Deck 19: Money Creation

Question 1

European banks began with which of the following?

A) Monarchs were the first bankers, lending out cash to help the poor learn a craft.
B) Churches were the first bankers, lending out cash to help the poor learn a craft.
C) Goldsmiths were the first bankers, and the paper receipts they issued for gold held on deposit became valued as money.
D) Fishermen were the first bankers, and the paper receipts they issued for the fish they stored in the hulls of their ships became valued as money.

Answer 1

C

Question 2

Which of the following would appear on the liability side of a commercial bank balance sheet?

A) reserves
B) checkable deposits
C) loans
D) securities

Answer 2

B

Question 3

Banks would be expected to:

A) minimize holding excess reserves because the practice of holding more than the required reserves is illegal.
B) minimize holding excess reserves because the practice of holding more than the required reserves is not profitable.
C) maximize holding excess reserves because the practice of holding more than the required reserves increases the assets of the bank.
D) maximize holding excess reserves because the practice of holding more than the required reserves reduces the tax paid by the bank to the Federal Reserve.

Answer 3

B

Question 4

Assume a bank has total deposits of $100,000 and $20,000 is set aside to meet reserve requirements of the Fed. Its required reserve ratio is:

A) $20,000.
B) 20 percent.
C) 0.2 percent.
D) 1 percent.

Question 5

A bank's "required reserves" are:

A) held as deposits with the Federal Reserve System.
B) equal to its checkable deposits.
C) equal to its transactions deposits.
D) equal to its loans.

Question 6

Assume we have a simplified banking system in balance-sheet equilibrium. Also assume that all banks are subject to a uniform 10 percent reserve requirement and demand deposits are the only form of money. A commercial bank receiving a new demand deposit of $100 would be able to extend new loans in the amount of:

A) $10.
B) $90.
C) $100.
D) $1,000.

Question 7

For a bank to earn as much profit as possible, its excess reserves should be:

A) equal to its required reserves.
B) as small as possible.
C) less than its vault cash.
D) growing at a constant rate.

Question 8

Which of the following correctly describes fractional reserve banking?

A) The federal government only insures a fraction of the deposits at most banks.
B) Banks keep a fraction of their loans with other banks to maintain the quality of their loan portfolio.
C) Banks can loan out all but a small fraction of its own money, but must hold all money deposited at the bank on reserve in bank vaults.
D) Banks can loan out all but a fraction of its own money, and all but a fraction of all money deposited at the bank.

Question 9

A bank has $100 million of checkable deposits, $6 million of required reserves, and $2 million of excess reserves. What is the required reserve ratio?

A) 2 percent
B) 3 percent
C) 6 percent
D) 12 percent

Question 10

If the fractional reserve system did not exist,

A) the banking system could not create money.
B) there would be no effect on the ability of the banking system to create money.
C) banks would loan out its required reserves.
D) banks would be highly susceptible to bank runs.

Question 11

If total deposits at Last Bank and Trust are $100 million, total loans are $70 million, and excess reserves are $20 million, then which of the following is the required reserve ratio?

A) 70 percent.
B) 30 percent.
C) 20 percent.
D) 10 percent.

Question 12

__________ plus __________ plus __________ equals ___________.

A) Total deposits, loans, required reserves, excess reserves.
B) Loans, required reserves, excess reserves, total deposits.
C) Required reserves, total deposits, excess reserves, loans.
D) Excess reserves, loans, total deposits, required reserves.

Question 13

A bank faces a required reserve ratio of 5 percent. If the bank has $200 million of checkable deposits and $15 million of total reserves, then how large are the bank's excess reserves?

A) $0
B) $5 million
C) $10 million
D) $15 million

Question 14

Which of the following is a valid statement?

A) The required reserve ratio equals the required reserves as a percentage of total deposits.
B) The required reserves equal the maximum reserves required by the Fed.
C) Excess reserves equal total reserves plus required reserves.
D) The required reserve ratio equals percentage of savings account deposit, but not checkable deposits, required by the Fed.

Question 15

Imagine that Odyssey National is a brand new bank, and that its required reserve ratio is 10 percent. If it accepts a $1,000 deposit, then its excess reserve balance will be:

A) $0.
B) $90.
C) $100.
D) $900.

Question 16

In a commercial bank's T-account, reserves and outstanding loans are recorded as:

A) debts.
B) profits.
C) assets.
D) liabilities.

Question 17

Which of the following does not appear on the asset side of a bank's balance sheet?

A) required reserves
B) checkable deposits
C) loans
D) excess reserves

Question 18

Which of the following compose the reserves of a commercial bank?

A) checkable deposits and time deposits
B) vault cash and deposits of the bank with the Federal Reserve
C) U.S. securities and stock equity
D) cash and U.S. securities

Question 19

Exhibit 19-1 Balance sheet of First Iliad State Bank $$\begin{array} { | l l | l l | } \hline { \text { Assets } } & &{ \text { Liabilities } } \\\hline \text { Required reserves } & \$ 1,000,000 & \text { Demand deposits } & \$ 10,000,000 \\\text { Excess reserves } &0 & & \\ \text { Loans } &\$ & & \\\hline\end{array}$$ In Exhibit 19-1, if the required reserve ratio is raised to 15 percent, First Iliad State will have to convert loans worth:

A) $9,000,000 to required reserves.
B) $1,500,000 to required reserves.
C) $500,000 to required reserves.
D) $1,000,000 to required reserves.

Question 20

If loans are $300,000, checkable deposits are $600,000, and the required reserve ratio is 40 percent, then excess reserves are:

A) $360,000.
B) $240,000.
C) $120,000.
D) $60,000.

Question 21

Assume a simplified banking system in which all banks are subject to a uniform reserve requirement of 20 percent and checkable deposits are the only from of money. A bank that received a new checkable deposit of $10,000 would be able to extend new loans up to a maximum of:

A) $2,000.
B) $8,000.
C) $9,000.
D) $10,000.

Question 22

If your bank faces a 20 percent required reserve ratio and receives a cash deposit of $4,000 into a checkable deposit account, the maximum total amount of money possible after the banking system makes all loans is:

A) $3,200.
B) $4,000.
C) $16,000.
D) $20,000.

Question 23

Exhibit 19-2 Balance Sheet of Springfield National Bank $$\begin{array} { | l l | l l | } \hline { \text { Assets } } && { \text { Liabilities } } \\\hline \text { Total reserves } & \$ 500 & \text { Demand deposits } & \$ 1,000 \\ \text { Loans } & \$ 500 & & \\\hline\end{array}$$ In Exhibit 19-2, if Springfield National's customers write checks for $200 and the required reserve ratio is 20 percent, then its required reserves fall to:

A) $0.
B) $40.
C) $160.
D) $460.

Question 24

Assume we have a simplified banking system in balance-sheet equilibrium. Also assume that all banks are subject to a uniform 10 percent reserve requirement and checkable deposits are the only form of money. A commercial bank receiving a new checkable deposit of $100 would be able to extend new loans in the amount of:

A) $10.
B) $90.
C) $100.
D) $1,000.

Question 25

A bank creates money when it:

A) gets new checkable deposits which the depositor formerly held as cash.
B) has a loan paid off, which creates excess reserves for the bank.
C) makes a loan from its excess reserves.
D) holds back excess reserves because of an increase in the required reserve ratio.

Question 26

Suppose the required reserve ratio is 3 percent, and currency and reserves total $10 million. The maximum change in the money supply that can be supported is:

A) $13 million.
B) $30 million.
C) $97 million.
D) $333.3 million.

Question 27

Exhibit 19-4 Balance sheet of Tucker National Bank $$\begin{array} { | l r | l l | } \hline { \text { Assets } } &&{ \text { Liabilities } } \\\hline \text { Required reserves } & \$ 4,000 & \text { Checkable deposits } & \$ 20,000 \\\text { Excess reserves } & 16,000 & & \\ \text { Loans } &{ 0 } & \\\text { Total } & \$ 20,000 & \text { Total } & \$ 20,000 \\\hline\end{array}$$ The required reserve ratio in Exhibit 19-4 is:

A) 5 percent.
B) 10 percent.
C) 15 percent.
D) 20 percent.

Question 28

Imagine that Odyssey National is a brand new bank, and that its required reserve ratio is 10 percent. If it accepts a $1,000 cash deposit, then, excluding the $1,000 initial deposit, the banking system can increase the money supply by:

A) $900.
B) $910.
C) $1,000.
D) $9,000.

Question 29

If banks have no excess reserves, and the required reserve ratio is raised, the amount that banks can lend is:

A) reduced and the money supply contracts.
B) reduced and the money supply expands.
C) reduced and there is no change in the money supply.
D) increased and the money supply expands.

Question 30

If your bank receives a checkable deposit that results in $20,000 in excess reserves, and the banking system makes loans totaling $60,000, the maximum possible, then the money multiplier must be:

A) 2.
B) 3.
C) 3.5.
D) 4.

Question 31

If Matt Taylor gets his $800 loan from the Paris First National Bank in cash rather than in the form of a new checkable deposit, the:

A) Paris First National Bank will get $800 in new reserves.
B) Paris First National Bank will not get $800 in new reserves.
C) assets of the Paris First National Bank will increase by $800.
D) assets of the Paris First National Bank will decease by $88.

Question 32

Best National Bank operates with a 20 percent required reserve ratio, but has substantial excess reserves. One day a depositor withdraws $500 from his or her checking account at this bank. As a result, the bank's excess reserves:

A) fall by $500.
B) fall by $400.
C) rise by $100.
D) rise by $500.

Question 33

A bank currently has checkable deposits of $100,000, total reserves of $30,000, and loans of $70,000. If the required reserve ratio is lowered from 20 percent to 15 percent, this bank can increase its loans by:

A) $10,000.
B) $15,000.
C) $75,000.
D) $5,000.

Question 34

If a bank has actual reserves of $40,000 and a 20 percent reserve requirement, then the maximum amount of checkable deposits the bank can have if excess reserves are zero is:

A) $200,000.
B) $80,000.
C) $300,000.
D) $20,000.

Question 35

Jeff Kaufman decides to bank with Paris First National Bank (PFN). He opens a checking account by depositing $1,000. According to the PFN balance sheet, after this initial $1,000 checkable deposit, there are $1,000 in:

A) reserves and $1,000 in checkable deposits.
B) liabilities and $2,000 in checkable deposits.
C) checkable deposits and $0 in assets.
D) assets and $0 in liabilities.

Question 36

Suppose a bank has checkable deposits of $100,000 and the required reserve ratio is 20 percent. If the bank currently has $100,000 in reserves, it could lend out as much as:

A) $100,000.
B) $400,000.
C) $80,000.
D) $20,000.

Question 37

A bank that has $10,000 in excess reserves can extend new loans up to a maximum of:

A) $1,000.
B) $9,000.
C) $10,000.
D) $100,000.

Question 38

Which of the following is the money multiplier?

A) The required reserve ratio.
B) 1/(1 - the required reserve ratio).
C) 1/(required reserve ratio).
D) 1/(1 - MPC).

Question 39

Exhibit 19-4 Balance sheet of Tucker National Bank $$\begin{array} { | l r | l l | } \hline { \text { Assets } } &&{ \text { Liabilities } } \\\hline \text { Required reserves } & \$ 4,000 & \text { Checkable deposits } & \$ 20,000 \\\text { Excess reserves } & 16,000 & & \\ \text { Loans } &{ 0 } & \\\text { Total } & \$ 20,000 & \text { Total } & \$ 20,000 \\\hline\end{array}$$ In Exhibit 19-4, the bank could make:

A) $1,000 in new loans.
B) $4,000 in new loans.
C) $16,000 in new loans.
D) $20,000 in new loans.

Question 40

Exhibit 19-4 Balance sheet of Tucker National Bank $$\begin{array} { | l r | l l | } \hline { \text { Assets } } &&{ \text { Liabilities } } \\\hline \text { Required reserves } & \$ 4,000 & \text { Checkable deposits } & \$ 20,000 \\\text { Excess reserves } & 16,000 & & \\ \text { Loans } &{ 0 } & \\\text { Total } & \$ 20,000 & \text { Total } & \$ 20,000 \\\hline\end{array}$$ Suppose Connie Rich deposits $500 in the bank in Exhibit 19-4. The result would be that the bank must increase its required reserves to:

A) $4,100.
B) $4,500.
C) $5,100.
D) $5,500.

Question 41

When the required reserve ratio is 20 percent, the money multiplier is:

A) 0.2.
B) 2.
C) 2.5.
D) 5.

Question 42

Suppose the Fed purchases $100 million of U.S. securities from security dealers. If the reserve requirement is 20 percent, the currency holdings of the public are unchanged, and banks have zero excess reserves both before and after the transaction, the total impact on the money supply will be a:

A) $100 million decrease in the money supply.
B) $100 million increase in the money supply.
C) $200 million increase in the money supply.
D) $500 million increase in the money supply.

Question 43

Exhibit 19-5 Balance sheet of Tucker National Bank $$\begin{array} { | l r | l l | } \hline { \text { Assets } } &&{ \text { Liabilities } } \\\hline \text { Required reserves } & \$\_& \text { Checkable deposits } & \$ 100,000 \\\text { Excess reserves } &5,000 & & \\ \text { Loans } &70,000 & \\\text { Total } & \$ 100,000 & \text { Total } & \$100,000 \\\hline\end{array}$$ If all banks in the system shown in Exhibit 19-5 were identical to Tucker National Bank, the money multiplier for the system would be:

A) 4.
B) 5.
C) 10.
D) 25.

Question 44

Assume all banks in the system started have a 10 percent required reserve ratio and the Fed made a $20,000 open market purchase. The result would be a(n):

A) $200,000 expansion of the money supply.
B) $20,000 expansion of the money supply.
C) $20,000 contraction of the money supply.
D) infinite contraction of the money supply.

Question 45

Assume a simplified banking system subject to a 20 percent required reserve ratio. If there is an initial increase in excess reserves of $100,000, the money supply:

A) increases $100,000.
B) increases $500,000.
C) increases $600,000.
D) decreases $500,000.

Question 46

Which of the following will make the real-world money multiplier smaller than the theoretical formula?

A) Banks actually hold fewer reserves than technically required by the Fed.
B) Banks actually make loans for more money than they have in excess reserves.
C) Banks may keep some excess reserves rather than loan it all out.
D) Consumers spend more than they have using credit cards.

Question 47

If the required reserve ratio is a uniform 25 percent on all deposits, the money multiplier will be:

A) 4.00.
B) 2.50.
C) 0.40.
D) 0.25.

Question 48

When the required reserve ratio is changed,

A) the money multiplier is changed but the amount of excess reserves in the banking system is unchanged.
B) the money multiplier is unchanged but the amount of excess reserves in the banking system is changed.
C) the size of the money multiplier and the amount of excess reserves change in the opposite direction from the required reserve ratio.
D) the size of the money multiplier and the amount of excess reserves change in the same direction as the required reserve ratio.

Question 49

The maximum change in the money supply due to an initial change in the excess reserves banks hold is called the:

A) fractional reserve banking system.
B) money multiplier.
C) required reserve ratio.
D) open market operations.

Question 50

Discuss how a single bank creates money. What is the limit to which a single bank can add to the money supply? By how much can an entire banking system add to the money supply?

Question 51

If a bank keeps some of its excess reserves, the money multiplier:

A) increases.
B) stays the same.
C) goes to zero.
D) decreases.

Question 52

Because the banking system operates using fractional reserves,

A) the money multiplier is greater than one.
B) excess reserves are equal to zero.
C) required reserves are equal to 100 percent.
D) banks can loan out only their required reserves.

Question 53

If the banking system's money multiplier is 4, then a $2,000 increase in checkable deposits when banks hold excess reserves will result in which of the following events?

A) The money supply will not change.
B) The money supply will increase by less than $8,000.
C) The money supply will increase by exactly $8,000.
D) The money supply will increase by more than $8,000.

Question 54

When the Federal Reserve System wants to increase the money supply, which of the following actions would the Fed choose?

A) It purchases U.S. government securities.
B) It increases the discount rate.
C) It increases the required reserve ratio.
D) It sells bonds on the open market.

Question 55

If a bank receives a new deposit of $10,000, and the required reserve ratio is 25 percent, then the new money that can be created by the banking system, including the initial deposit, is:

A) $25,000.
B) $2,500.
C) $4,000.
D) $40,000.

Question 56

Which of the following events would reduce the size of the "real-world" money multiplier?

A) Banks hold more excess reserves.
B) Households hold less currency.
C) The Fed increases the discount rate.
D) The Fed reduces the required reserve ratio.

Question 57

In a simplified banking system subject to a 25 percent required reserve ratio, a $1,000 open-market purchase by the Fed would cause the money supply to:

A) increase by $1,000.
B) decrease by $1,000.
C) decrease by $4,000.
D) increase by $4,000.

Question 58

Exhibit 19-7 Lower Walloon National Bank $$\begin{array} { | l l | l l | } \hline { \text { Assets } } &&{ \text { Liabilities } } \\\hline \text { Reserves } & \$ 10,000 & \text { Checkable deposits } & \$ 10,000 \\\hline\end{array}$$ In Exhibit 19-7, if the required reserve ratio is 20 percent for all banks, and every bank in the banking system loans out all of its excess reserves. Then a $10,000 deposit from Mr. Brown in checkable deposits could create for the entire banking system:

A) $8,000 worth of new money.
B) $2,000 worth of new money.
C) $10,000 worth of new money.
D) $40,000 worth of new money.

Question 59

If the required reserve ratio decreases, the:

A) money multiplier increases.
B) money multiplier decreases.
C) amount of excess reserves the bank has decreases.
D) money multiplier stays the same.

Question 60

When the required reserve ratio is lowered, the money multiplier ,

A) increases, and the amount of excess reserves increases in the banking system.
B) decreases, and the amount of excess reserves increases in the banking system.
C) decreases, and the amount of excess reserves decreases in the banking system.
D) increases, and the amount of excess reserves decreases in the banking system.

Question 61

When the Fed buys government securities, it:

A) lowers the cost of borrowing from the Fed, encouraging banks to make loans to the general public.
B) raises the cost of borrowing from the Fed, discouraging banks from making loans to the general public.
C) increases the amount of excess reserves that banks hold, encouraging them to make loans to the general public.
D) increases the amount of excess reserves that banks hold, discouraging them from making loans to the general public.

Question 62

Exhibit 19-3 Balance sheet of Tucker National Bank $$\begin{array} { | l r | l l | } \hline { \text { Assets } } &&{ \text { Liabilities } } \\\hline \text { Required reserves } & \$20,000 & \text { Checkable deposits } & \$ 100,000 \\\text { Excess reserves } &0& & \\ \text { Loans } &80,000& \\\text { Total } & \$ 100,000 & \text { Total } & \$ 100,000 \\\hline\end{array}$$ Assume all banks in the system started with balance sheets as shown in Exhibit 19-3 and the Fed made a $100,000 open market purchase. The result would be a(n):

A) $500,000 expansion of the money supply.
B) $100,000 expansion of the money supply.
C) $20,000 contraction of the money supply.
D) infinite expansion of the money supply.

Question 63

If the Fed decides to engage in an open market operation to increase the money supply, what will it do?

A) Sell Treasury bonds, bills, or notes on the bond market.
B) Buy Treasury bonds, bills, or notes on the bond market.
C) Increase the required reserve ratio.
D) Increase the fed funds rate.

Question 64

During a period of inflation, the Fed is likely to:

A) sell government securities to banks in order to reduce the amount of loanable funds.
B) buy government securities from banks in order to reduce the amount of loanable funds.
C) cut the discount rate to increase the affordability of loanable funds.
D) cut the required reserve ratio in order to reduce the amount of excess reserves banks have to loan out.

Question 65

When the Federal Reserve sells government bonds to the public, it:

A) increases the M1 money supply and increases the reserves of the commercial banking system.
B) increases the M1 money supply, while reducing the reserves of the commercial banking system.
C) reduces the M1 money supply, while increasing the reserves of the commercial banking system.
D) reduces the M1 money supply and decreases the reserves of the commercial banking system.

Question 66

When the Fed buys federal government securities on the open market from commercial banks, over time, the:

A) assets of these banks fall.
B) liabilities of the bank fall.
C) assets of the banks rise.
D) liabilities of the bank rise.

Question 67

Bank reserves will increase over time when:

A) the Fed sells government securities on the open market.
B) the Treasury sells government securities on the open market.
C) depositors take funds out of their checkable deposit accounts.
D) the Fed buys government securities on the open market.

Question 68

When the Fed sells government securities, it:

A) lowers the cost of borrowing from the Fed, encouraging banks to make loans to the general public.
B) raises the cost of borrowing from the Fed, discouraging banks from making loans to the general public.
C) decreases the amount of excess reserves that banks hold, discouraging them from making loans to the general public.
D) increases the amount of excess reserves that banks hold, encouraging them to make loans to the general public.

Question 69

If the Fed sells $10 million in bonds to a bank, and the required reserve ratio is 20 percent, then the banking system can:

A) decrease the money supply by up to $10 million.
B) decrease the money supply by up to $40 million.
C) decrease the money supply by up to $50 million.
D) increase the money supply by up to $2 million.

Question 70

Which of the following directs the buying and selling of U.S. government securities?

A) Board of Governors
B) Federal Reserve Banks
C) Federal Open Market Committee
D) Federal Advisory Council

Question 71

If the economy is inflationary, the Fed would most likely:

A) increase bank reserves by raising the discount rate.
B) increase bank reserves by buying government securities
C) decrease bank reserves by lowering the discount rate.
D) decrease bank reserves by selling government securities.

Question 72

Which of the following is the most frequently used tool the Fed uses to control the supply of money?

A) the discount rate
B) the reserve requirements
C) open market operations
D) the 30-year home-mortgage interest rate

Question 73

If the Fed decides to use an open market operation to reduce the money supply by $1 million, and if the money multiplier is 10, then what total amount of Treasury securities must the Fed initially sell?

A) $10,000,000.
B) $1,000,000.
C) $100,000.
D) $10,000.

Question 74

Which of the following policy actions by the Fed would cause the money supply to decrease?

A) an open market purchase of government securities
B) a decrease in required reserve ratios
C) a decrease in the discount rate
D) an open-market sale of government securities

Question 75

If the Fed buys $10 million dollars in government securities, and the required reserve ratio is 20 percent, the banking system is able to expand the money supply by:

A) $10 million.
B) $50 million.
C) $2 million.
D) $40 million.

Question 76

If there is a recession, the Fed would most likely encourage banks to provide loans by:

A) buying government securities.
B) raising the discount rate.
C) selling government securities.
D) raising the federal funds rate.

Question 77

Which of the following is an appropriate monetary policy if the Fed wants to increase the money supply?

A) an increase in the required reserve ratio
B) an increase in the discount rate
C) purchases of bonds in open market operations
D) an increase in taxes on interest income

Question 78

If there is a recession, the Fed would most likely:

A) increase bank reserves by raising the discount rate.
B) increase bank reserves by buying government securities.
C) decrease bank reserves by raising the discount rate.
D) decrease bank reserves by selling government securities.

Question 79

Which of the following would be most appropriate if the Federal Reserve wanted to increase the money supply in order to stimulate the economy?

A) Buy U.S. government securities.
B) Force the Treasury to reduce the national debt.
C) Raise the discount rate.
D) Increase the reserve requirements.

Question 80

The term "open market operations" refers to the:

A) loan-making activities of commercial banks.
B) effect of expansionary monetary policy on interest rates.
C) operation of competitive markets in the banking industry as the result of deregulation.
D) buying and selling of government securities by the Federal Reserve.