Question 1

A chartered bank has demand-deposit liabilities of $500,000,cash reserves of $150,000,and a desired reserve ratio of 20 percent.The amount by which this single chartered bank and the amount by which the banking system can increase loans are respectively:

Accepted Answer

The bank's desired reserve ratio is 20%, so it needs to hold 20% of its demand-deposit liabilities in reserves, which would be $100,000. However, it only has $150,000 in cash reserves, so it has an excess reserve of $50,000. This means it can increase its loans by $50,000. 
The banking system as a whole can increase loans by a multiple of this excess reserve, which is determined by the reserve ratio. In this case, the reserve ratio is 20%, so the banking system can increase loans by a multiple of 1/0.2 or 5 times the excess reserve. 
Therefore, the banking system can increase loans by $50,000 x 5 = $250,000.

Question 2

Henry Trudeau deposits $2,000 in currency in the First Street Bank.Later that same day Jane Harris negotiates a loan for $5,400 at the same bank.This loan alone will:

Accepted Answer

When Jane Harris negotiates a loan for $5,400, the bank creates new money, increasing the supply of money by the same amount. This is because the bank only needs to hold a fraction of the loan amount as reserves (based on the reserve ratio set by the Federal Reserve), and can lend out the rest to generate new money. Therefore, the supply of money increases by $5,400.

Question 3

Refer to the information below.The maximum amount by which the chartered banking system can expand the supply of money by lending is about:
Consolidated balance sheet for the chartered banking system.Assume the desired reserve ratio is 30 percent.All figures are in billions.

Accepted Answer

The answer of Refer to the information below.The maximum amount...

Question 4

The basic reason why the chartered banking system can increase its demand deposits by a multiple of its excess reserves is that:

Accepted Answer

The answer of The basic reason why the chartered banking...

Question 5

If D equals the maximum amount of new demand-deposit money that can be created by the banking system on the basis of any given amount of excess reserves;E equals the amount of excess reserves;and m is the money multiplier,then we can say that:

Accepted Answer

The formula for calculating the maximum amount of new demand-deposit money that can be created by the banking system on the basis of any given amount of excess reserves is D = E × m, where E is the amount of excess reserves and m is the money multiplier. Therefore, option B is the correct choice. Option A and D are not correct because they reverse the formula. Option C is incorrect as it does not include the money multiplier.

Question 6

The multiple by which the chartered banking system can increase the supply of money on the basis of each dollar of excess reserves is equal to:

Accepted Answer

The answer of The multiple by which the chartered banking...

Question 7

The value of the money multiplier is:

Accepted Answer

The value of the money multiplier is determined by the desired reserve ratio, which is the ratio of required reserves to deposits. The formula for the money multiplier is 1/Desired Reserve Ratio. Therefore, choice D is the correct answer. Choices A, B, and C are not correct because they do not accurately reflect the formula for the money multiplier.

Question 8

Assume that Smith deposits $600 in currency in the XYZ Bank.Later that same day Jones negotiates a loan for $1,200 at the same bank.In what direction and by what amount has this single transaction changed the supply of money?

Accepted Answer

The answer of Assume that Smith deposits $600 in currency...

Question 9

The greater the desired reserve ratio,the:

Accepted Answer

The reserve ratio is the fraction of deposits that banks are required to hold in reserve as cash or deposits with the central bank. The monetary multiplier is the ratio of the total money supply to the monetary base (reserves). A higher reserve ratio means that banks are required to hold a larger portion of deposits in reserve, which reduces the amount of funds available for lending and thus reduces the monetary multiplier. Therefore, a lower reserve ratio leads to a higher monetary multiplier, while a higher reserve ratio leads to a lower monetary multiplier.

Question 10

Refer to the information below,after a deposit of $10 billion of new currency into a chequing account in the banking system,the maximum amount by which the chartered banking system can expand the supply of money is:
Consolidated balance sheet for the chartered banking system.Assume the desired reserve ratio is 10 percent.All figures are in billions.

Accepted Answer

The answer of Refer to the information below,after a deposit...

Question 11

If we assume m to be equal to the maximum amount of dollar that can be created from a single dollar of excess reserves and R to be equal to the desired reserve ratio,then we can say that for the banking system:

Accepted Answer

This is because m represents the maximum amount of money that can be created from a single dollar of excess reserves, so m represents the money multiplier. The desired reserve ratio, R, represents the fraction of deposits that must be held in reserve, so the reciprocal of R, 1/R, represents the inverse of the reserve ratio, or the amount of deposits that can be created for every dollar of reserves. Therefore, m = 1/R.

Question 12

The balance sheet below is for chartered bank EFG.Assume the desired reserve ratio is 25 percent.All figures are in billions.
 
-Refer to the above information.The amount by which this single chartered bank and the amount by which the banking system can increase loans are respectively:

Accepted Answer

The answer of The balance sheet below is for chartered...

Question 13

The balance sheet below is for chartered bank ABC.Assume the desired reserve ratio is 20 percent.All figures are in billions.
 
-Refer to the above information.The amount by which this single chartered bank and the amount by which the banking system can increase loans are respectively:

Accepted Answer

The single chartered bank can increase loans by $5,000, which is the excess reserve. The banking system can increase loans by the money multiplier effect, which is calculated as the excess reserve ($5,000) times the money multiplier (assuming a reserve ratio of 20%, the multiplier is 5), resulting in $25,000.

Question 14

Assume the Standard Toy Company negotiates a loan for $5,000 from the Metro Bank and receives a demand deposit for that amount in exchange for its promissory note (IOU).As a result of this single transaction:

Accepted Answer

When Standard Toy Company receives a demand deposit for $5,000 from Metro Bank in exchange for its promissory note, the supply of money increases by $5,000. This is because demand deposits are considered a form of money and the company can now make payments or withdraw money from the account. Therefore, choice A is the correct answer.

Question 15

If the desired reserve ratio were 15 percent,the value of the monetary multiplier would be:

Accepted Answer

The monetary multiplier is calculated by dividing 1 by the reserve ratio. If the desired reserve ratio is 15 percent, then the reserve ratio would be 0.15 (15/100). Therefore, the monetary multiplier would be 1/0.15 = 6.67.

Question 16

Suppose a chartered banking system has $100,000 of outstanding demand deposits and actual cash reserves of $35,000.If the desired reserve ratio is 20 percent,the banking system can expand the supply of money by the maximum amount of:

Accepted Answer

The answer of Suppose a chartered banking system has $100,000...

Question 17

If actual reserves in the banking system are $50,000,excess reserves are $5,000,and demand deposits are $225,000,then the money multiplier:

Accepted Answer

The money multiplier is calculated as 1/required reserve ratio. Since the excess reserves are not given, we can use the formula: 
Required reserve ratio = Required reserves / Demand deposits. 
The required reserves can be calculated as: 
Required reserves = Demand deposits x required reserve ratio. 
Since the required reserve ratio is set by the Federal Reserve, we assume it to be a constant in this scenario.

Required reserve ratio = Required reserves / Demand deposits = (Actual reserves - Excess reserves) / Demand deposits = ($50,000 - $5,000) / $225,000 = 0.2

Therefore, the money multiplier is 1/0.2 = 5.

Question 18

Individual chartered banks are limited in their ability to create money by lending because:

Accepted Answer

Banks are limited in their ability to create money through lending because as they lend out their reserves, they may lose them to other banks, which can limit their ability to lend further. This is known as the \u201cmoney multiplier effect\u201d and is a key constraint on a bank\u2019s ability to expand the money supply.

Question 19

The multiple by which the chartered banking system can expand the supply of money is equal to the reciprocal of:

Accepted Answer

The multiple by which the chartered banking system can expand the supply of money is equal to the reciprocal of the desired reserve ratio. This is known as the money multiplier effect. The desired reserve ratio is the proportion of deposits that banks choose to hold as reserves, and the reciprocal of this ratio represents the multiple by which the supply of money can be expanded.

Question 20

Refer to the information below which shows the demand deposits and actual reserves of a banking system.When the desired reserve ratio is 20 percent,the money creating potential of the entire banking system is:

Accepted Answer

The answer of Refer to the information below which shows...

Quiz 14: Money, Banking, and Money Creation