Question 1

In a fractional reserve economy where the required reserve ratio is 10%, must it be the case that an initial deposit of $100 increases the total money supply by $1,000? Explain.

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Question 2

What is the Term Auction Facility?

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Question 3

What is bank insolvancy?

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Question 4

Suppose a bank has $3,000 in reserves, $25,000 of deposits, and a 10 percent reserve requirement. What is the amount of excess reserves?

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Question 5

The fractional reserve characteristic of the banking system allows banks to create money and also create wealth from bank deposits. Describe why this statement is or is not true.

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Question 6

A bank has $30,000 in deposits and has $5,400 in reserves. What is its reserve ratio?

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Question 7

A bank has $1000 in deposits and maintains a 12 percent reserve ratio. Its reserves are $_____.

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Question 8

The money multiplier is _____ when the reserve ratio is 12.5 percent.

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Question 9

Describe the role of bank leverage in bank insolvency during times of falling asset prices.

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Question 10

What is the change in the money supply when the Fed purchases $700 worth of bonds and the required reserve ratio is 14 percent assuming banks hold no excess reserves?

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Question 11

Suppose a bank purchases $50 of government securities using funds from reserves. How much do bank assets change as a result of this transaction?

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Question 12

When the Fed purchases government bonds the money supply _____ and the federal funds rate _____.

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Question 13

Suppose the required reserve ratio is 20%. What is the maximum amount of total money supply that can be created from an initial deposit of $200? In general, why might the actual amount of total money creation be less than the maximum?

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Question 14

When banks decide to increase their reserves, the money supply will _____ (holding all else constant).

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Question 15

Describe how the use of leverage affects the impact of bank investments.

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Question 16

A bank operates with reserves of $100, loans of $300 and securities of $100. The bank's only liability is deposits of $400 since it has zero debt. Calculate the bank's leverage ratio.

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Question 17

Trace the effects on the money supply when the Fed decreases the discount rate.

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Question 18

Suppose a bank is operating with a leverage ratio of 20. What is the maximum decrease in the market value of assets before the bank becomes insolvent?

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Question 19

Discuss why the Fed rarely changes the reserve requirements.

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Question 20

The interest rate charged by the Fed to member banks is called the _____.

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Quiz 29: The Monetary System