Question 1

Which of the following equations is correct?
A) Total reserves = Required reserves + Excess reserves
B) Required reserves = Reserve requirement × Loans
C) Required reserves = Excess reserves - Total reserves
D) Total reserves = Reserve requirement × Deposits

Accepted Answer

The answer of Which of the following equations is correct?
A)...

Question 2

What is fractional reserve banking?
A) Borrowers are required to repay only a fraction of the amount loaned to them.
B) Banks are required to hold only a set proportion of total deposits in reserve.
C) The actual amount that a borrower receives is a fraction of the loan value that must be repaid.
D) Banks are required to hold only a fraction of their reserves at the central bank.

Accepted Answer

Fractional reserve banking refers to the banking system where banks are required to hold only a set proportion of their total deposits in reserve, allowing them to lend out the remainder. This system is fundamental to modern banking, enabling banks to extend credit and create money through the lending process.

Question 3

Bigtown Bank has total deposits of $900 million and total reserves of $150 million. It is subject to a required reserve ratio of 15%. How much, if anything, does Bigtown Bank have in excess reserves?
A) $15 million in excess reserves
B) $135 million in excess reserves
C) $50 million in excess reserves
D) There are no excess reserves.

Accepted Answer

Excess reserves = Total reserves - Required reservesRequired reserves = Total deposits * Required reserve ratioRequired reserves = $900 million * 15% = $135 millionExcess reserves = $150 million - $135 million = $15 million

Question 4

Bigtown Bank has total deposits of $900 million and total reserve of $150 million. It is subject to a required reserve ratio of 15%. What are Bigtown Bank's required reserves?
A) $22.5 million
B) $15 million
C) $120 million
D) $135 million

Accepted Answer

The required reserves are calculated by multiplying the total deposits by the required reserve ratio: $900 million * 15% = $135 million.

Question 5

On a bank's balance sheet, deposits are listed as _____, reserves are listed as _____, and loans are listed as:
A) liabilities; assets; liabilities.
B) assets; liabilities; assets.
C) liabilities; assets; assets.
D) assets; liabilities; liabilities.

Accepted Answer

Deposits are a liability for the bank because they represent money the bank owes to its depositors. Reserves are considered assets because they are cash or cash-equivalents the bank holds. Loans are also assets because they represent money the bank has lent out and expects to be repaid with interest.

Question 6

Bigtown Bank has total deposits of $900 million and total reserve of $150 million. It is subject to a required reserve ratio of 15%. What is the maximum amount of additional loans that Bigtown Bank could lend out today?
A) $150 million
B) $135 million
C) $15 million
D) $90 million

Accepted Answer

The maximum amount of additional loans that Bigtown Bank could lend out today is $15 million. This is calculated as follows:Excess reserves = Total reserves - Required reserves= $150 million - (0.15 x $900 million)= $15 million

Question 7

Which of the following correctly explains the deposit expansion process of the banking system?
A) When a bank loans out its excess reserves, the loan typically ends up being deposited, increasing the total deposits.
B) When banks receive interest on loans, that extra revenue from interest raises deposits.
C) Commercial banks are issuers of currency. When they print additional currency, the extra funds eventually are deposited.
D) If a bank buys additional gold to store in its vault, then it can make additional loans, which end up as deposits.

Accepted Answer

A) The deposit expansion process in the banking system works through the mechanism of banks lending out their excess reserves. When these loans are made, the money is typically deposited in some form in the banking system, either by the borrower or by those who receive payments from the borrower. This process increases the total deposits within the banking system, illustrating the multiplier effect where initial deposits lead to a multiple increase in total deposits through repeated rounds of lending and depositing. Choices B, C, and D do not accurately describe the deposit expansion process. Banks earning interest on loans affects their revenue but does not directly increase deposits in the manner described by the deposit expansion model. Commercial banks do not issue currency; that is the role of the central bank or monetary authority. Buying gold does not directly allow banks to make additional loans in the context of deposit expansion; loans are primarily made based on the bank's reserves and regulatory requirements.

Question 8

A banking system has total deposits of $500 billion and total reserves of $130 billion. If the reserve requirement is 20%, what is the maximum possible deposit creation potential of the banking system?
A) $150 billion
B) $130 billion
C) $500 billion
D) $30 billion

Accepted Answer

The maximum possible deposit creation potential is calculated by subtracting the required reserves from the actual reserves and then using the money multiplier. Required reserves for $500 billion at 20% are $100 billion ($500 billion * 20%). The actual reserves are $130 billion, so the excess reserves are $30 billion ($130 billion - $100 billion). The money multiplier is 1/reserve requirement = 1/0.20 = 5. Therefore, the maximum possible deposit creation is $30 billion * 5 = $150 billion.

Question 9

A banking system has total deposits of $200 billion and total reserves of $50 billion. If the reserve requirement is 20%, what is the deposit creation potential of the banking system?
A) $200 billion
B) $10 billion
C) $20 billion
D) $50 billion

Accepted Answer

The answer of A banking system has total deposits of...

Question 10

A banking system has total deposits of $50 billion and total reserves of $7 billion. If the required reserve ratio is 10%, what is the maximum deposit creation potential of the banking system?
A) $2 billion
B) $14 billion
C) $20 billion
D) $70 billion

Accepted Answer

The required reserves are 10% of $50 billion, which is $5 billion. The excess reserves are $7 billion - $5 billion = $2 billion. The money multiplier is 1/0.10 = 10. Therefore, the maximum deposit creation potential is $2 billion * 10 = $20 billion.

Question 11

If the reserve requirement is 10%, what is the size of the money or deposit expansion multiplier?
A) 9
B) 10
C) 11
D) 5

Accepted Answer

The answer of If the reserve requirement is 10%, what...

Question 12

The multiplier used to assess the impact of monetary policy on the economy is equal to:
A) excess reserves times the required reserve ratio.
B) total deposits times the required reserve ratio.
C) one divided by the required reserve ratio.
D) the required reserve ratio divided by excess reserves.

Accepted Answer

The multiplier used to assess the impact of monetary policy on the economy, often referred to as the money multiplier, is equal to one divided by the required reserve ratio. This multiplier reflects how much the money supply can potentially increase with an initial injection of reserves into the banking system.

Question 13

The required reserve ratio is 20%. What is the maximum possible potential deposit multiplier?
A) 20
B) 5
C) 2
D) 80

Accepted Answer

The maximum possible potential deposit multiplier is calculated as the reciprocal of the required reserve ratio. Therefore, with a required reserve ratio of 20% (or 0.20), the deposit multiplier is 1 / 0.20 = 5.

Question 14

When a fractional reserve banking system is present, can the banking system impact the money supply?
A) No, policymakers set the level of the money supply, and banks are not free to make decisions that impact the money supply.
B) No, the fractional reserve constraint prevents banks from impacting the money supply.
C) Yes, at the moment that a bank accepts a deposit of cash, the money supply immediately increases.
D) Yes, banks decide how much of their excess reserves to loan out. When the loans are made, the money supply grows.

Accepted Answer

In a fractional reserve banking system, banks are required to keep a fraction of deposits as reserves but can loan out the rest. When banks make loans from their excess reserves, the money supply increases because the recipients of the loans have more money to spend, and the original depositors still have access to their deposits. This process can multiply the initial deposit into a larger amount of money in the economy, illustrating how banks can indeed impact the money supply.

Question 15

How can the commercial banking system cause the money supply to grow?
A) Every time that a bank accepts a new deposit, the money supply gets larger.
B) When loans end up as deposits, there are more excess reserves that can be lent out, and the money supply can increase.
C) When banks charge interest on loans, that extra revenue to the bank raises the money supply.
D) Banks are the issuers of currency. When they print additional currency, the money supply grows.

Accepted Answer

When banks lend out their excess reserves, the money ends up as deposits in other banks, which can then lend out a portion of those deposits, creating a multiplier effect that increases the overall money supply.

Question 16

Banks can impact the size of the money supply because:
A) bank loans usually occur, and this increases the money supply.
B) if a bank buys additional gold to store in its vault, it is allowed to make additional loans that count as part of the money supply.
C) banks charge interest on loans and the interest revenue counts as extra money in the money supply.
D) banks issue currency so they can just print additional currency to raise the money supply.

Accepted Answer

Bank loans increase the money supply because when banks lend money, they create new deposits in the borrower's account, effectively increasing the total amount of money in circulation.

Question 17

The shadow banking system is:
A) an underground banking system that is largely illegal.
B) a system that is outside the regulation system of commercial banks but provides many of the same banking services.
C) a secondary system of commercial banks that backs up the primary system of commercial banks.
D) the branches of a nation's banks that operate in foreign countries.

Accepted Answer

The shadow banking system consists of financial intermediaries involved in facilitating the creation of credit across the global financial system but whose members are not subject to regulatory oversight. This system still provides services similar to traditional banks, like loans and credit, but operates outside the regular banking regulations.

Question 18

Deposit insurance helps to reduce the likelihood of:
A) loan defaults.
B) loans.
C) bank runs.
D) money creation.

Accepted Answer

Deposit insurance reassures depositors that their money is safe even if a bank fails, reducing the panic that can lead to bank runs.

Question 19

If required reserves (RR) equals 0.2 and there are $5 million of new deposits of currency made (not transfers of deposits), what is the maximum potential impact of these deposits on the country's money supply over time?
A) $20 million
B) $8 million
C) $5 million
D) $25 million

Accepted Answer

The money multiplier is 1/RR, which is 1/0.2 = 5. The maximum potential impact on the money supply is the initial deposit multiplied by the money multiplier: $5 million * 5 = $25 million.

Question 20

A banking system has total deposits of $500 billion and total reserves of $140 billion. If the required reserve ratio is 20%, what is the deposit creation potential of the banking system?
A) $280 billion
B) $500 billion
C) $140 billion
D) $200 billion

Accepted Answer

The required reserves are 20% of $500 billion, which is $100 billion. The excess reserves are $140 billion - $100 billion = $40 billion. The deposit creation potential is the excess reserves divided by the reserve ratio, which is $40 billion / 0.20 = $200 billion.

Quiz 24: The Monetary System

Which of the following equations is correct?

What is fractional reserve banking?

Bigtown Bank has total deposits of $900 million and total reserves of $150 million. It is subject to a required reserve ratio of 15%. How much, if anything, does Bigtown Bank have in excess reserves?

Bigtown Bank has total deposits of $900 million and total reserve of $150 million. It is subject to a required reserve ratio of 15%. What are Bigtown Bank's required reserves?

On a bank's balance sheet, deposits are listed as _, reserves are listed as _, and loans are listed as:

Bigtown Bank has total deposits of $900 million and total reserve of $150 million. It is subject to a required reserve ratio of 15%. What is the maximum amount of additional loans that Bigtown Bank could lend out today?

Which of the following correctly explains the deposit expansion process of the banking system?

A banking system has total deposits of $500 billion and total reserves of $130 billion. If the reserve requirement is 20%, what is the maximum possible deposit creation potential of the banking system?

A banking system has total deposits of $200 billion and total reserves of $50 billion. If the reserve requirement is 20%, what is the deposit creation potential of the banking system?

A banking system has total deposits of $50 billion and total reserves of $7 billion. If the required reserve ratio is 10%, what is the maximum deposit creation potential of the banking system?

If the reserve requirement is 10%, what is the size of the money or deposit expansion multiplier?

The multiplier used to assess the impact of monetary policy on the economy is equal to:

The required reserve ratio is 20%. What is the maximum possible potential deposit multiplier?

When a fractional reserve banking system is present, can the banking system impact the money supply?

How can the commercial banking system cause the money supply to grow?

Banks can impact the size of the money supply because:

The shadow banking system is:

Deposit insurance helps to reduce the likelihood of:

If required reserves (RR) equals 0.2 and there are $5 million of new deposits of currency made (not transfers of deposits) , what is the maximum potential impact of these deposits on the country's money supply over time?

A banking system has total deposits of $500 billion and total reserves of $140 billion. If the required reserve ratio is 20%, what is the deposit creation potential of the banking system?