Question 1

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%, which means that the bank is required to hold 15% of the primary deposit in reserves. In this case, 15% of $1,000 is $150.

Therefore, the bank would hold reserves of $150, leaving $850 available for loans. Once the maximum loan amount of $850 is made, the asset side of the balance sheet would show reserves of $150 and loans of $850, for a total of $1,000. Thus, the correct answer is D, which shows reserves of $1,000 and loans of $850.

Question 2

Special Drawing Rights are a form of reserve asset or paper gold created by the:

Accepted Answer

Special Drawing Rights (SDRs) are created and allocated by the International Monetary Fund (IMF) as a type of international reserve asset that can be exchanged for hard currency among member countries. They were created in 1969 as a way to supplement the existing international reserve system based on gold and the U.S. dollar, and are used to help countries maintain liquidity in their foreign exchange reserves.

Question 3

Changes in the growth rates for money supply and money velocity affect the growth rate in:

Accepted Answer

Changes in both money supply and money velocity affect both real economic activity (through changes in the availability of credit and investment opportunities) and the rate of inflation (through changes in purchasing power and price levels). Additionally, changes in money velocity affect the turnover of goods and services, as higher velocity means that money is being exchanged more frequently within an economy.

Question 4

When a customer demands additional currency and cashes a check for $500,all of the following occur except:

Accepted Answer

Federal Reserve notes actually increase in circulation when a customer cashes a check for $500, as the bank gives out physical currency to the customer. Choices A, B, and D describe direct consequences of the transaction on the bank's financial position, but Federal Reserve notes in circulation increase when cash is withdrawn.

Question 5

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 answer of Assume that a bank must keep reserves...

Question 6

Which of the following statements is most correct?

Accepted Answer

Derivative deposits, also known as secondary deposits, are created when the initial (primary) deposits are loaned out by banks, and these loaned amounts are deposited back into the banking system. This process increases the money supply through the money multiplier effect, as banks can lend out a portion of deposits, which then get redeposited and can be lent out again, creating more deposits from the initial reserve.

Question 7

Which of the following statements is most correct?

Accepted Answer

The money multiplier is influenced by the public's switching between checkable and non-checkable deposits at their banks. The other statements are incorrect. A monetary base of $5 million and a money multiplier of 5 would result in a money supply of $25 million (not $1 million), the magnitude of the money multiplier today is typically in the 3 to 4 range (not 8 to 9), and the monetary base multiplied by the money multiplier produces the M2 definition of the money supply (not M3).

Question 8

Total reserves in the banking system consist of:

Accepted Answer

Total reserves in the banking system consist of both a and b, which are vault cash held at commercial banks and other depository institutions and reserve deposits held at Federal Reserve banks. Currency in circulation is not a component of total reserves.

Question 9

In our financial system,the money multiplier:

Accepted Answer

The money multiplier can fluctuate over time as it is affected by various factors such as the reserve requirement and lending practices of banks. The Federal Reserve, nonbank public, and U.S. Treasury can all impact the money supply and banking system, but they do not directly affect the money multiplier.

Question 10

Which one of the following transactions or operations is entirely at the initiative of the Federal Reserve?

Accepted Answer

The answer of Which one of the following transactions or...

Question 11

Which one of the following sources provides the least backing (collateral)today for U.S.Federal Reserve notes?

Accepted Answer

Eligible paper in the form of business notes and drafts provides the least backing for U.S. Federal Reserve notes today, as the primary backing comes from U.S. government and agency securities. Gold certificates and Special Drawing Rights also play a role, but eligible paper is not a significant source of collateral.

Question 12

Assume that a bank receives a primary deposit of $1,000.If the reserve requirement is 25%,what will be the amount of excess reserves available for lending purposes?

Accepted Answer

The reserve requirement is 25%, which means that the bank must hold $250 in reserves (25% of $1,000). The remaining $750 will be available for lending purposes as excess reserves. Therefore, the correct answer is C) $750.

Question 13

The monetary base:

Accepted Answer

The monetary base consists of bank reserves, which are deposits that banks hold at the Federal Reserve, and currency in circulation. It does not include checkable or noncheckable deposits, and it is not equivalent to the money supply or the money multiplier.

Question 14

Which of the following statements is false?

Accepted Answer

All the statements are correct. The multiplying capacity of primary deposits is hindered by cash leakages from the banking system, the monetary base is defined as bank reserves plus currency held by the nonbank public, and open market operations are entirely at the initiative of the Federal Reserve.

Question 15

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...

Question 16

If a check is written for the full amount of a derivative deposit created by a bank loan and then is sent to a bank in another city for deposit:

Accepted Answer

The answer of If a check is written for the...

Question 17

The multiplying capacity of primary deposits is reduced if:

Accepted Answer

The answer of The multiplying capacity of primary deposits is...

Question 18

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

Accepted Answer

The fractional reserve system allows banks to hold only a fraction of their deposits as reserves, while lending out the rest. This creates a multiplier effect, where the original deposit can be used to create new loans and deposits, thereby increasing the overall money supply in the economy. The Federal Reserve also has tools to influence the reserves held by banks, such as setting reserve requirements and conducting open market operations to buy or sell government securities, which can further affect the money supply.

Question 19

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 20

Which of the following statements is false?

Accepted Answer

The statement that "the ability to alter the money supply and credit is based on the fact that our banking system does not utilize a fractional reserve system" is false. In fact, our banking system does utilize a fractional reserve system, which is the basis for the ability of banks to create money through the lending process. The other statements are true.

Quiz 5: Policy Makers and the Money Supply

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?

Special Drawing Rights are a form of reserve asset or paper gold created by the:

Changes in the growth rates for money supply and money velocity affect the growth rate in:

When a customer demands additional currency and cashes a check for $500,all of the following occur except:

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?

Which of the following statements is most correct?

Which of the following statements is most correct?

Total reserves in the banking system consist of:

In our financial system,the money multiplier:

Which one of the following transactions or operations is entirely at the initiative of the Federal Reserve?

Which one of the following sources provides the least backing (collateral) today for U.S.Federal Reserve notes?

Assume that a bank receives a primary deposit of $1,000.If the reserve requirement is 25%,what will be the amount of excess reserves available for lending purposes?

The monetary base:

Which of the following statements is false?

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?

If a check is written for the full amount of a derivative deposit created by a bank loan and then is sent to a bank in another city for deposit:

The multiplying capacity of primary deposits is reduced if:

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

Bank reserves are not affected by:

Which of the following statements is false?