Question 1

A commercial bank has required reserves of $60 million and the reserve ratio is 20 percent. How much are the commercial bank's checkable-deposit liabilities?

Accepted Answer

The checkable-deposit liabilities can be calculated using the formula:
Checkable-deposit liabilities = required reserves / reserve ratio
= $60 million / 0.20
= $300 million. Therefore, the correct answer is C.

Question 2

A depositor places $5,000 in cash in a commercial bank, and the reserve ratio is 20 percent; the bank sends the $5,000 to the Federal Reserve Bank. As a result, the reserves and excess reserves of the bank have been
Increased by

Accepted Answer

When the depositor places $5,000 in cash in the bank, the reserves of the bank increase by $5,000. However, due to the reserve ratio of 20 percent, the bank must hold 20 percent of the deposit ($1,000) as required reserves and can lend out the other 80 percent ($4,000) as excess reserves. When the bank sends the $5,000 to the Federal Reserve Bank, its reserves decrease by $5,000, but it still holds $1,000 in required reserves and $4,000 in excess reserves, so both its reserves and excess reserves remain unchanged. Therefore, the correct answer is B, with reserves and excess reserves both increasing by $5,000 and $4,000, respectively.

Question 3

A commercial bank's checkable-deposit liabilities can be estimated by

Accepted Answer

Checkable-deposit liabilities can be estimated by dividing a bank's required reserves by the reserve ratio, as this ratio determines the fraction of deposits a bank must hold in reserve.

Question 4

A bank is in the position to make loans when required reserves

Accepted Answer

A bank is in the position to make loans when its actual reserves exceed its required reserves, meaning it has excess reserves available to lend out.

Question 5

A commercial bank has checkable-deposit liabilities of $50,000 and a required reserve ratio of 20 percent. What is the amount of required reserves?

Accepted Answer

The required reserve ratio is 20 percent, so the bank is required to hold 20 percent of its checkable-deposit liabilities in reserves. Thus, the amount of required reserves is $50,000 x 0.20 = $10,000.

Question 6

When a bank accepts a checkable deposit from a customer, its deposits will increase and its excess reserves will

Accepted Answer

When a bank accepts a checkable deposit from a customer, its deposits will increase by the amount of the deposit. However, the bank must also meet reserve requirements set by the Federal Reserve, so it will hold a portion of the deposit as reserves. The remaining portion of the deposit, known as excess reserves, can be loaned out to other customers. Therefore, while deposits increase, excess reserves increase by less than the amount of the deposit.

Question 7

The required reserve ratio is equal to

Accepted Answer

The required reserve ratio is defined as the commercial bank's required reserves divided by its checkable-deposit liabilities. This ratio indicates the percentage of deposits that a bank is required to hold in reserve and cannot lend out.

Question 8

A commercial bank has actual reserves of $1 million and checkable-deposit liabilities of $9 million, and the required reserve ratio is 10 percent. The excess reserves of the bank are

Accepted Answer

The required reserves for the bank at a 10% reserve ratio would be $900,000 ($9 million x 0.10). Since the bank has actual reserves of $1 million, it has excess reserves of $100,000 ($1 million - $900,000).

Question 9

Suppose that the reserve ratio is 6 percent, and applies only to checkable deposits. A bank has noncheckable time deposits of $300 million, checkable deposits of $100 million, and reserves of $8 million. What are the excess
Reserves of this bank?

Accepted Answer

The answer of Suppose that the reserve ratio is 6...

Question 10

A bank's checkable deposits shrink from $40 million to $33 million. What happens to its required reserves if the required reserve ratio is 3 percent?

Accepted Answer

The answer of A bank's checkable deposits shrink from $40...

Question 11

An individual deposits $12,000 in a commercial bank. The bank is required to hold 10 percent of all deposits on reserve at the regional Federal Reserve Bank. The deposit increases the loan capacity of the bank by

Accepted Answer

The required reserve ratio is 10 percent, which means the bank must hold $1,200 on reserve. The remaining $10,800 can be used to increase the loan capacity of the bank. Therefore, the deposit increases the loan capacity by $10,800.

Question 12

Sharon sells a government security worth $4,600,000 to the Federal Reserve Bank of Kansas City. She then deposits the funds in her checking account at First Commerce Bank. Her checking account had a $150,000
Balance before this deposit. The reserves of First Commerce Bank would

Accepted Answer

When Sharon sells the government security worth $4,600,000 to the Federal Reserve Bank of Kansas City, the reserves of the bank increase by $4,600,000. When she deposits the funds in her checking account at First Commerce Bank, the bank's reserves don't change as the deposit represents a liability for the bank. Therefore, the reserves of First Commerce Bank would increase by $4,600,000. The balance of Sharon's checking account would now be $4,750,000 ($150,000 + $4,600,000).

Question 13

Assume that the required reserve ratio is 5 percent. If a commercial bank has $2 million cash in its vault, $1 million in government securities, $3 million on deposit at the Fed, and $60 million in checkable deposits, then its excess
Reserves equal

Accepted Answer

The required reserves are 5% of $60 million in checkable deposits, which is $3 million. The bank has $2 million in cash and $3 million on deposit at the Fed, totaling $5 million in reserves. Excess reserves are total reserves minus required reserves, which is $5 million - $3 million = $2 million.

Question 14

Suppose the Northwestern Bank has excess reserves of $12,000 and checkable deposits of $125,000. If the reserve requirement is 20 percent, what are the bank's actual reserves?

Accepted Answer

To find the actual reserves of the bank, we use the formula:

Actual Reserves = Excess Reserves + Required Reserves

Required Reserves = Reserve Requirement x Checkable Deposits

Required Reserves = 0.20 x $125,000 = $25,000

Actual Reserves = $12,000 + $25,000 = $37,000

Therefore, the correct answer is B.

Question 15

$$\begin{array} { | l | c | } 
\hline { \text { Type of Deposit } } & \text { Reserve Requirement } \
\hline \text { Checkable Deposits } & \
\hline \$ 7.8 \text { - 48.3 Million } & 3 \% \
\hline \text { Over \$48.3 Million } & 10 \
\hline \text { Noncheckable personal savings and time deposits } & 0 \
\hline
\end{array}$$ Refer to the accompanying table. If a bank has $60 million in savings deposits and $40 million in checkable deposits, then its required reserves are

Accepted Answer

The required reserves for the $40 million in checkable deposits are calculated as follows: The first $7.8 million to $48.3 million is subject to a 3% reserve requirement, which applies to $32.5 million ($40 million - $7.8 million). Therefore, the required reserves are $0.975 million (3% of $32.5 million). Since savings deposits have a 0% reserve requirement, they do not contribute to the required reserves. Thus, the total required reserves are $0.975 million, which is closest to option D, $1.2 million, acknowledging a potential discrepancy in the calculation or interpretation of the provided options.

Question 16

When cash is withdrawn from a checkable-deposit account at a bank,

Accepted Answer

The money supply M1 includes both cash and checkable deposits. When cash is withdrawn from a checkable-deposit account, the total amount of M1 remains the same, but the composition shifts from checkable deposits to currency in circulation.

Question 17

When cash is deposited in a checkable-deposit account at a bank, there is

Accepted Answer

Depositing cash into a checkable-deposit account increases the bank's liabilities because the bank owes this amount to the depositor. The money supply M1, which includes cash and checkable deposits, remains unchanged by such a deposit, and the bank's net worth does not directly increase from the deposit itself.

Question 18

A bank's required reserves can be calculated by

Accepted Answer

Required reserves are calculated by multiplying a bank's checkable-deposit liabilities by the reserve ratio set by the Federal Reserve. Therefore, choice C is the correct answer.

Question 19

A bank has excess reserves of $5,000 and demand deposits of $50,000; the required reserve ratio is 20 percent. If the reserve ratio is raised to 25 percent, then this bank can lend a maximum of

Accepted Answer

Required reserves = demand deposits x required reserve ratio
At a 20% required reserve ratio, the required reserves would be:
$50,000 x 0.20 = $10,000
Excess reserves = actual reserves - required reserves
$5,000 = actual reserves - $10,000
Actual reserves = $15,000

If the reserve ratio is increased to 25%, then the new required reserves would be:
$50,000 x 0.25 = $12,500

Excess reserves = actual reserves - required reserves
$5,000 = actual reserves - $12,500
Actual reserves = $17,500

The maximum amount the bank can lend is equal to the excess reserves:
$17,500 - $10,000 = $7,500
However, the question asks for the maximum amount the bank can lend after the reserve ratio is increased, so we need to subtract the amount the bank can no longer lend due to the increase in required reserves:
$7,500 - ($12,500 - $10,000) = $2,500.

Therefore, the correct answer is D.

Question 20

$$\begin{array} { | l | c | } 
\hline { \text { Type of Deposit } } & \text { Reserve Requirement } \
\hline \text { Checkable Deposits } & \
\hline \$ 7.8 \text { - 48.3 Million } & 3 \% \
\hline \text { Over \$48.3 Million } & 10 \
\hline \text { Noncheckable personal savings and time deposits } & 0 \
\hline
\end{array}$$ Refer to the accompanying table. If a bank has checkable deposits of $45 million and reserves of $2 million, then its excess reserves are

Accepted Answer

For checkable deposits up to $7.8 million, the required reserves are $234,000 ($7.8 million x 0.03). For checkable deposits between $7.8 million and $48.3 million, the required reserves are 3% of the amount over $7.8 million. Therefore, for the next $37.5 million ($45 million - $7.8 million), the required reserves are $1,125,000 ($37.5 million x 0.03). For the remaining checkable deposits over $48.3 million, the required reserves are 10%. Since the bank has only $45 million in checkable deposits, this does not apply.

So, total required reserves for this bank is $1,359,000 ($234,000 + $1,125,000). Excess reserves can be calculated by subtracting required reserves from actual reserves: 
Excess reserves = Actual reserves - Required reserves 
= $2 million - $1,359,000 
= $641,000 or $0.641 million. 
Therefore, the answer is B as it is the closest option to $0.641 million.

Quiz 15: Money Creation