Question 1

Suppose a bank has $1,500,000 in deposits and the desired reserve ratio is 12 percent.If the bank is currently holding $200,000 in reserves,the excess reserves are equal to

Accepted Answer

The answer of Suppose a bank has $1,500,000 in deposits...

Question 2

A bank with $200 million in deposits keeps $20 million of cash in the bank vault,$10 million in deposits at the Bank of Canada,and $5 million in government securities in the bank vault.Its actual reserves equal

Accepted Answer

The bank's actual reserves are the sum of the cash in the bank vault, the deposits at the Bank of Canada, and the government securities in the bank vault. Therefore, the actual reserves are:

$20 million (cash in vault) + $10 million (deposits at Bank of Canada) + $5 million (government securities) = $35 million

So the correct answer is actually D)$35 million.

Question 3

If a bank holds $20,000 in desired reserves in order to meet a desired reserve ratio of 40 percent,demand deposits must equal

Accepted Answer

The desired reserve ratio is the fraction of deposits a bank aims to hold as reserves. If the bank wants to hold $20,000 in reserves at a 40% reserve ratio, then the total deposits can be calculated as $20,000 / 0.4 = $50,000.

Question 4

The desired reserve requirement for commercial banks

Accepted Answer

The desired reserve requirement for commercial banks directly affects how much money they can create from a new deposit. If the reserve requirement is high, banks can create less money from new deposits, whereas if the reserve requirement is low, banks can create more money from new deposits. The other choices (A, C, and D) are not accurate as the reserve requirement is set neither to prevent a run on bank deposits nor by the Prime Minister or the Parliament.

Question 5

Table 13-4
 
-In Table 13-4,the Bank of Wealth can make additional loans up to

Accepted Answer

The Bank of Wealth can make additional loans up to the amount of its excess reserves. Excess reserves are calculated as total reserves minus required reserves. Without specific numbers from Table 13-4, the correct answer relies on understanding this banking principle. Given the options, if the question implies a calculation based on a reserve requirement, the correct answer would be the one that aligns with the bank's available excess reserves for lending.

Question 6

When banks have excess reserves,their reserve holdings exceed

Accepted Answer

The answer of When banks have excess reserves,their reserve holdings...

Question 7

With the fractional banking system in Canada,a commercial bank with $1,000 of deposits generally would

Accepted Answer

In Canada, commercial banks are required to maintain a minimum reserve ratio of 0.05, which means they must hold at least 5 cents of every dollar deposited as cash reserves. So, a bank with $1,000 of deposits would be required to maintain at least $50 in cash reserves, but they may choose to hold more to ensure they can meet the demand for withdrawals. Therefore, the most appropriate answer is C, which states that the bank would maintain less than $1,000 but more than $0 in cash reserves.

Question 8

Table 13-4
 
-In Table 13-4,the Bank of Wealth could

Accepted Answer

Excess reserves are the funds that banks hold in excess of the required reserve ratio. Banks can use these excess reserves to make more loans or buy government securities to earn more profits. Therefore, the Bank of Wealth can use its excess reserves to make more loans or buy government securities. Option B is incorrect because excess reserves cannot directly decrease liabilities. Option C is also incorrect because banks need to maintain a certain level of reserves as per the reserve ratio requirements. Option D is incorrect because the bank can change its asset portfolio by using its excess reserves to make more loans or buy government securities.

Question 9

Excess reserves are defined as

Accepted Answer

Excess reserves are the amount by which a bank's actual reserves exceed its required reserves. They are calculated by subtracting the required (or desired) reserves from the actual reserves a bank holds.

Question 10

A bank with $500 million in deposits holds $35 million in vault cash,has $40 million on deposit with the Bank of Canada,and owns $50 million in government securities.If a fall in the desired reserve ratio generates excess reserves of $25 million,and prior to the fall the bank had no excess reserves,then the former desired reserve ratio was ________ and the new desired reserve ratio is ________.

Accepted Answer

The former desired reserve ratio was 20 percent and the new desired reserve ratio is 10 percent.

Question 11

A commercial bank with negative excess reserves

Accepted Answer

A commercial bank with negative excess reserves does not have enough reserves on hand to meet the reserve requirement, meaning it cannot legally make additional loans until it acquires more reserves.

Question 12

Following a new deposit of $50 when the desired reserve ratio is 10 percent,the maximum increase in the assets of commercial banks will be

Accepted Answer

When the desired reserve ratio is 10 percent, a new deposit of $50 allows banks to lend out 90% of that deposit (since they must keep 10% as reserves). This initial lending can be multiplied throughout the banking system as each recipient deposits the money, and it gets lent out again, minus the reserve requirement. The formula for the maximum increase in the assets of commercial banks is given by the money multiplier formula, which is 1/reserve ratio. In this case, it's 1/0.1 = 10. Therefore, the maximum increase in assets is $50 * 10 = $500.

Question 13

Actual reserves are

Accepted Answer

Actual reserves are anything that depository institutions are allowed to hold as reserves. It can be cash or any other financial assets that can be easily converted into cash. It is not determined by law or regulations, but by the institution's own decision-making.

Question 14

Given a desired reserve ratio of 20 percent,a commercial bank which has received a new deposit of $100 can make additional loans of

Accepted Answer

The reserve ratio is the percentage of deposits that a bank is required to keep as reserves and cannot lend out. In this case, the desired reserve ratio is 20%, which means that the bank must keep 20% of the $100 deposit as reserves, or $20.

This leaves the bank with $80 that it can lend out. Therefore, the bank can make additional loans of $80. The correct answer is thus choice C) $80.

Question 15

When banks have positive excess reserves,this indicates that

Accepted Answer

When banks have positive excess reserves, it means they have more money than the minimum reserve required by the central bank. This gives them the ability to lend out more money, which can lead to an expansion of loans and the money supply. Therefore, the best choice is A, indicating that banks can expand their loans.

Question 16

Suppose a bank is exactly meeting its desired reserve ratio of 10 percent and a new deposit of $75,000 is made.Immediately after the deposit is made,the excess reserves will equal

Accepted Answer

With a reserve ratio of 10%, the bank must keep $7,500 (10% of $75,000) as reserves. The remaining $67,500 is excess reserves, as it is above what is required.

Question 17

When all banks have zero excess reserves to start and you write a cheque that is deposited in another bank,it is true that

Accepted Answer

When a cheque is written and deposited in another bank, the reserves simply move from one bank to the other without changing the total amount of reserves in the banking system.

Question 18

Following a new deposit of $500,the loans of a commercial bank increase by $400.In this situation,the desired reserve ratio is most likely

Accepted Answer

The desired reserve ratio is the percentage of deposits that a bank must hold in reserves. In this case, the bank's loans increased by $400 after receiving a new deposit of $500, which means that the bank was able to lend out $100 of the new deposit (since it must hold 20% of the deposit as required reserves). This implies that the desired reserve ratio is 20%, which means that Option B is the best choice. Option A (0%) is not possible as all banks are required to hold some minimum level of reserves. Options C (80%) and D (180%) are also not possible as they would require the bank to hold more in reserves than the deposit itself, which is not allowed.

Question 19

Suppose that the desired reserve ratio is 20 percent and that a bank is just meeting that requirement when $10,000 in cash is withdrawn from a demand deposit.The bank must now

Accepted Answer

When $10,000 in cash is withdrawn from a demand deposit, the bank's reserves decrease by $10,000. To maintain the 20% reserve requirement, the bank must increase its reserves by 20% of $10,000, which is $2,000. Therefore, the bank must increase its reserves by $8,000 ($10,000 - $2,000) to meet the reserve requirement again.

Question 20

If a bank has $100,000 in demand deposits and $30,000 on reserve with a 20 percent reserve requirement,the bank

Accepted Answer

The bank's required reserves are 20% of $100,000, which is $20,000. Since it has $30,000 on reserve, it has $10,000 more than required, which are its excess reserves.

Quiz 13: Money Creation and Deposit Insurance