Question 1

A reserve requirement of 20 percent implies a potential money deposit multiplier of

Accepted Answer

The potential money deposit multiplier is equal to 1/required reserve ratio. Therefore, for a reserve requirement of 20%, the potential money deposit multiplier would be 1/0.20, which equals 5.

Question 2

Which of the following will cause the U.S. money supply to expand?

Accepted Answer

When a commercial bank uses excess reserves to extend a loan to a customer, it creates new money and expands the money supply.

Answer: B
 When a commercial bank purchases U.S. securities from the Fed, it increases the reserves held by the bank, which can then be used to make additional loans, thereby expanding the money supply.

Answer: C and D
 An increase in reserve requirements (choice C) or an increase in the discount rate (choice D) would decrease the amount of money that banks can lend out and therefore contract the money supply.

Question 3

A reserve requirement of 5 percent implies a potential money deposit multiplier of

Accepted Answer

The money deposit multiplier is calculated as the reciprocal of the reserve requirement ratio. With a reserve requirement of 5 percent (or 0.05), the multiplier is 1/0.05, which equals 20.

Question 4

If a number of people suddenly deposit into their checking accounts a great deal of cash previously kept in their pockets or at home, other things constant, their actions will

Accepted Answer

When individuals deposit cash into their checking accounts, this increases the amount of reserves banks have available. With more reserves, banks can extend additional loans, which leads to an expansion of the money supply. Therefore, the correct answer is B.

Question 5

Citizens Bank confronts a reserve requirement of 20 percent and currently holds millions of dollars in excess reserves. If a depositor withdraws $35,000, the excess reserves of the bank will

Accepted Answer

The reserve requirement is 20%, so the bank must keep $7,000 (20% of $35,000) in reserves. The remaining $28,000 can be taken from excess reserves, causing them to decline by $28,000.

Question 6

On a certain date, the banking system had $40 billion in excess reserves. The legally required reserve ratio was 20 percent. Potentially, if these funds were loaned and eventually the entire amount re-deposited with a bank, the banking system as a whole could increase the money supply by

Accepted Answer

The excess reserves of $40 billion can support loans up to $200 billion ($40 billion/20%). This means that if all of these funds were loaned out and eventually redeposited with a bank, the banking system could increase the money supply by a maximum of $200 billion. Therefore, option C is the correct answer.

Question 7

If the Fed wanted to expand the money supply as part of an antirecession strategy, it could

Accepted Answer

Decreasing the interest rate paid on excess reserves would encourage banks to extend more loans, which would increase the money supply. Option A would actually reduce the money supply by requiring banks to hold more reserves. Option C would also reduce the money supply by taking money out of circulation. Option D would make it more expensive for banks to borrow, which could lead to them extending fewer loans, again reducing the money supply.

Question 8

Suppose the Fed purchases $40,000 of U.S. Treasury bonds from Benjamin, who deposits the money with First National Bank. If the required reserve ratio is 20 percent, this transaction will increase the excess reserves of First National Bank by

Accepted Answer

When the Fed purchases $40,000 of U.S. Treasury bonds from Benjamin, the money is deposited in First National Bank. As the required reserve ratio is 20 percent, the bank is required to hold 20 percent of the deposit as reserves, while the remaining 80 percent can be used for new loans or other investments.

Thus, the initial impact on First National Bank's excess reserves will be:

Excess reserves = Deposit - Required reserves
Excess reserves = $40,000 - (20% x $40,000)
Excess reserves = $40,000 - $8,000
Excess reserves = $32,000

Therefore, the transaction will increase the excess reserves of First National Bank by $32,000.

Question 9

If you have a checking account at a local bank, your bank account there is

Accepted Answer

Your checking account is a liability for the bank because they owe you that money, and it is an asset for you because it is money you own.

Question 10

If people decide to hold less money as currency and more as checking deposits, this will most likely cause

Accepted Answer

When people hold less money as currency and more as checking deposits, the demand for money increases, leading to an increase in the money supply. This is because the checking deposits are counted as a part of the money supply, whereas currency held by the public is not. A decrease in bank reserves or an increase in the discount rate would work to decrease the money supply, while a decrease in required reserves would have little effect on the money supply in this scenario.

Question 11

If the Fed injects additional reserves into the banking system, why will banks generally want to expand their loans and investments?

Accepted Answer

Banks generally want to expand their loans and investments because loans and investments generally earn more interest income for the banks than excess reserves. Therefore, banks want to put excess reserves to work by lending or investing them to earn more income.

Question 12

Suppose you withdraw $1,000 from your checking account. If the reserve requirement is 20 percent, how does this transaction affect the supply of money and the excess reserves of your bank?

Accepted Answer

When you withdraw $1,000, the money supply does not change because the money is simply transferred from the bank to you. The bank's excess reserves decrease by $800 because it must keep 20% ($200) as required reserves, leaving $800 as the reduction in excess reserves.

Question 13

Suppose the Fed buys $100,000 of U.S. Treasury bonds from Bill Gates. If the reserve requirement is 10 percent, the currency holdings of the public are unchanged, and banks have zero excess reserves both before and after the transaction, the total impact on the money supply will be

Accepted Answer

When the Fed buys $100,000 of U.S. Treasury bonds from Bill Gates, it pays him with a check drawn on the Fed. This check is deposited in his bank account, which creates a $100,000 increase in the bank's reserves. Since the reserve requirement is 10 percent, the bank can lend out $90,000 of those reserves, which will be deposited in another bank, creating another $81,000 of deposits. This process continues, with each bank being able to lend out 90 percent of the new deposits it receives, until the total increase in the money supply is $1,000,000.

Question 14

Suppose all banks are subject to a uniform reserve requirement of 20 percent and that the Union Bank has no excess reserves. If a new customer deposits $50,000, the bank could extend new loans up to a maximum of

Accepted Answer

Since the reserve requirement is 20 percent, the bank is required to keep 20% of $50,000 = $10,000 as reserves, leaving $40,000 available for new loans.

Question 15

If many people were to suddenly deposit into their checking accounts large sums of cash previously held in their homes and/or wallets, and there were no offsetting actions by the Fed or change in institutional policies, this would

Accepted Answer

When people deposit cash into their checking accounts, it increases the reserves of banks, leading to an expansion of the money supply if those reserves are used to make new loans. This mechanism is known as the deposit multiplier effect. Therefore, if there were no offsetting actions by the Fed or change in institutional policies, the increase in deposits would increase the excess reserves of banks and expand the money supply if those reserves were used to make additional loans. This would be consistent with Choice B, which is the correct answer. Choice A is incorrect because an increase in deposits would increase both M1 and M2 money supplies. Choices C and D are incorrect because they assume that the deposit multiplier effect would not occur, but that would not be the case under the scenario described.

Question 16

Drawing on her account at Regional Bank, Samantha writes a check to Isabella, who deposits the check in her account at Local Bank. Once the check has cleared, which of the following will occur to the reserves of the banking system and the M1 money supply?

Accepted Answer

When Samantha writes a check to Isabella, the reserves in the banking system do not change; they are simply transferred from one bank to another. Similarly, the M1 money supply remains unchanged because the transaction is merely a transfer of funds within the existing money supply.

Question 17

Which of the following would cause the actual deposit expansion multiplier to be less than its potential?

Accepted Answer

Both a and b. If the general public holds funds in the form of currency rather than bank deposits, banks will have fewer reserves to work with, which will limit the amount they can lend out. Similarly, if commercial banks hold excess reserves, they will have fewer funds available for lending, which will limit the potential for deposit expansion.

Question 18

If uncertainty causes commercial banks to increase their holdings of excess reserves, other things constant, this will

Accepted Answer

If commercial banks increase their holdings of excess reserves due to uncertainty, it means the banks are less likely to loan out these excess reserves. This reduces their lending capacity, which in turn reduces the size of the deposit expansion multiplier. Therefore, the correct answer is B.

Question 19

You withdraw $100 from your checking account. How does this affect the money supply and the reserves of your bank?

Accepted Answer

When you withdraw $100 from your checking account, the money supply does not change because the money is not leaving the economy, it is just changing hands from your checking account to your cash in hand. However, the reserves of your bank decline because they must have enough physical cash on hand to fulfill your withdrawal request.

Question 20

Suppose Laqueta deposits $10,000 of cash into a checking account at a commercial bank. The immediate effect is

Accepted Answer

Depositing cash into a checking account does not change the M1 money supply immediately, as both cash and checking deposits are part of M1. However, the bank can lend out a portion of the deposit, potentially increasing the M1 money supply in the future.

Quiz 13: Money and the Banking System