Question 1

How is it that the banking system is able to lend by a multiple of its excess reserves?

Accepted Answer

Banks in most countries are required to hold a fraction of their deposits as reserves, which depends on the country's central bank's regulations. This is called the reserve requirement ratio. Banks can lend out the rest of the deposits to borrowers, creating money in the process. This lending can occur in multiples of the banks' excess reserves, not just its required reserves.

Question 2

In reality, individuals do not deposit all of their cash into the banking system. Consequently,

Accepted Answer

The simple money deposit multiplier assumes that all cash is deposited in the banking system, which is not the case in reality. As a result, the actual money deposit multiplier is smaller than the simple multiplier.

Question 3

Which of the following is an assumption made in the money-creation process?

Accepted Answer

The assumption that all currency is deposited in a bank is fundamental to the money-creation process in banking. This assumption allows for the calculation of the maximum potential increase in the money supply through the multiplier effect, as it assumes that all money, once deposited, can be lent out again (minus reserves), thereby creating more deposits and loans in a continuous cycle.

Question 4

If a bank that faces a 10 percent reserve ratio received a deposit of $50,000 and makes a loan to a customer for $5,000, what is the consequence if the bank then deposits the rest of the funds at the Federal Reserve?

Accepted Answer

With a 10 percent reserve ratio, the bank is required to hold $5,000 (10% of $50,000) as required reserves. By making a loan of $5,000 and depositing the remaining $45,000 at the Federal Reserve, the bank meets its required reserve of $5,000 and the remaining $45,000 becomes excess reserves.

Question 5

Suppose that the Bank of Apples has excess reserves of $450,000 and checkable deposits of $30,000,000. If the bank has a reserve requirement of 30 percent, what is its total amount of reserves?

Accepted Answer

The reserve requirement for this bank is 30%, which means that it must hold 30% of its checkable deposits as reserves. The checkable deposits are $30,000,000, so the required reserves are $9,000,000 (30% of $30,000,000). The excess reserves are $450,000. To find the total amount of reserves, we add the excess reserves to the required reserves. Therefore, the total amount of reserves is $9,450,000 (required reserves of $9,000,000 + excess reserves of $450,000).

Question 6

________is the phenomenon when one party that is protected from risk behaves differently than if it were fully exposed to the risk.

Accepted Answer

Moral hazard refers to the idea that when one party is protected from risk, they may behave in a riskier or more reckless manner than they otherwise would if they were fully exposed to the risk. This often occurs in situations such as insurance, where the insured party may take more risks since they know they are protected from any potential losses.

Question 7

In a fractional reserve banking system, banks

Accepted Answer

In a fractional reserve banking system, banks are able to create money by lending out a portion of the deposits they hold as excess reserves. This allows them to lend out more money than they actually have on hand, which increases the money supply and stimulates economic growth. However, if too many people try to withdraw their deposits at the same time, the bank may not have enough reserves to meet their demands, which can lead to a bank run or even a banking crisis.

Question 8

If the required reserve ratio is 20 percent, what is the simple deposit multiplier?

Accepted Answer

The simple deposit multiplier is calculated as 1/rr, where rr is the required reserve ratio. Therefore, the simple deposit multiplier is 1/0.2 = 5.

Question 9

To the extent that a bank holds excess reserves, which of the following is a consequence?

Accepted Answer

Excess reserves do not contribute to the creation of new deposits through the deposit multiplier process. Therefore, the deposit multiplier is smaller when a bank holds excess reserves.

Question 10

Mena receives a $1,000 check from her parents for her birthday, and she deposits this in a bank that faces a 10 percent reserve ratio. What is the consequence if the bank then deposits her check at the Federal Reserve?

Accepted Answer

When Mena deposits the $1,000 check, the bank is required to keep 10 percent ($100) as reserves and has $900 in excess reserves. If the bank then deposits this $900 at the Federal Reserve, the required reserves will still be $100 (10 percent of $1,000), but the excess reserves will decrease by $900. Therefore, the new excess reserves will be $0 and the required reserves will still be $100. So, excess reserves will increase by $900 ($0 - $900) and required reserves increase by $100 ($100 - $0).

Question 11

Tom Goldman deposits $1,000 in newly printed birthday cash into his checking account at the bank. How would this be recorded on the bank's balance sheet?

Accepted Answer

When Tom deposits $1,000 into his checking account, the bank's assets increase because it now holds more cash. Simultaneously, the bank's liabilities increase because the deposit represents money the bank owes to Tom.

Question 12

Suppose that the Bank of Bananas has excess reserves of $10,000,000 and checkable deposits of $200,000,000. If the bank has a reserve requirement of 25 percent, what is its total amount of required reserves?

Accepted Answer

The answer of Suppose that the Bank of Bananas has...

Question 13

In a fiat money economy, money is created when

Accepted Answer

In a fiat money economy, money is created when commercial banks make loans. When banks make loans, they create new deposits in the borrower's account, increasing the money supply. This process of creating money through lending is called fractional reserve banking.

Question 14

If the required reserve ratio is 10 percent, what is the simple deposit multiplier?

Accepted Answer

The answer of If the required reserve ratio is 10...

Question 15

Suppose that the Bank of Oranges has excess reserves of $80,000,000 and checkable deposits of $500,000,000. If the bank has a reserve requirement of 10 percent, what is the bank's total amount of reserves?

Accepted Answer

The bank's total reserves can be calculated by adding its required reserves to its excess reserves. Required reserves are 10% of checkable deposits, which is $50,000,000 (10% of $500,000,000). Adding the excess reserves of $80,000,000 gives a total of $130,000,000.

Question 16

Which of the following is an assumption made in the money-creation process?

Accepted Answer

Banks holding no excess reserves is an assumption in the money-creation process, as it implies all available funds (beyond required reserves) are lent out, facilitating the multiplier effect in the banking system.

Question 17

Sayed receives a bonus check from his employer for $10,000, and he deposits this in a bank that faces a 20 percent reserve ratio. What is the consequence if the bank then deposits his check at the Federal Reserve?

Accepted Answer

When Sayed deposits his $10,000 check, the bank must keep 20% ($2,000) as required reserves due to the reserve ratio. The remaining $8,000 becomes excess reserves that the bank can lend out, increasing the bank's excess reserves by $8,000 and required reserves by $2,000.

Question 18

Sam Black deposits the $5,000 in coins she had been storing between her couch cushions into her savings account at the bank. How would this affect the money supply?

Accepted Answer

Depositing coins that were previously held outside the banking system into a bank account does not change the total money supply; it merely shifts the form of money from physical currency to a deposit.

Question 19

If a bank that faces a 25 percent reserve ratio received a deposit of $30,000 and makes a loan to a customer for $10,000, what is the consequence if the bank then deposits the rest of the funds at the Federal Reserve?

Accepted Answer

The initial deposit of $30,000 increases both the bank's required reserves and its excess reserves by $7,500 ($30,000 x 0.25). When the bank makes a loan of $10,000, the required reserves remain the same but the excess reserves decrease by $10,000, leaving the bank with $17,500 in excess reserves ($27,500 - $10,000). When the bank deposits the remaining funds at the Federal Reserve, the excess reserves increase by $12,500 ($30,000 - $10,000 - $7,500) and the required reserves increase by $7,500, bringing the total required reserves to $15,000 ($30,000 x 0.5). Therefore, the correct choice is C.

Question 20

Dave Macy decides to sell his gold jewelry and deposits the cash at his local bank. As a result, the money supply will

Accepted Answer

Selling gold jewelry and depositing the cash into a bank does not change the total money supply. The transaction merely converts one form of asset (gold) into another (cash), and then moves the cash into the banking system, which does not alter the overall money supply.

Quiz 17: Money and the Federal Reserve

How is it that the banking system is able to lend by a multiple of its excess reserves?

In reality, individuals do not deposit all of their cash into the banking system. Consequently,

Which of the following is an assumption made in the money-creation process?

If a bank that faces a 10 percent reserve ratio received a deposit of $50,000 and makes a loan to a customer for $5,000, what is the consequence if the bank then deposits the rest of the funds at the Federal Reserve?

Suppose that the Bank of Apples has excess reserves of $450,000 and checkable deposits of $30,000,000. If the bank has a reserve requirement of 30 percent, what is its total amount of reserves?

________is the phenomenon when one party that is protected from risk behaves differently than if it were fully exposed to the risk.

In a fractional reserve banking system, banks

If the required reserve ratio is 20 percent, what is the simple deposit multiplier?

To the extent that a bank holds excess reserves, which of the following is a consequence?

Mena receives a $1,000 check from her parents for her birthday, and she deposits this in a bank that faces a 10 percent reserve ratio. What is the consequence if the bank then deposits her check at the Federal Reserve?

Tom Goldman deposits $1,000 in newly printed birthday cash into his checking account at the bank. How would this be recorded on the bank's balance sheet?

Suppose that the Bank of Bananas has excess reserves of $10,000,000 and checkable deposits of $200,000,000. If the bank has a reserve requirement of 25 percent, what is its total amount of required reserves?

In a fiat money economy, money is created when

If the required reserve ratio is 10 percent, what is the simple deposit multiplier?

Suppose that the Bank of Oranges has excess reserves of $80,000,000 and checkable deposits of $500,000,000. If the bank has a reserve requirement of 10 percent, what is the bank's total amount of reserves?

Which of the following is an assumption made in the money-creation process?

Sayed receives a bonus check from his employer for $10,000, and he deposits this in a bank that faces a 20 percent reserve ratio. What is the consequence if the bank then deposits his check at the Federal Reserve?

Sam Black deposits the $5,000 in coins she had been storing between her couch cushions into her savings account at the bank. How would this affect the money supply?

If a bank that faces a 25 percent reserve ratio received a deposit of $30,000 and makes a loan to a customer for $10,000, what is the consequence if the bank then deposits the rest of the funds at the Federal Reserve?

Dave Macy decides to sell his gold jewelry and deposits the cash at his local bank. As a result, the money supply will