Question 1

Refer to the information below.The maximum amount by which the chartered banking system can expand the supply of money by lending is about: Consolidated balance sheet for the chartered banking system.Assume the desired reserve ratio is 30 percent.All figures are in billions.

Accepted Answer

The answer of Refer to the information below.The maximum amount...

Question 2

Assume that Smith deposits $600 in currency 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 this single transaction changed the supply of money?

Accepted Answer

The deposit of $600 increases the money supply by $600, and the loan of $1,200 increases the money supply by $1,200. So the total increase in the money supply is $1,200 + $600 = $1,800.

Question 3

The following is a consolidated balance sheet for the chartered banking system.All figures are in billions.Assume that the desired reserve ratio is 20 percent.  Refer to the above information.The maximum amount by which this chartered banking system can expand the supply of money by lending is:

Accepted Answer

The answer of The following is a consolidated balance sheet...

Question 4

Assume the Standard Toy Company negotiates a loan for $5,000 from the Metro Bank and receives a demand deposit for that amount in exchange for its promissory note (IOU).As a result of this single transaction:

Accepted Answer

When the Standard Toy Company negotiates a loan for $5,000 from the Metro Bank and receives a demand deposit for that amount, it increases the supply of money by $5,000. This is because demand deposits are considered part of the money supply. Therefore, choice A is the correct answer.

Question 5

The following is a consolidated balance sheet for the chartered banking system.All figures are in billions.Assume that the desired reserve ratio is 20 percent.  Refer to the above information.If there is a deposit of $10 billion of new currency into chequing accounts in the banking system, excess reserves will increase by:

Accepted Answer

The answer of The following is a consolidated balance sheet...

Question 6

The relative importance of various asset items on a chartered bank's balance sheet reflects a bank's pursuit of which two conflicting goals?

Accepted Answer

The two conflicting goals are liquidity and profits. Banks want to have a balance between the two, as they need to have enough liquid assets to meet potential customer demands for withdrawals or loans, but also want to make profits by investing in higher yielding assets such as loans or securities. Therefore, the relative importance of various asset items on the balance sheet reflects the bank's pursuit of these two goals.

Question 7

Henry Trudeau deposits $2,000 in currency in the First Street Bank.Later that same day Jane Harris negotiates a loan for $5,400 at the same bank.This loan alone will:

Accepted Answer

When Jane Harris negotiates a loan for $5,400, the bank creates new money in the form of a loan, increasing the money supply by the full amount of the loan, $5,400.

Question 8

Individual chartered banks are limited in their ability to create money by lending because:

Accepted Answer

Individual chartered banks are limited in their ability to create money by lending because when they lend, the reserves may be transferred to other banks, reducing their own reserves and limiting further lending.

Question 9

The multiple by which the chartered banking system can expand the supply of money is equal to the reciprocal of:

Accepted Answer

The multiple by which the chartered banking system can expand the supply of money is equal to the reciprocal of the desired reserve ratio. This means that if the desired reserve ratio is 10%, then the banking system can expand the money supply by a multiple of 10, which is the reciprocal of 0.1. Therefore, the best choice is D.

Question 10

Refer to the information below, after a deposit of $10 billion of new currency into a chequing account in the banking system, the maximum amount by which the chartered banking system can expand the supply of money is: Consolidated balance sheet for the chartered banking system.Assume the desired reserve ratio is 10 percent.All figures are in billions.

Accepted Answer

The answer of Refer to the information below, after a...

Question 11

The following is a consolidated balance sheet for the chartered banking system.All figures are in billions.Assume that the desired reserve ratio is 20 percent.  Refer to the above information.The amount of excess reserves is:

Accepted Answer

Excess reserves are the amount by which actual reserves exceed required reserves. Required reserves can be calculated by multiplying total deposits by the desired reserve ratio (20%). Required reserves = 3000 x 0.20 = 600. Actual reserves are given as 800, so excess reserves = 800 - 600 = 200. However, the question asks for excess reserves for the entire chartered banking system, so we need to multiply by the number of banks in the system (300): 200 x 300 = 60,000 or $60 billion. Therefore, the correct answer is B.

Question 12

The basic reason why the chartered banking system can increase its demand deposits by a multiple of its excess reserves is that:

Accepted Answer

When one bank loses reserves, another bank gains them, allowing the banking system as a whole to expand deposits through the money multiplier effect.

Question 13

A chartered bank has demand-deposit liabilities of $500,000, cash reserves of $150,000, and a desired reserve ratio of 20 percent.The amount by which this single chartered bank and the amount by which the banking system can increase loans are respectively:

Accepted Answer

The required reserves for this bank can be calculated as follows:

Required Reserves = Demand-Deposit Liabilities × Reserve Ratio
Required Reserves = $500,000 × 0.20
Required Reserves = $100,000

Since the bank currently holds cash reserves of $150,000, it already has excess reserves of $50,000.

The amount by which this single chartered bank can increase loans is equal to its excess reserves, which is $50,000.

The amount by which the banking system can increase loans is equal to the excess reserves in the entire banking system. We are not given this information in the question. However, we can make an estimate based on the reserve ratio. If the reserve ratio for all banks is also 20 percent, then the total demand-deposit liabilities for all banks would be:

Total Demand-Deposit Liabilities = Excess Reserves ÷ Reserve Ratio
Total Demand-Deposit Liabilities = $150,000 ÷ 0.20
Total Demand-Deposit Liabilities = $750,000

This means that the total cash reserves for all banks would be:

Total Cash Reserves = Total Demand-Deposit Liabilities × Reserve Ratio
Total Cash Reserves = $750,000 × 0.20
Total Cash Reserves = $150,000

Therefore, the excess reserves in the entire banking system would be:

Excess Reserves = Total Cash Reserves - Required Reserves
Excess Reserves = $150,000 - $100,000
Excess Reserves = $50,000

This is the same as the excess reserves for the single chartered bank. Therefore, the amount by which the banking system can increase loans is also $50,000.

Question 14

Refer to the information below which shows the demand deposits and actual reserves of a banking system.When the desired reserve ratio is 20 percent, the money creating potential of the entire banking system is:

Accepted Answer

The answer of Refer to the information below which shows...

Question 15

Suppose a chartered banking system has $100,000 of outstanding demand deposits and actual cash reserves of $35,000.If the desired reserve ratio is 20 percent, the banking system can expand the supply of money by the maximum amount of:

Accepted Answer

The banking system needs to hold 20% of $100,000, which is $20,000, as reserves. With $35,000 in actual reserves, they have $15,000 in excess reserves. Using the money multiplier (1/reserve ratio = 5), they can expand the money supply by $15,000 * 5 = $75,000.

Question 16

Assume that Johnson deposits $350 of his currency in his account in the XYZ bank.Later the same day Swanson negotiates a loan for $2,000 at the same bank.In what direction and by what amount has this single transaction changed the supply of money?

Accepted Answer

The supply of money has increased by $2,000 due to Swanson's loan, as this creates new money in the form of credit extended to him by the bank. Johnson's deposit does not affect the supply of money as it merely moves existing currency from one account to another. Therefore, the correct answer is B.

Question 17

A chartered bank that is temporarily short in the level of reserves it wishes to hold will borrow from another chartered bank:

Accepted Answer

When a chartered bank is temporarily short in the level of reserves it wishes to hold, it is most likely to borrow from another chartered bank overnight. This is because the need for reserves in the banking system is often short-term and overnight borrowing is a common practice for banks to meet their reserve requirements. Borrowing for longer periods of time, such as over a week or six months, may not be necessary and can incur higher costs for the borrowing bank.

Question 18

The balance sheet below is for chartered bank ABC.Assume the desired reserve ratio is 20 percent.All figures are in billions.  Refer to the above information.The amount by which this single chartered bank and the amount by which the banking system can increase loans are respectively:

Accepted Answer

The excess reserves of the bank are $5,000 ($35,000 - $30,000). The maximum amount by which the banking system can increase loans is determined by the money multiplier, which is the reciprocal of the reserve requirement. In this case, the reserve requirement is 20%, so the money multiplier is 1/0.2 = 5. Therefore, the banking system can increase loans by a maximum amount of $5,000 x 5 = $25,000.

Question 19

The balance sheet below is for chartered bank EFG.Assume the desired reserve ratio is 25 percent.All figures are in billions.  Refer to the above information.The amount by which this single chartered bank and the amount by which the banking system can increase loans are respectively:

Accepted Answer

The answer of The balance sheet below is for chartered...

Question 20

The multiple by which the chartered banking system can increase the supply of money on the basis of each dollar of excess reserves is equal to:

Accepted Answer

The money multiplier is the reciprocal of the reserve ratio, which determines how much the money supply can increase based on excess reserves.

Quiz 14: B: Money, Banking, and Money Creation