Question 1

Assume that a banking system must keep reserves of 20% against deposits. The bank receives a primary deposit of $10,000. What would be the maximum amount of loan that could be made by the system?

Accepted Answer

The maximum amount of loan that could be made by the system would be calculated by subtracting the required reserve ratio (20%) from 100%, leaving 80% available for loans. This means that the maximum loan that could be made would be (0.8 * $10,000) = $8,000. Therefore, the total amount of money in the system would be $18,000 ($10,000 deposit + $8,000 loan). To find the limit of the loan, the process can be repeated with the new total amount; (0.8 * $18,000) = $14,400. Continuing this process, the maximum amount of loan that could be made would eventually converge to $40,000. Therefore, the best choice is B.

Question 2

Which of the following statements is false?

Accepted Answer

The multiplying capacity of primary deposits is actually hindered, not helped, by cash leakages from the banking system. Cash leakages reduce the reserves available for banks to lend, thereby reducing the money multiplier effect.

Question 3

If a customer makes new deposits of $10,000 to a bank and the reserve requirement is 15%, then excess reserves will be

Accepted Answer

Excess reserves are calculated by subtracting the required reserves from the total deposits. In this case, the required reserves for a deposit of $10,000 with a reserve requirement of 15% would be $1,500 (10,000 x 0.15). Therefore, the excess reserves would be $8,500 (10,000 - 1,500).

Question 4

Open market operations differ from setting reserve requirements in that they are

Accepted Answer

Open market operations are used daily by central banks to control the money supply, unlike setting reserve requirements which is done less frequently and applies uniformly to all banks, not just large city banks or by specific initiation from member institutions or the President.

Question 5

Bank reserves are decreased when the Treasury

Accepted Answer

The answer of Bank reserves are decreased when the Treasury
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Question 6

Assume that a bank must keep reserves of 20% against deposits. The bank receives a primary deposit of $50,000. What amount of excess reserves can the bank safely lend?

Accepted Answer

The bank must keep 20% of $50,000 as reserves, which is $10,000. Therefore, the excess reserves that can be lent out are $50,000 - $10,000 = $40,000.

Question 7

Assume that a bank receives a primary deposit of $1,000, and the reserve requirement is 15%. Which of the following would reflect the asset side of the balance sheet after a maximum loan amount has just been made?

Accepted Answer

The reserve requirement is 15%, so the bank must hold back $150 (15% of $1,000) as reserves. This means the bank can lend out a maximum of $850. Therefore, the asset side of the balance sheet would show reserves of $150 and loans of $850, for a total of $1,000. So, the best choice is D, which states reserves of $1,000 and loans of $850.

Question 8

Federal Reserve open market operations

Accepted Answer

Federal Reserve open market operations involve buying and selling of bonds to affect bank reserves. This is done to control the money supply in the economy and influence interest rates. It is a tool used solely by the Federal Reserve and is not shared with the U.S. Treasury. The operations are not usually conducted simultaneously, as they are based on economic conditions and the Fed's policy objectives. They are also not designed to improve the federal deficit, which is the difference between government revenues and expenditures.

Question 9

The U.S. banking system has the ability to alter the size of the money supply because of the use of

Accepted Answer

A fractional reserve system allows banks to hold a portion of deposits in reserve and lend out the remainder, increasing the overall money supply. The other choices do not provide banks with the ability to alter the size of the money supply.

Question 10

Deposits that add new reserves to the bank where they are deposited are called

Accepted Answer

Primary deposits add new reserves to the bank where they are deposited, while derivative and secondary deposits are based on existing reserves or deposits. Special Drawing Rights are a type of international reserve asset used by the International Monetary Fund.

Question 11

Bank reserves are not affected by

Accepted Answer

Bank reserves are primarily affected by factors that directly influence the amount of funds banks hold in reserve at the central bank or in their vaults. Currency in circulation refers to the money that is physically held by the public. While it is part of the broader money supply, it does not directly affect the reserves that banks maintain at the central bank or in their vaults. Changes in reserve requirements, open market operations, and the level of deposits of foreign banks at the Federal Reserve directly impact bank reserves by altering the amount of reserves banks are either required to hold, choose to hold, or are able to hold.

Question 12

Bank reserves are increased when the Treasury

Accepted Answer

When the Treasury decreases its holding of cash, it deposits the cash into its account at a Federal Reserve bank, which increases bank reserves.

Question 13

Which of the following statements is false?

Accepted Answer

This statement is false because the ability to alter the money supply and credit is actually based on our banking system utilizing a fractional reserve system.

Question 14

The percentage of deposits that must be held as reserves is called

Accepted Answer

The required reserves ratio is a percentage set by the central bank that determines how much of a bank's deposits must be held as reserves. Option A (excess reserves) refers to any reserves held by a bank above and beyond the required amount. Option B (required reserves) is not specific enough, as it doesn't specify the percentage or ratio involved. Option D (transfer deposits) refers to deposits that are transferred from one account to another, and is not directly related to reserve requirements.

Question 15

One factor that decreases the volume of bank reserves is a decrease in

Accepted Answer

A decrease in the Federal Reserve float decreases the volume of bank reserves because the float represents checks in the process of collection that are temporarily counted as part of the banks' reserves. When the float decreases, it means that the checks have been processed, reducing the amount of reserves banks have available.

Question 16

Open market operations differ from discounting operations in that they are

Accepted Answer

Open market operations are initiated by the Federal Reserve, whereas discounting operations are initiated by member depository institutions. Option A is incorrect. Option B is incorrect as open market operations are significant for all depository institutions. Option D is incorrect as the U.S. Treasury does not initiate either open market operations or discounting operations.

Question 17

If the reserve requirement is 25% and $5,000 is injected into the banking system, the maximum expansion in the money supply would be

Accepted Answer

The maximum expansion in the money supply is calculated using the money multiplier formula, which is 1/reserve requirement. With a 25% reserve requirement, the multiplier is 1/0.25 = 4. Therefore, an injection of $5,000 into the banking system could potentially increase the money supply by $5,000 * 4 = $20,000.

Question 18

One factor that increases the volume of bank reserves is a decrease in

Accepted Answer

When reserve requirements decrease, banks are required to hold a smaller percentage of deposits as reserves, which increases the amount of reserves available for lending and other activities.

Question 19

A customer of a bank needs additional currency and cashes a check for $10,000. The reserve requirement is 20%. The bank has no excess reserves. It must

Accepted Answer

The bank needs to maintain a reserve of 20% of the $10,000, which is $2,000. Since it has no excess reserves, it needs to acquire the remaining $8,000 to cover the check.

Question 20

Assume that a banking system must keep reserves of 20% against deposits. The bank receives a primary deposit of $20,000. What would be the maximum amount of loan that could be made by the system?

Accepted Answer

The answer of Assume that a banking system must keep...

Quiz 5: Policy Makers and the Money Supply

Assume that a banking system must keep reserves of 20% against deposits. The bank receives a primary deposit of $10,000. What would be the maximum amount of loan that could be made by the system?

Which of the following statements is false?

If a customer makes new deposits of $10,000 to a bank and the reserve requirement is 15%, then excess reserves will be

Open market operations differ from setting reserve requirements in that they are

Bank reserves are decreased when the Treasury

Assume that a bank must keep reserves of 20% against deposits. The bank receives a primary deposit of $50,000. What amount of excess reserves can the bank safely lend?

Assume that a bank receives a primary deposit of $1,000, and the reserve requirement is 15%. Which of the following would reflect the asset side of the balance sheet after a maximum loan amount has just been made?

Federal Reserve open market operations

The U.S. banking system has the ability to alter the size of the money supply because of the use of

Deposits that add new reserves to the bank where they are deposited are called

Bank reserves are not affected by

Bank reserves are increased when the Treasury

Which of the following statements is false?

The percentage of deposits that must be held as reserves is called

One factor that decreases the volume of bank reserves is a decrease in

Open market operations differ from discounting operations in that they are

If the reserve requirement is 25% and $5,000 is injected into the banking system, the maximum expansion in the money supply would be

One factor that increases the volume of bank reserves is a decrease in

A customer of a bank needs additional currency and cashes a check for $10,000. The reserve requirement is 20%. The bank has no excess reserves. It must

Assume that a banking system must keep reserves of 20% against deposits. The bank receives a primary deposit of $20,000. What would be the maximum amount of loan that could be made by the system?