Deck 35: Money Creation

Question 1

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.Topic: Money-Creating Transactions of a Commercial Bank

Answer 1

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

Question 2

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.

Answer 2

A bank's liabilities plus its net worth equal its assets.

Question 3

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.

Answer 3

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

Question 4

Most modern banking systems are based on

A)money of intrinsic value.
B)commodity money.
C)100 percent reserves.
D)fractional reserves.

Question 5

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.

Question 6

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.

Question 7

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.

Question 8

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

Question 9

The accompanying table gives data for a commercial bank or thrift.In row 2, the number appropriate for space X is

A)$20,000.
B)$60,000.
C)$200,000.
D)$100,000.

Question 10

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.

Question 11

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.

Question 12

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.

Question 13

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

Question 14

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.

Question 15

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.

Question 16

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.

Question 17

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.

Question 18

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.

Question 19

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.

Question 20

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.

Question 21

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.

Question 22

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.

Question 23

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.

Question 24

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.

Question 25

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 amounthas the supply of moneychanged?

A)decreased by $600
B)increased by $1,800
C)increased by $600
D)increased by $1,200

Question 26

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.

Question 27

In prosperous times, commercial banks are likely to hold very small amounts of excess reserves because

A)the Fed forces 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)Federal Reserve Banks pay lower rates of interest on bank reserves than could be earned by the commercial banks loaning out the reserves.
D)Federal Reserve Banks want to minimize their interest payments on such deposits.Topic: Money-Creating Transactions of a Commercial Bank

Question 28

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.

Question 29

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

Question 30

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.Topic: Money-Creating Transactions of a Commercial Bank

Question 31

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.

Question 32

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.

Question 33

Overnight loans from one bank to another for reserve purposes entail an interest rate called the

A)prime rate.
B)discount rate.
C)federal funds rate.
D)treasury bill rate.Topic: Money-Creating Transactions of a Commercial Bank

Question 34

The last transaction in the federal funds market occurred in 2008 because Topic: Money-Creating Transactions of a Commercial Bank

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.Topic: Money-Creating Transactions of a Commercial Bank

Question 35

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.

Question 36

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.

Question 37

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.Topic: Money-Creating Transactions of a Commercial Bank

Question 38

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.

Question 39

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.

Question 40

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.Topic: Money-Creating Transactions of a Commercial Bank

Question 41

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.

Question 42

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.

Question 43

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.

Question 44

Balance sheets always balance because reserves must always equal liabilities plus net worth.

Question 45

(Last Word) The greater the leverage in the financial system, all else equal,

A)the smaller the monetary multiplier.
B)the smaller the profit and loss margins of financial firms.
C)the greater the stability of the financial system.
D)the greater the instability of the financial system.

Question 46

Actual reserves equal required reserves plus excess reserves.

Question 47

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.

Question 48

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.

Question 49

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)3½.
B)4.
C)5.
D)6.67.

Question 50

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.

Question 51

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.

Question 52

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.

Question 53

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.

Question 54

If the reserve ratio is 100 percent, the value of the monetary multiplier is

A)0.
B)1.
C) 10
D) 100

Question 55

(Last Word) Leverage in the financial system

A)magnifies profits but reduces losses.
B)magnifies both profits and losses.
C)reduces profits but magnifies losses.
D)reduces both profits and losses.

Question 56

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.

Question 57

Commercial bank reserves are an asset to commercial banks but a liability to the Federal Reserve Bank holding them.

Question 58

Excess reserves are the amount by which required reserves exceed actual reserves.

Question 59

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.

Question 60

(Last Word) The term "leverage" refers to

A)using borrowed money in an attempt to increase profits.
B)the Fed's ability to control money creation through the reserve ratio.
C)investing in stocks from multiple companies in an effort to spread risk.
D)Fed sales and purchases of bonds to stabilize the money supply.

Question 61

A bank owns a 10-story office building.In the bank's balance sheet, this would be listed as part of

A)assets.
B)liabilities.
C)capital stock.
D)net worth.

Question 62

What is one significant consequence of fractional reserve banking?

A)Banks are vulnerable to "panics" or "bank runs."
B)Banks can only lend an amount equal to their deposits.
C)Banks hold a portion of their deposits in gold.
D)Banks can serve the withdrawals of all their depositors.

Question 63

The higher the reserve requirement, the lower is the monetary multiplier.

Question 64

If the reserve requirement is 20 percent, the monetary multiplier will be 4.

Question 65

Checkable deposits are a liability on a bank's balance sheet.

Question 66

A bank's net worth is equal to its

A)assets plus its liabilities.
B)assets minus its liabilities.
C)liabilities minus its assets.
D)profits plus its assets.

Question 67

Fractional reserve banking refers to a system where banks

A)grant loans to their borrowing customers.
B)deposit a fraction of their reserves at the central bank.
C)hold only a fraction of their deposits in their reserves.
D)accept a portion of their deposits in checkable accounts.

Question 68

An individual bank can safely lend out a multiple of its excess reserves, but the banking system can safely lend out only an amount equal to the excess reserves in the banking system.

Question 69

The monetary multiplier and the spending multiplier are two ways of referring to the same concept.

Question 70

Commercial banks increase the supply of money when they purchase either personal IOUs or government bonds from businesses and households.

Question 71

The claims of creditors of a bank against the bank's assets are called

A)loans.
B)net worth.
C)liabilities.
D)required reserves.

Question 72

The fractional reserve system of banking started when goldsmiths began

A)accepting deposits of gold for safe storage.
B)charging people who deposited their gold.
C)using deposited gold to produce products for sale to others.
D)issuing paper receipts in excess of the amount of gold held.

Question 73

A bank has $2 million in checkable deposits.In the bank's balance sheet, this would be part of

A)assets.
B)liabilities.
C)capital stock.
D)net worth.

Question 74

When commercial banks retire outstanding loans, the supply of money is increased.

Question 75

What is one significant characteristic of fractional reserve banking?

A)Banks hold a fraction of their loans in reserve.
B)Banks use deposit insurance for loans to customers.
C)Bank loans will be equal to the amount of gold on deposit.
D)Banks can create money through lending their reserves.

Question 76

The banking system can lend by a multiple of its excess reserves because lending does not result in a loss of reserves to the banking system as a whole.

Question 77

A bank's net worth is the

A)measure of its profitability.
B)value of its vault cash and loan portfolio.
C)claims of its owners against the bank's assets.
D)claims of its creditors against the bank's assets.

Question 78

In an uncontrolled or unregulated system, commercial bank lending will tend to intensify the business cycle.

Question 79

Commercial banks monetize claims when they sell securities to Federal Reserve Banks.

Question 80

The supply of money increases when the public buys government securities from commercial banks.