Question 1

When the Fed buys U.S. government securities from a bank, that bank's required reserves and total reserves increase but excess reserves decrease.

Accepted Answer

The answer of When the Fed buys U.S. government securities...

Question 2

In the money and credit expansion process, when r = the required reserve ratio, the total change in checkable deposits is equal to the initial change in excess reserves

Accepted Answer

The money multiplier is defined as 1/r, where r is the required reserve ratio. Therefore, the total change in checkable deposits is equal to the initial change in excess reserves multiplied by 1/r.

Question 3

Banks create new deposits by

Accepted Answer

Banks can create new deposits by lending out excess reserves. When a bank receives a deposit, it is required to hold a certain percentage of that deposit as reserves. The percentage is determined by the reserve requirement set by the Central Bank. Reserve requirement is the amount of money banks must keep on hand rather than lend out. Banks are allowed to lend out any excess reserves that they have, which can create new deposits. This is referred to as the money multiplier effect.

Question 4

What essential factor enables commercial banks to create money?

Accepted Answer

Commercial banks are able to create money through the process of fractional reserve banking. This means that they are only required to hold a certain percentage of deposits as reserves (required reserves), leaving the rest as excess reserves. These excess reserves can then be used by the bank to make loans and create additional deposits, effectively multiplying the initial deposit and creating new money. Therefore, excess reserves are the essential factor that enables commercial banks to create money.

Question 5

The simple money multiplier

Accepted Answer

The simple money multiplier is calculated as the reciprocal of the required reserve ratio. It represents the maximum amount of money that can be created by the banking system through the process of lending out excess reserves. As the required reserve ratio increases, the simple money multiplier decreases, indicating that banks have less excess reserves to lend out.

Question 6

Exhibit 15-2
 
-Refer to Exhibit 15-2. By how much can this bank alone now increase its lending? Assume a required reserve ratio of 10 percent.

Accepted Answer

The bank can increase its lending by the amount of excess reserves it holds. With a required reserve ratio of 10%, if the bank has $1,000 in reserves, it must keep $100 as required reserves, leaving $900 as excess reserves available for lending.

Question 7

Which of the following would likely increase the money supply?

Accepted Answer

The answer of Which of the following would likely increase...

Question 8

If the required reserve ratio is 10 percent and the Fed buys a $5,000 security from a depository institution, what happens to the money supply, using the simple multiplier?

Accepted Answer

The simple multiplier is calculated as 1/required reserve ratio. In this case, the simple multiplier is 1/0.1=10. Therefore, the Fed's purchase of the $5,000 security increases the bank's reserves by $5,000. Using the simple multiplier, this $5,000 increase in reserves will lead to a $50,000 increase in the money supply (multiplier of 10 times the initial increase in reserves).

Question 9

If a bank borrows $1,000 from the Fed and lends it out, the bank sets in motion a process that will result in an expansion of the money supply by a multiple of that $1,000.

Accepted Answer

This is because of the fractional reserve banking system, where banks are required to keep only a fraction of the deposits as reserves and can lend out the rest. As the loan is deposited in another account, that bank also has the ability to lend out a portion of the deposit, and this process continues, resulting in a multiple expansion of the money supply.

Question 10

In order to increase the money supply, the banking system must have

Accepted Answer

In order to increase the money supply, banks must have excess reserves. Excess reserves are the amount of funds that a bank holds above the required reserves. These excess reserves can be used by the bank to make loans, which in turn increases the money supply. Therefore, choice D is the best choice. The other choices are not relevant to increasing the money supply through the banking system.

Question 11

When the Fed buys U.S. government securities from a member bank, that bank's excess reserves, required reserves, and total reserves all increase.

Accepted Answer

When the Fed buys U.S. government securities from a member bank, that bank's excess reserves increase, but its required reserves remain unchanged. Total reserves increase due to the increase in excess reserves.

Question 12

Exhibit 15-2
 
-Refer to Exhibit 15-2. What kind of transaction just took place at Countybank?

Accepted Answer

The transaction code "Dep" stands for deposit and the account type "CK" stands for checking account. Therefore, a customer deposited $1,000 in her checking account.

Question 13

If the Fed purchases government securities on the open market, the money supply will

Accepted Answer

When the Fed purchases government securities on the open market, it pays for those securities with newly-created bank reserves that are ultimately deposited into commercial banks. This increases the level of reserves in the banking system, which in turn allows banks to lend out more money and increase the money supply. This process occurs regardless of who the seller of the securities is. Therefore, the correct answer is E.

Question 14

Money expansion stops when new reserves introduced into the banking system have been converted into

Accepted Answer

When new reserves are introduced into the banking system, banks are required to hold a certain percentage of those reserves as required reserves. Once the banks have fulfilled this requirement, any remaining reserves can be loaned out, resulting in a multiplication effect and expansion of the money supply. However, once all new reserves have been converted into required reserves, there is no further potential for money expansion.

Question 15

If the required reserve ratio is 20 percent and the Fed buys a $10,000 security from a depository institution that currently has no excess reserves, what happens to the money supply, using the simple multiplier?

Accepted Answer

The answer of If the required reserve ratio is 20...

Question 16

When the Fed buys U.S. government securities from a bank, that bank's excess reserves and total reserves increase, but there is no change in required reserves.

Accepted Answer

When the Fed buys U.S. government securities from a bank, the bank receives payment in the form of reserves. This increases both the bank's excess reserves (reserves held above the required amount) and total reserves. However, there is no change in the required reserves, which are determined by the bank's deposit liabilities.

Question 17

Exhibit 15-1
 
-Refer to Exhibit 15-1. If the interest rate on loans is 10 percent, the annual cost to Eubank of holding excess reserves is

Accepted Answer

The annual cost to Eubank of holding excess reserves is 10 percent of the excess reserves, as the interest rate on loans represents the opportunity cost of not lending out those reserves.

Question 18

When the Fed buys U.S. government securities from a bank, that bank's excess reserves and required reserves increase but total reserves decrease.

Accepted Answer

When the Fed buys U.S. government securities from a bank, the bank's reserves increase, both excess and required. Therefore, total reserves increase, not decrease.

Question 19

The banking system creates money in the sense that it

Accepted Answer

The banking system creates money by creating loans from excess reserves. When a bank receives a deposit, it is required to hold a certain percentage of that deposit as reserves. The rest of the deposit can be used to make loans. When a loan is made, the borrower receives the loan amount as new money in their account, increasing the money supply. Thus, the banking system creates money by creating loans.

Question 20

The money expansion process continues until there are no more

Accepted Answer

The money expansion process depends on the willingness of banks to lend their excess reserves, which are the reserves above the required amount set by the Federal Reserve. Once all excess reserves are lent out, the money expansion process stops since there are no longer any funds available for additional loans. Therefore, the correct answer is C, excess reserves in the system that banks are willing to lend.

Quiz 15: Banking and the Money Supply