

A) 4%
B) 10%
C) 25%
D) 40%

Answer 1

C

Question 2

Which of the following acts created the central bank of the United States as we know it today?

A) The Federal Reserve Act of 1913
B) The Employment Act of 1946
C) International Banking Act of 1978
D) FDIC Improvement Act of 1991

Answer 2

A

Question 3

What is the most important function of the Federal Reserve?

A) open market operations
B) setting the reserve requirement
C) determining mortgage rates
D) setting the discount rate

Answer 3

A

Question 4

The federal funds rate is the interest rate that banks charge other banks for _____ loans.

A) 3-day
B) 30-day
C) 90-day
D) overnight

Question 5

Under which condition would the Fed be most likely to engage in its role as the lender of last resort?

A) when throngs of borrowers apply for loans as the housing market picks up
B) when a stock market crash causes people to sell their stocks and purchase bank CDs instead
C) if a lack of confidence in the financial system causes savers to withdraw money from banks
D) when record amounts of student loans are paid back before interest rates rise

Question 6

Which of these is a liability for a bank?

A) cash it keeps in its ATMs
B) reserves at the Fed
C) loans it makes to customers
D) customers' checking account balances

Question 7

If the reserve requirement changes from 10% to 15%, what happens to the money multiplier?

A) It goes up.
B) It goes down.
C) It stays the same.
D) It becomes 15.

Question 8

If a bank has a total of $80,000 in deposits and has made three loans in the amounts of $10,000, $20,000, and $30,000, what is this bank's reserve ratio (assuming it has no other deposits or made any other loans)?

A) 20%
B) 25%
C) 60%
D) 75%

Question 9

Which of these would be the lowest interest rate?

A) discount rate
B) federal funds rate
C) prime rate
D) 30-year mortgage rate

Question 10

Which of these are functions performed by the Federal Reserve Banks and their branches? I. regulating and supervising member banks
II) distributing coins and currency
III) setting interest rates paid by homeowners

A) I only
B) I and II
C) II and III
D) I, II, and III

Question 11

The main feature of fractional reserve banking is that banks:

A) lend out as little as possible to avoid becoming insolvent.
B) keep most of its deposits in a vault in order for customers to have easy access to cash.
C) keep a portion of deposits in reserves but lend out the rest.
D) invest all of its deposits in a combination of stocks and bonds.

Question 12

If Eighth Street Bank receives a $1,000 deposit, loans out $800, and keeps $200 in reserves, the total assets of Eighth Street Bank increased by:

A) $200
B) $800
C) $1,000
D) $2,000

Question 13

Suppose banks hold 20% of money in reserves. What is the money multiplier?

A) 5
B) 10
C) 20
D) 50

Question 14

How is money created "out of thin air" by banks?

A) Banks loan out money that is then redeposited into other banks, creating a cycle.
B) Banks are able to print as much money as they need to run their daily operations.
C) Banks can borrow large amounts of money from the government at virtually no interest.
D) Banks can recall loans back from customers at any time, generating reserves quickly.

Question 15

There are _____ Regional Federal Reserve Banks; the only Regional Bank president who is a permanent member of the Federal Open Market Committee is based in _____.

A) 7; San Francisco
B) 7; New York
C) 12; San Francisco
D) 12; New York

Question 16

When the Federal Reserve prints money, what does it do with it?

A) buys bonds to reduce the interest rate
B) sells bonds to reduce the interest rate
C) buys bonds to raise the interest rate
D) sells bonds to raise the interest rate

Question 17

If the reserve requirement is 20%, but the banks hold an additional 10% of deposits as excess reserves, what is the leakage-adjusted money multiplier?

A) 2.5
B) 3.3
C) 5
D) 10

Question 18

Which of the following is NOT true about the Fed's Board of Governors?

A) There are seven members of the Board of Governors.
B) Members of the Board of Governors serve one 14-year term.
C) The Board of Governors is located in Washington, D.C.
D) Members of the Board of Governors are elected by voters in the region they serve.

Question 19

In order for the Federal Reserve to raise interest rates, it needs to:

A) reduce the money supply.
B) raise the money supply.
C) print money to buy bonds.
D) reduce the reserve requirement.

Question 20

Which of these is NOT a leakage in money creation?

A) keeping cash under the mattress
B) foreigners holding U.S. dollars to diversify risk
C) banks holding more reserves than required
D) depositing a large jar of coins at the bank

Question 21

(Table) SCENARIO: Assume that the Empathy State Bank begins with the balance sheet below and is fully loaned up. Vanessa has a checking account at Empathy State Bank. If she writes a check for $5,000 to pay for her new car and if the bank has a reserve requirement of 5%, this bank's excess reserves will be:

A) $250.
B) $5,250.
C) $0; Empathy State Bank will be fully loaned up.
D) negative; Empathy State Bank will need to acquire $2,250 in reserves.

Question 22

The idea that banks hold only a portion of deposits and lend the rest out is called the:

A) fractional reserve banking system.
B) partial banking system.
C) double-entry bookkeeping system.
D) loan-maximization system.

Question 23

If Zachary deposits $500 cash into his checking account, his bank's assets then:

A) rise by $500 and liabilities rise by $500.
B) rise by $500 but liabilities do not change.
C) do not change but liabilities rise by $500.
D) rise by $500 and liabilities fall by $500.

Question 24

The formula for calculating the reserve ratio is:

A) total deposits divided by the reserve requirement.
B) reserves times the reserve requirement.
C) reserves divided by the reserve requirement.
D) reserves divided by total deposits.

Question 25

(Table) SCENARIO: Assume that the Empathy State Bank begins with the balance sheet below and is fully loaned up. What is the amount of this bank's reserves?

A) $2,500
B) $7,500
C) $10,000
D) $100,000

Question 26

Consider this T-account for your bank, which shows that you deposited $100 into your checking account and that your bank then made a $75 loan to Michelle. $$\begin{array} { l l } \text { Assets } & \text { Liabilities } \\+ \$ 100 \text { (cash) } & + \$ 100 \text { (increase in your checking account) } \\+ \$ 75 \text { (loan to Michelle) } & + \$ 75 \text { (increase in Michelle's checking account) }\end{array}$$ Your bank's reserve ratio is:

A) 57.14%
B) 75%
C) 125%.
D) 42.8%.

Question 27

Assume that the reserve requirement is 20%. A bank has $20 billion in demand deposits. How much money does the bank have to keep in reserves?

A) $20 billion
B) $10 billion
C) $4 billion
D) $2 billion

Question 28

An individual bank can, at most, lend out all of its:

A) checkable deposits.
B) excess reserves.
C) reserves.
D) deposits.

Question 29

If a bank is subject to a reserve requirement of 15%, then it is required to:

A) place 15% of its deposits in the vault.
B) lend out 15% of its deposits.
C) place 15% of its deposits in the account with its regional Federal Reserve bank.
D) place 15% of its deposits in the account with its regional Federal Reserve bank or the vault.

Question 30

(Table) SCENARIO: Assume that the Empathy State Bank begins with the balance sheet below and is fully loaned up. This bank's reserve ratio is:

A) 0.025.
B) 0.075.
C) 0.10.
D) 0.25.

Question 31

Suppose a bank has $1 million in deposits, a reserve requirement of 10%, and bank reserves of $300,000. The bank has excess reserves of:

A) $50,000.
B) $100,000.
C) $200,000.
D) $300,000.

Question 32

The fractional reserve banking system:

A) makes possible the money creation process.
B) helps to prevent bank runs.
C) requires banks to hold a portion of their demand deposits in reserves.
D) All of the answers are correct.

Question 33

If the reserve requirement is 10%, a withdrawal of $500 leads to a potential decrease in the money supply of:

A) $50.
B) $2,500.
C) $5,000.
D) $4,500.

Question 34

If a bank is subject to a reserve requirement of 10% and if its reserve ratio is 33%, then all of the following are true EXCEPT that it:

A) can make additional loans.
B) has excess reserves.
C) must limit withdrawals.
D) is considered highly liquid.

Question 35

(Table) SCENARIO: Assume that the Empathy State Bank begins with the balance sheet below and is fully loaned up. If this bank is subject to a reserve requirement of 5%, how much more can it loan out if it wants to be fully loaned up?

A) $2,500
B) $5,000
C) $10,000
D) Nothing. This bank is already fully loaned up.

Question 36

(Table) SCENARIO: Assume that the Empathy State Bank begins with the balance sheet below and is fully loaned up. If this bank is subject to a reserve requirement of 5%, what is the amount of its excess reserves?

A) $2,500
B) $5,000
C) $10,000
D) Negative. This bank does not have excess reserves; it needs $2,500 to meet its reserve requirement.

Question 37

If Abigail withdraws $300 cash from her checking account, her bank's assets then:

A) do not change but liabilities fall by $300.
B) fall by $300 but liabilities do not change.
C) fall by $300 and liabilities fall by $300.
D) fall by $300 and liabilities rise by $300.

Question 38

The fractional reserve banking system refers to a system in which banks:

A) hold reserves equal to a fraction of their deposit liabilities.
B) keep 100% of their liabilities always on reserve.
C) forbid the removal of more than a fraction of demand deposits per day.
D) keep only a fraction of each person's demand deposits.

Question 39

If the reserve requirement is 25%, a new deposit of $1,000 leads to a potential increase in the money supply of:

A) $4,000.
B) $250.
C) $10,000.
D) $5,000.

Question 40

Assume that the Federal Reserve sets the reserve requirement at 10%. If a bank has $100 million in deposits, then its required reserves must equal:

A) $1 million.
B) $10 million.
C) $90 million.
D) $110 million.

Question 41

When banks hold excess reserves, they:

A) increase the amount of loans to the public.
B) reduce the actual money multiplier.
C) increase the money supply.
D) increase the reserve requirement.

Question 42

A bank has $50,000 in deposits from its checking account customers and loans of $49,000. Of the $49,000 loaned out, $43,000 had remained in the checking accounts of the loan recipients but it now has been converted to cash by the loan recipients. The bank had $50,000 cash on hand prior to the remaining loan proceeds being converted to cash, and the reserve requirement is 25%. The reserve ratio for this bank after the remaining loan proceeds are converted to cash is _____, and _____ meeting its reserve requirement.

A) 14%; it is not
B) 53.76%; it is
C) 0.002%; it is not
D) 20%, it is

Question 43

If a bank's required reserve ratio is 10%, an initial injection of $2,000 would increase the overall money supply by up to:

A) $200.
B) $2,000.
C) $10,000.
D) $20,000.

Question 44

Assume that the reserve requirement is 10% and no excess reserves are held. If an initial cash deposit of $10,000 is made, the money supply has the potential to increase by:

A) $11,000.
B) $100,000.
C) $90,000.
D) $110,000.

Question 45

Sumit deposits $1,500 cash into his checking account. The reserve requirement is 25%. What is the change in his bank's required reserves?

A) $1,500
B) $375
C) $1,125
D) $6,000

Question 46

If the reserve requirement is 25% and a new deposit leads to a potential increase in the money supply of $4,000, the amount of the new deposit must equal:

A) $4,000.
B) $1,000.
C) $10,000.
D) $5,000.

Question 47

Sumit deposits $1,500 cash into his checking account. The reserve requirement is 25%. How many dollars' worth of loans can the banking system create?

A) $1,500
B) $0
C) $4,500
D) $6,000

Question 48

The _____ measures the maximum amount the money supply can increase when new deposits enter the system.

A) equity multiplier
B) FDIC
C) money multiplier
D) Federal Reserve System

Question 49

If the reserve requirement is 25%, then a $500 increase in deposits means that the money supply:

A) will increase by $2,000.
B) has the potential to increase by $2,000.
C) will increase by $125.
D) has the potential to increase by $125.

Question 50

Sumit deposits $1,500 cash into his checking account. The reserve requirement is 25%. What is the change in his bank's excess reserves?

A) $1,500
B) $375
C) $1,125
D) $0

Question 51

If the reserve requirement is 18.5%, what is the money multiplier?

A) 1.9
B) 20
C) 18.5
D) 5.4

Question 52

A bank has $50,000 in checking account deposits and loans of $49,000. Of the $49,000 loaned out, $43,000 remains in the checking accounts of the loan recipients. The bank has $50,000 cash on hand, and the reserve requirement is 25%. The amount of its required reserves equals:

A) $27,000.
B) $50,000.
C) $26,750.
D) $23,250.

Question 53

Assume the reserve requirement is 10% and all banks are fully loaned up. If a new deposit of $10,000 is made into Bank X, that bank, with this deposit, can make new loans of:

A) $9,000.
B) $10,000.
C) $1,000.
D) $11,000.

Question 54

A bank has $50,000 in deposits from its checking account customers and loans of $49,000. Of the $49,000 loaned out, $43,000 remains in the checking accounts of the loan recipients. The bank has $50,000 cash on hand, and the reserve requirement is 25%. The reserve ratio for this bank is _____, and _____ meeting its reserve requirement.

A) 186%; it is not
B) 53.76%; it is
C) 0.002%; it is not
D) 20%, it is

Question 55

Callie withdraws $600 from her bank account. If the reserve requirement is 15%, by how many dollars must her bank reduce its lending?

A) $510
B) $600
C) $90
D) $667

Question 56

If the reserve requirement is 2.5% and a bank initially receives $30,000 in deposits from the Fed, then the maximum amount of money that the banking system can create is:

A) $750.
B) $1,500.
C) $30,000.
D) $1.2 million.

Question 57

If the reserve requirement is 25%, then a $1 increase in deposits means that the money supply:

A) will increase by $4.
B) has the potential to increase by $4.
C) will increase by $25.
D) has the potential to increase by $25.

Question 58

A bank has $50,000 in checking account deposits and loans of $49,000. Of the $49,000 loaned out, $43,000 remains in the checking accounts of the loan recipients. The bank has $50,000 cash on hand, and the reserve requirement is 25%. The amount of its excess reserves equals:

A) $27,000.
B) $50,000.
C) $26,750.
D) $23,250.

Question 59

The money multiplier:

A) is equal to the reserve requirement.
B) measures the maximum amount the money supply can increase when new deposits enter the banking system.
C) works only for increases in the money supply and never for decreases.
D) demonstrates that small changes in reserves have a negligible impact on the total money supply.

Question 60

Sumit deposits $1,500 cash into his checking account. The reserve requirement is 25%. How much money can the banking system create?

A) $1,500
B) $0
C) $1,125
D) $6,000

Question 61

If the reserve requirement is 10%, then the potential money multiplier is _____ and the actual money multiplier is _____.

A) 10; greater than 10
B) 100; greater than 100
C) 10; less than 10
D) 100; less than 100

Question 62

If the reserve requirement is 25%, then the potential money multiplier is _____ and the actual money multiplier is _____.

A) 25; less than 25
B) 25; greater than 25
C) 4; less than 4
D) 250; greater than 250

Question 63

(Table) Consider the T-account in the table. If the reserve requirement is 20%, then: $$\begin{array} { | l | l | } \hline \text { Assets } & \text { Liabilities } \\\hline \$ 25,000 \text { (cash) } & \begin{array} { l } \$ 50,000 \text { (checking account } \\\text { balances) }\end{array} \\\hline \$ 50,000 \text { (loans) } & \begin{array} { l } \$ 25,000 \text { (loan recipients' checking } \\\text { account balances) }\end{array} \\\hline\end{array}$$

A) the potential money multiplier and the actual money multiplier are the same.
B) the potential money multiplier is larger than the actual money multiplier.
C) the potential money multiplier is smaller than the actual money multiplier.
D) the actual money multiplier is zero.

Question 64

The actual money multiplier is:

A) usually equal to the potential money multiplier.
B) usually larger than the potential money multiplier.
C) usually smaller than the potential money multiplier.
D) always equal to the potential money multiplier.

Question 65

If the reserve requirement is 20%, then a $1 decrease in deposits means that the money supply:

A) will decrease by $5.
B) has the potential to increase by $20.
C) will increase by $5.
D) has the potential to decrease by $5.

Question 66

The growth of businesses such as Coinstar, which converts coins into bank notes or gift cards, caused money to _____, and the actual money multiplier to _____, ceteris paribus.

A) reenter the banking system; rise
B) reenter the banking system; fall
C) leave the banking system; rise
D) leave the banking system; fall

Question 67

(Table) Consider the T-account in the table. If the reserve requirement is 20%, then: $$\begin{array} { | l | l | } \hline \text { Assets } & \text { Liabilities } \\\hline \$ 14,000 \text { (cash) } & \begin{array} { l } \$ 50,000 \text { (checking account } \\\text { balances) }\end{array} \\\hline \$ 56,000 \text { (loans) } & \begin{array} { l } \$ 20,000 \text { (loan recipients' checking } \\\text { account balances) }\end{array} \\\hline\end{array}$$

A) the potential money multiplier and the actual money multiplier are the same.
B) the potential money multiplier is larger than the actual money multiplier.
C) the potential money multiplier is smaller than the actual money multiplier.
D) the actual money multiplier is zero.

Question 68

Tighter lending standards tend to _____ the money multiplier, making it _____ for the Fed to use its tools effectively.

A) increase; easier
B) increase; harder
C) decrease; easier
D) decrease; harder

Question 69

Money leakages tend to _____ during recessions, causing the actual money multiplier to _____.

A) rise; rise
B) rise; fall
C) fall; rise
D) fall; fall

Question 70

(Table) Consider the T-account in the table. If the reserve requirement is 20%, then: $$\begin{array} { | l | l | } \hline \text { Assets } & \text { Liabilities } \\\hline \$ 28,000 \text { (cash) } & \begin{array} { l } \$ 5,000 \text { (checking account } \\\text { balances) }\end{array} \\\hline \$ 42,000 \text { (loans) } & \$ 20,000 \text { (loan recipients' checking } \\& \text { account balances) }\\\hline \end{array}$$

A) the potential money multiplier and the actual money multiplier are the same.
B) the potential money multiplier is 50% larger than the actual money multiplier.
C) the potential money multiplier is 20% smaller than the actual money multiplier.
D) the actual money multiplier is 5.

Question 71

If foreigners become less confident in the ability of the U.S. dollar to hold its value:

A) the potential multiplier will rise.
B) the potential multiplier will fall.
C) the actual multiplier will rise.
D) the actual multiplier will fall.

Question 72

If a bank has assets of $5 billion and liabilities of $4.8 billion:

A) its equity equals $200 million.
B) its equity equals -$800 million.
C) it faces a solvency crisis.
D) its equity equals -$800 million and it faces a solvency crisis.

Question 73

If the spread of ATMs made it more likely for people to hold their money in banks, the potential money multiplier probably _____ and the actual money multiplier probably _____, ceteris paribus.

A) did not change; rose
B) did not change; fell
C) rose; rose
D) rose; did not change

Question 74

Which statement does NOT explain why the actual money multiplier and the potential money multiplier are different?

A) Banks hold excess reserves during tough economic times.
B) The interest rate that banks pay on deposits is very low.
C) Foreign deposits in American banks are not counted in the actual money multiplier.
D) Foreign consumers, businesses, and governments hold U.S. dollars.

Question 75

There are two ways for money to be initially deposited into the banking system. They include:

A) the deposit of a check by a bank customer and a gold deposit by the government.
B) the deposit of a check by a bank customer and a cash deposit by a bank customer.
C) a cash deposit by a bank customer and a cash deposit by the government.
D) a cash deposit by a bank customer and an electronic reserve deposit by the government.

Question 76

If there is a general rise in fear of the financial system:

A) the potential multiplier will rise.
B) the potential multiplier will fall.
C) the actual multiplier will rise.
D) the actual multiplier will fall.

Question 77

During the 2007-2009 recession, the money multiplier:

A) fell but remained above 1.
B) fell to less than 1.
C) rose above 1.
D) rose above 10 for the first time.

Question 78

If the reserve requirement is 10%, then a $6,000 decrease in deposits means that the money supply:

A) will decrease by $600.
B) has the potential to decrease by $600.
C) will decrease by $60,000.
D) has the potential to decrease by $60,000.

Question 79

If banks increase excess reserves to increase their ability to absorb a higher rate of defaults:

A) the potential multiplier will rise.
B) the potential multiplier will fall.
C) the actual multiplier will rise.
D) the actual multiplier will fall.

Question 80

About _____ of U.S. currency is held outside the United States.

A) one-quarter
B) one-third
C) half
D) two-thirds