Deck 15: Money Creation

Question 1

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.

Answer 1

10 percent.

Question 2

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 2

Goldsmiths were the first bankers, and the paper receipts they issued for gold held on deposit became valued as money.

Question 3

Which of the following would be classified as a liability for a bank?

A)Required reserves.
B)Excess reserves.
C)Loans.
D)Checkable deposits.

Answer 3

Checkable deposits.

Question 4

Banks would be expected to minimize holding excess reserves because this practice is:

A)illegal.
B)not profitable.
C)technically difficult.
D)subject to a stiff excess reserves tax.

Question 5

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 6

Which of the following is a valid statement?

A)Excess reserves = total reserves minus required reserves.
B)Required reserves = the minimum reserves required by the Fed.
C)Required reserve ratio = required reserves as a percentage to total deposits.
D)All of these.

Question 7

Which of the following would not appear on the asset side of a commercial bank balance sheet?

A)Reserves.
B)Checkable deposits.
C)Loans.
D)Securities.

Question 8

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 9

Which of the following is an interest-earning asset of banks?

A)Required reserves.
B)Checkable deposits.
C)Excess reserves.
D)None of these are interest-earning assets of banks.

Question 10

Which of the following appears on the asset side of a bank's balance sheet?

A)Required reserve deposits.
B)Loans.
C)Excess reserves.
D)All of these.

Question 11

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 12

Banks normally hold few excess reserves because this practice is:

A)subject to an excess reserves tax.
B)not profitable.
C)against Fed policy.
D)illegal.

Question 13

Which of the following is not an interest-earning asset of commercial banks?

A)Required reserves.
B)Securities.
C)Loans.
D)All of these are interest-earning assets of commercial banks.

Question 14

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 15

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)none of these.

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

The required reserves of a bank are:

A)held as deposits with the Federal Reserve System.
B)equal to its loans.
C)equal to its checkable deposits.
D)none of these.

Question 18

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 19

In order 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 20

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, but must hold all money deposited at the bank on reserve in bank vaults.

Question 21

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.
E)$910.

Question 22

A bank's required reserves are either held as vault cash or:

A)used to purchase Treasury bonds.
B)deposited with the Fed.
C)invested in the stock market.
D)loaned out to other commercial banks.

Question 23

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 24

The balance sheet for a commercial bank shows the bank's:

A)required reserves as assets and excess reserves as liabilities.
B)loans as assets and required reserves as liabilities.
C)loans as assets and checkable deposits as liabilities.
D)checkable deposits as assets and loans as liabilities.
E)excess reserves as assets and required reserves as liabilities.

Question 25

An individual bank can lend out at most its:

A)actual reserves.
B)fractional reserves.
C)legal reserves.
D)checkable deposits.
E)excess reserves.

Question 26

Which of the following appears on the asset side of a bank's balance sheet?

A)Excess reserves.
B)Loans.
C)Required reserves.
D)All of the above.

Question 27

The major assets and liabilities of a bank are:

A)checkable deposits and total reserves, respectively.
B)checkable deposits and gold, respectively.
C)total reserves and checkable deposits, respectively.
D)total reserves and excess reserves, respectively.
E)checkable deposits and excess reserves, respectively.

Question 28

The amount of assets that a bank must hold at all times is determined by the:

A)banks' actual reserves.
B)required reserve ratio.
C)actual reserve requirement.
D)fractional reserve requirement.
E)excess reserve requirement.

Question 29

Which of the following is a valid statement?

A)Required reserve ratio = required reserves as a percentage to total deposits.
B)Required reserves = the maximum reserves required by the Fed.
C)Excess reserves = total reserves plus required reserves.
D)All of these.

Question 30

Which of the following is not an interest-earning asset of commercial banks?

A)Required reserves.
B)Checkable deposits.
C)Customer savings accounts.
D)All of the above are interest-earning assets of commercial banks.
E)None of the above are interest-earning assets of commercial banks.

Question 31

The quantity of reserves held by a bank in addition to the legally required amounts is known as:

A)actual reserves.
B)excess reserves.
C)the required reserve ratio.
D)the money multiplier.
E)the monetary base.

Question 32

Assume that Paris First National Bank is a thriving bank with deposits of $20 million. If the required reserve ratio is 20 percent and the bank is fully loaned out, the bank will keep what amount of required reserves?

A)$2 million.
B)$4 million.
C)$10 million.
D)$16 million.
E)$20 million.

Question 33

A banking system that provides people immediate access to their deposits, but that allows banks to hold only a portion of those deposits on reserve, is known as:

A)an excess reserve system.
B)a fractional reserve system.
C)the Fed.
D)the FDIC.
E)an asset-based system.

Question 34

The percentage of checkable deposits that banks and other financial intermediaries are required to keep in cash reserves is known as:

A)the fractional reserve requirement.
B)the excess reserve requirement.
C)the required reserve ratio.
D)the discount rate.
E)M1.

Question 35

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

A)Loans.
B)Checkable deposits.
C)Savings deposits.
D)Net worth.

Question 36

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 required reserves balance will be:

A)$0.
B)$90.
C)$100.
D)$900.
E)$910

Question 37

The required reserve ratio for a bank is set by:

A)Congress.
B)the bank itself.
C)the Treasury Department.
D)the banking system.
E)the Federal Reserve.

Question 38

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.
E)the banking system would realize the money multiplier.

Question 39

Which of the following is a bank liability?

A)Required reserves.
B)Excess reserves.
C)Actual reserves.
D)Checkable deposits.
E)Loans.

Question 40

If a bank has $100,000 in checkable deposits, reserves of $20,000, and no excess reserves, then the required reserve ratio is:

A)10 percent.
B)20 percent.
C)25 percent.
D)30 percent.
E)50 percent.

Question 41

Exhibit 15-2 Balance Sheet of Springfield National Bank  
In Exhibit 15-2, if Springfield National finds that it has excess reserves of $300, then the required reserve ratio must be:

A)30 percent.
B)0.30 percent.
C)0.80 percent.
D)0.20 percent.
E)20 percent.

Question 42

Exhibit 15-1 Balance sheet of First Iliad State Bank
               
       
In Exhibit 15-1, if the required reserve ratio is lowered to 5 percent, First Iliad State will be able to make additional loans worth:

A)$9,000,000.
B)$1,500,000.
C)$500,000.
D)$1,000,000.
E)$450,000.

Question 43

If your bank receives a checkable deposit of $20,000, and the banking system makes loans totaling $180,000, the maximum possible, then the required reserve ratio must be:

A)0.10.
B)0.20.
C)0.25.
D)0.40.
E)0.50.

Question 44

Exhibit 15-2 Balance Sheet of Springfield National Bank
In Exhibit 15-2, if Springfield National has excess reserves equal to $300, and the required reserve ratio increases to 35 percent, it will:

A)be able to cover its increased reserve requirements from its excess reserves.
B)have to call in loans worth $350.
C)have to call in loans worth $250.
D)have to call in loans worth $200.
E)have to call in loans worth $150.

Question 45

Exhibit 15-1 Balance sheet of First Iliad State Bank
              
       
In Exhibit 15-1, if the required reserve ratio is raised to 18 percent, then First Iliad State will:

A)have to convert loans worth $800,000 to required reserves.
B)have to convert loans worth $200,000 to required reserves.
C)be able to make additional loans worth $800,000.
D)be able to make additional loans worth $200,000.

Question 46

Exhibit 15-2 Balance Sheet of Springfield National Bank In Exhibit 15-2, 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.
E)$260.

Question 47

Exhibit 15-2 Balance Sheet of Springfield National Bank In Exhibit 15-2, if Springfield National has excess reserves equal to $300, and then its customers write checks for $200, its excess reserves will fall to:

A)$0.
B)$100.
C)$140.
D)$160.
E)$200.

Question 48

If loans are $69,000, excess reserves are $1,400, and checkable deposits are $80,000, then the required reserve ratio must be:

A)1.75 percent.
B)12 percent.
C)13.75 percent.
D)17.5 percent.
E)0.12 percent.

Question 49

If a single banks faces a required reserve ratio of 20 percent, has total reserves of $500,000, and checkable deposit liabilities of $400,000, what is the maximum amount of money this bank could create (add to the money supply)?

A)$420,000.
B)$100,000.
C)$80,000.
D)$2,100,000.

Question 50

Exhibit 15-1 Balance sheet of First Iliad State Bank
In Exhibit 15-1, 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.
E)$450,000 to required reserves.

Question 51

Best National Bank is subject to a 10 percent required reserve ratio. If this bank received a new checkable deposit of $1,000, it could make new loans of:

A)$100.
B)$900.
C)$1,000.
D)$10,000.

Question 52

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 53

Which of the following correctly 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 54

The required reserve ratio is:

A)the minimum amount of reserves the Fed requires a bank to hold.
B)the interest rate that the Fed charges banks who borrow from it.
C)the interest rate on loans made by banks to other banks.
D)the maximum percentage of the cost of a stock that can be borrowed from a bank, with the stock offered as collateral.
E)an appeal by the Fed to banks, asking for voluntary compliance with the Fed's wishes.

Question 55

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.
E)$30,000.

Question 56

Exhibit 15-1 Balance sheet of First Iliad State Bank
               
       
In Exhibit 15-1, if the required reserve ratio is lowered to 8 percent, then First Iliad State will:

A)have to convert loans worth $800,000 to required reserves
B)have to convert loans worth $200,000 to required reserves.
C)be able to make additional loans worth $800,000.
D)be able to make additional loans worth $200,000.
E)not have to act.

Question 57

The required reserve ratio is the:

A)actual amount of reserves that banks must hold.
B)excess amount of reserves that a bank must hold.
C)minimum amount of reserves the Fed requires a bank to hold.
D)total amount of reserves that banks hold at all times.
E)maximum amount of reserves that banks can hold to remain liquid.

Question 58

If a bank that is subject to a 10 percent required reserve ratio has $20,000 in excess reserves, it can make new loans of:

A)$2,000.
B)$18,000.
C)$20,000.
D)$200,000.

Question 59

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

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

Question 60

Best National Bank is subject to a 20 percent required reserve ratio. If this bank received a new checkable deposit of $1,000, it could make new loans of:

A)$500.
B)$800.
C)$1,000.
D)$5,000.

Question 61

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)$800.
B)$3,200.
C)$4,000.
D)$16,000.
E)$20,000.

Question 62

If the required reserve ratio is 10 percent, $1,000 cash deposited into a checkable deposit account will generate, assuming willing borrowers, an increase in the money supply of:

A)$900.
B)$1,100.
C)$9,000.
D)$10,000.
E)$11,000.

Question 63

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.
E)$10,000.

Question 64

When new checkable deposits are created through loans,

A)the money supply contracts.
B)excess reserves are destroyed.
C)the money supply remains the same.
D)the money supply expands.
E)the required reserve ratio declines

Question 65

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.
E)reserves and $0 in liabilities.

Question 66

If your bank receives a checkable deposit of $20,000 cash, and the banking system makes loans totaling $60,000, the maximum possible, then the money multiplier must be:

A)2.
B)2.5.
C)3.
D)3.5.
E)4.

Question 67

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.
E)$0.

Question 68

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)$100,000.
B)$80,000.
C)$300,000.
D)$20,000.
E)$200,000.

Question 69

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.
E)liabilities of the Paris First National Bank will increase by $800.

Question 70

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 71

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 Odyssey National can increase the money supply by:

A)$900.
B)$910.
C)$1,000.
D)$9,000.
E)$10,000.

Question 72

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 73

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 74

Best National Bank operates with a 20 percent required reserve ratio. 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 75

If a bank receives a new checkable deposit of $10,000, and the required reserve ratio is 20 percent, then the bank can lend out:

A)$2,000.
B)$10,000.
C)$40,000.
D)$8,000.
E)$0.

Question 76

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 expand the money supply by as much as:

A)$100,000.
B)$400,000.
C)$0.
D)$20,000.
E)$80,000.

Question 77

If banks are fully loaned up, 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.
E)increased and the money supply contracts.

Question 78

If your bank faces a 20 percent required reserve ratio and receives a checkable deposit of $4,000, it can make additional loans worth a maximum of:

A)$800.
B)$3,200.
C)$4,000.
D)$16,000.
E)$20,000.

Question 79

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.
E)gets more excess reserves because of a decrease in the required reserve ratio.

Question 80

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 loan balance can increase by a maximum of:

A)$0.
B)$90.
C)$100.
D)$900.
E)$910.