Deck 15: Money Creation

Question 1

$$\begin{array} { | c | c | c | c | c | } \hline & \text { Reserve Requirement (\%) } & \text { Checkable Deposits } & \text { Actual Reserves } & \text { Excess Reserves } \\\hline ( 1 ) & \underline { W } & \$ 100,000 & \$ 10,000 & \$ 0 \\\hline ( 2 ) & 8 & \underline { X }&20,000 & 12,000 \\\hline ( 3 ) & 12 & 200,000 & \underline { Y } & 8,000 \\\hline ( 4 ) & 20 & 300,000 & 70,000 & \underline { Z } \\\hline\end{array}$$ 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.

Answer 1

$100,000.

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

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.

Answer 3

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

Question 4

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 5

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 6

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 7

A fractional reserve banking system

A) is susceptible to bank "panics" or "runs."
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.

Question 8

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 9

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 10

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 11

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 12

A bank that has assets of $85 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.

Question 13

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 14

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

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

Question 15

Most modern banking systems are based on

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

Question 16

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 17

$$\begin{array} { | c | c | c | c | c | } \hline & \text { Reserve Requirement (\%) } & \text { Checkable Deposits } & \text { Actual Reserves } & \text { Excess Reserves } \\\hline ( 1 ) & \underline { W } & \$ 100,000 & \$ 10,000 & \$ 0 \\\hline ( 2 ) & 8 & \underline { X } & 20,000 & 12,000 \\\hline ( 3 ) & 12 & 200,000 & \underline { Y } & 8,000 \\\hline ( 4 ) & 20 & 300,000 & 70,000 & \underline { Z } \\\hline\end{array}$$ The accompanying table gives data for a commercial bank or thrift. In row 1, the number appropriate for space W is

A) 4.
B) 6.
C) 10.
D) 12.

Question 18

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 19

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.

Question 20

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 21

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.

Question 22

$$\begin{array} { | c | c | c | c | c | } \hline & \text { Reserve Requirement (\%) } & \text { Checkable Deposits } & \text { Actual Reserves } & \text { Excess Reserves } \\\hline ( 1 ) & \underline { W } & \$ 100,000 & \$ 10,000 & \$ 0 \\\hline ( 2 ) & 8 & \underline { X } & 20,000 & 12,000 \\\hline ( 3 ) & 12 & 200,000 & \underline { Y } & 8,000 \\\hline ( 4 ) & 20 & 300,000 & 70,000 & \underline { Z } \\\hline\end{array}$$ The accompanying table gives data for a commercial bank or thrift. In row 4, the number appropriate for space Z is

A) $10,000.
B) $70,000.
C) $48,000.
D) zero.

Question 23

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.

Question 24

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 25

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 26

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.

Question 27

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 28

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

Question 29

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.

Question 30

Assume the Continental National Bank's balance statement is as shown in the accompanying table. Assuming a legal reserve ratio of 20 percent, how much in excess reserves would this bank have after a check for $10,000
Was drawn and cleared against it?

A) $3,000
B) $24,000
C) $6,000
D) $16,000

Question 31

Refer to the accompanying balance sheet for the ABC National Bank. Assume the required reserve ratio is 20 percent. This commercial bank has excess reserves of

A) $0.
B) $3,000.
C) $12,000.
D) $5,000.

Question 32

$$\begin{array} { | c | c | c | c | c | } \hline & \text { Reserve Requirement (\%) } & \text { Checkable Deposits } & \text { Actual Reserves } & \text { Excess Reserves } \\\hline ( 1 ) & \underline { W } & \$ 100,000 & \$ 10,000 & \$ 0 \\\hline ( 2 ) & 8 & \underline { X } & 20,000 & 12,000 \\\hline ( 3 ) & 12 & 200,000 & \underline { Y } & 8,000 \\\hline ( 4 ) & 20 & 300,000 & 70,000 & \underline { Z } \\\hline\end{array}$$ The accompanying table gives data for a commercial bank or thrift. In row 3, the number appropriate for space Y is

A) $24,000.
B) $32,000.
C) $48,000.
D) $96,000.

Question 33

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 34

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.

Question 35

cess 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 36

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 37

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 38

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

Question 39

A reserve requirement of 20 percent means a bank must have at least $1,000 of reserves if its checkable deposits are

A) $100.
B) $1,000.
C) $5,000.
D) $12,000.

Question 40

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 41

Refer to the accompanying balance sheet for the ABC National Bank. Assume the required reserve ratio is 20 percent. If the original balance sheet was for the commercial banking system, rather than a single bank, loans and
Checkable deposits could have been expanded by a maximum of

A) $8,000.
B) $15,000.
C) $48,000.
D) $25,000.

Question 42

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.

Question 43

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 44

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.

Question 45

Refer to the accompanying balance sheet for the First National Bank of Bunco. All figures are in millions. Suppose that this bank currently has $6 million in excess reserves and that customers of this bank collectively write checks
For cash at the bank in the amount of $6 million. As a result, the bank's excess reserves diminish to

A) $0.
B) $6 million.
C) $0.72 million.
D) $0.84 million.

Question 46

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 47

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.

Question 48

If you deposit a $50 bill 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.

Question 49

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.

Question 50

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 51

Refer to the accompanying balance sheet for the ABC National Bank. Assume the required reserve ratio is 20 percent. Assuming the bank loans out all of its remaining excess reserves as a checkable deposit and has a check
Cleared against it for that amount, its reserves and checkable deposits will now be

A) $25,000 and $122,000, respectively.
B) $22,000 and $110,000, respectively.
C) $32,000 and $115,000, respectively.
D) $22,000 and $105,000, respectively.

Question 52

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 53

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 54

Refer to the accompanying balance sheet for the First National Bank of Bunco. All figures are in millions. If this bank has excess reserves of $6 million, the legal reserve ratio must be

A) 10 percent.
B) 12 percent.
C) 14 percent.
D) 20 percent.

Question 55

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.

Question 56

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 57

Refer to the accompanying balance sheet for the ABC National Bank. Assume the required reserve ratio is 20 percent. This bank can safely expand its loans by a maximum of

A) $7,000.
B) $25,000.
C) $12,000.
D) $5,000.

Question 58

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.

Question 59

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 60

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.

Question 61

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 62

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 63

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.

Question 64

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 65

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 66

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.

Question 67

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 68

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.

Question 69

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.

Question 70

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) 3?.
B) 4.
C) 5.
D) 6.67.

Question 71

Refer to the accompanying consolidated balance sheet for the commercial banking system. Assume the required reserve ratio is 30 percent. All figures are in billions. If the commercial banking system actually loans the maximum
Amount it is able to lend,

A) reserves and deposits equal to that amount will be gained.
B) excess reserves will be $2.6 billion.
C) excess reserves will fall to $1.7 billion.
D) excess reserves will be reduced to zero.

Question 72

The basic reason why the commercial banking system can increase its checkable deposits by a multiple of itscess 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.

Question 73

Refer to the accompanying consolidated balance sheet for the commercial banking system. Assume the required reserve ratio is 30 percent. All figures are in billions. The maximum amount by which the commercial banking
System can expand the supply of money by lending is

A) $30 billion.
B) $23.1 billion.
C) $27 billion.
D) $15 billion.

Question 74

A bank temporarily short of required reserves 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.

Question 75

Refer to the accompanying consolidated balance sheet for the commercial banking system. Assume the required reserve ratio is 10 percent. All figures are in billions. The commercial banking system has excess reserves of

A) $0 billion.
B) $30 billion.
C) $60 billion.
D) $70 billion.

Question 76

Since 2009, how much has been borrowed through the federal funds market?

A) $0
B) $43 billion
C) $1,148 billion
D) $787 million

Question 77

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) $D = E \times m$
C) $D = E - 1 / m$
D) $D = m / E$

Question 78

Refer to the accompanying consolidated balance sheet for the commercial banking system. Assume the required reserve ratio is 30 percent. All figures are in billions. The commercial banking system has excess reserves of

A) $9 billion.
B) $7 billion.
C) $6.1 billion.
D) $5 billion.

Question 79

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.

Question 80

The multiple by which the commercial banking system can expand the supply of money on the basis of 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.