Question 1

Explain why an initial deposit in the banking system leads to the creation of new deposits.
-How does the bank manage the asset side of its "T" account in order to make money?

Accepted Answer

The answer of Explain why an initial deposit in the...

Question 2

Calculate the change in deposits or money supply from an initial deposit
-How do changes in the reserve requirement affect the deposit multiplier?

Accepted Answer

The answer of Calculate the change in deposits or money...

Question 3

Calculate the change in deposits or money supply from an initial deposit
-Given an initial deposit of $100, how much money is created if the reserve requirement is 5%, 10%, 15%?

Accepted Answer

The answer of Calculate the change in deposits or money...

Question 4

State and explain the meaning of the assumptions made when using the money multiplier and what happens when the assumptions don't hold.
-What happens to the money creation process if banks do not lend out all their excess reserves?

Accepted Answer

The answer of State and explain the meaning of the...

Question 5

State and explain the meaning of the assumptions made when using the money multiplier and what happens when the assumptions don't hold.
-What happens to the money creation process if people do not redeposit all money into the bank?

Accepted Answer

The answer of State and explain the meaning of the...

Question 6

To qualify as "money," a commodity must

Accepted Answer

In order for something to be considered as "money," it must be accepted as a medium of exchange, meaning that people are willing to trade goods or services for it. The other options, while they may be desirable qualities for money, are not necessary for something to be considered as such.

Question 7

Precious metals have several virtues as a medium of exchange. Which of the following is not an important reason to use precious metals as a medium of exchange?

Accepted Answer

The statement "Precious metals are plentiful and readily available" is not a true characteristic of precious metals. In fact, the scarcity of these metals is what gives them their value as a medium of exchange. The other statements are true advantages of using precious metals as a medium of exchange.

Question 8

A major step in the evolution of money is the substitution of paper claims for metallic money. What does this mean?

Accepted Answer

The substitution of paper claims for metallic money means that banks and governments issued paper money that could be redeemed in gold or other precious metals. This allowed for a more convenient and portable form of currency, as people could carry paper money instead of heavy coins.

Question 9

Today paper money

Accepted Answer

Only governments have the authority to issue paper money through their central banks. Banks can only lend out the money they have on deposit, and cannot create new money themselves. Paper money is no longer convertible to gold on demand, as the gold standard was abandoned by most countries in the early 20th century. Paper money remains widely accepted as a medium of exchange in most countries.

Question 10

Early goldsmiths earned income by keeping deposits of coins and gold for safekeeping and issuing receipts for these deposits. From the point of view of the goldsmiths, these receipts were

Accepted Answer

The receipts issued by goldsmiths for deposits of coins and gold were liabilities because they represented the goldsmiths' obligation to return the deposited gold or coins to the depositor upon presentation of the receipt.

Question 11

From the point of view of depositors, receipts issued by goldsmiths in exchange for deposits of coins and gold were considered

Accepted Answer

Receipts issued by goldsmiths in exchange for deposits of coins and gold were considered as money because they were widely accepted as a medium of exchange and could be used to make purchases and pay debts. While these receipts represented a claim on the actual gold and coins deposited, they functioned in practice as a form of currency.

Question 12

Goldsmiths became bankers when they created money. How did they create money?

Accepted Answer

Goldsmiths created money by making loans in the form of receipts. This meant that they would issue receipts to borrowers in exchange for a promise to repay the loan with interest. These receipts could then be used as currency and traded among individuals, effectively creating new money in the economy. This practice laid the foundation for modern banking and the creation of paper money. A) is incorrect because goldsmiths did not have the authority to print their own receipts as currency. B) is incorrect because accepting more deposits of coins did not directly create new money. C) is incorrect because finding more gold and turning it into coins did not necessarily increase the total amount of money in circulation.

Question 13

What is a bank panic?

Accepted Answer

A bank panic occurs when customers of a bank want to withdraw their money faster than the bank can provide it. This leads to a situation where banks cannot repay all depositors who want to withdraw their money, which can ultimately lead to the bank going out of business. This scenario can quickly spread to other banks, causing a chain reaction of failures and creating a wider economic crisis.

Question 14

The availability of credit makes an economy more financially fragile because

Accepted Answer

When credit is readily available, consumers and businesses may take on too much debt. During recessions or economic downturns, they may struggle to repay their debts, leading to financial difficulties for financial institutions. This can then spiral into a financial crisis, as we saw in the 2008 global financial crisis. Therefore, the availability of credit makes an economy more financially fragile.

Question 15

What is the prime rate?

Accepted Answer

The prime rate is the interest rate that commercial banks charge their most creditworthy customers, typically large corporations. It serves as a benchmark for other lending rates, such as for mortgages and consumer loans.

Question 16

Why does the interest rate typically fall during economic contractions?

Accepted Answer

During economic contractions, people and businesses are typically not spending as much money, leading to a lower demand for loans. Banks may also be more hesitant to lend out money due to the increased risk of default. To stimulate borrowing and spending, the central bank may lower interest rates, making borrowing cheaper and potentially increasing demand for loans.

Question 17

What is the relationship between the business cycle and the prime rate?

Accepted Answer

The prime rate tends to rise during an expansion as demand for loans increases, and fall during a contraction as demand for loans decreases. This relationship is due to the fact that during an expansion, businesses and consumers are generally more confident in the economy and therefore more likely to take out loans, leading to increased demand for borrowing and higher interest rates. Conversely, during a contraction, businesses and consumers may be more cautious and less likely to borrow, leading to decreased demand for borrowing and lower interest rates.

Question 18

Assume that the Federal Reserve sets a required reserve ratio of 10%. If a bank receives a deposit of $1000, then

Accepted Answer

According to the required reserve ratio of 10%, the bank must keep $100 on reserve (10% of $1000 deposit) and can loan out the remaining $900.

Question 19

Assume that the Federal Reserve sets a required reserve ratio of 5%. Then the money multiplier is

Accepted Answer

The money multiplier equals 1/reserve ratio. Therefore, in this case, the money multiplier is 1/0.05 = 20. Option B is the correct answer.

Question 20

Assume that the Federal Reserve sets a required reserve ratio of 20%. An individual deposits $1000 in cash into the bank. How much money will eventually be created when all banks are fully loaned out?

Accepted Answer

The money multiplier is 1 divided by the reserve ratio, so 1/0.20 = 5. The initial deposit of $1000 can create $1000 x 5 = $5000 in total money supply when fully loaned out.

Quiz 49: Money, Banking, and Credit

Explain why an initial deposit in the banking system leads to the creation of new deposits. -How does the bank manage the asset side of its "T" account in order to make money?

Calculate the change in deposits or money supply from an initial deposit -How do changes in the reserve requirement affect the deposit multiplier?

Calculate the change in deposits or money supply from an initial deposit -Given an initial deposit of $100, how much money is created if the reserve requirement is 5%, 10%, 15%?

State and explain the meaning of the assumptions made when using the money multiplier and what happens when the assumptions don't hold. -What happens to the money creation process if banks do not lend out all their excess reserves?

State and explain the meaning of the assumptions made when using the money multiplier and what happens when the assumptions don't hold. -What happens to the money creation process if people do not redeposit all money into the bank?