Question 1

Suppose a bank gets a new deposit of $100 cash and it has a 20% required reserve ratio. If the bank lends the maximum amount of money allowed, then the checkable deposits (including the original deposit) increase by:

Accepted Answer

The bank must keep 20% of the $100 deposit as reserves, which is $20. It can lend out the remaining $80. This $80, when deposited in another bank, will have 20% kept as reserves ($16) and $64 lent out, and so on. This process continues, creating a money multiplier effect. The money multiplier is 1/0.2 = 5. Therefore, the total increase in checkable deposits is 5 times the original deposit, which is $500.

Question 2

Suppose a bank receives a $5,000 deposit and the reserve ratio is 25%. Based on this deposit alone, the bank can lend out:

Accepted Answer

The answer of Suppose a bank receives a $5,000 deposit...

Question 3

Suppose your grandma sends you $100 for your birthday and you deposit that $100 in your checking account. The reserve ratio is 10%. Based upon this deposit, the bank's excess reserves have increased by _____, and if the bank lends these new excess reserves, the money supply could eventually grow by as much as an additional _____.

Accepted Answer

When you deposit $100 in your checking account, the bank's excess reserves increase by $90 (10% of $100 is held as required reserves). If the bank lends these new excess reserves, the money supply could potentially grow by up to $900 (using the money multiplier formula of 1/reserve ratio, so 1/0.1 = 10, and $90 x 10 = $900). Therefore, choice C is the correct answer.

Question 4

Suppose the banking system does NOT hold excess reserves and the reserve ratio is 25%. If Molly deposits $1,000 cash in her checking account, the banking system can increase the money supply by:

Accepted Answer

With a reserve ratio of 25%, the banking system can increase the money supply by four times the initial deposit. Therefore, the money supply can be increased by 4 x $1,000 = $4,000. However, Molly's deposit itself is part of the money supply, so the total increase is $4,000 + $1,000 = $5,000. Therefore, the correct answer is C.

Question 5

If a bank has deposits of $100,000, cash in its vault of $10,000, and $15,000 on deposit at the Federal Reserve and if the required reserve ratio is 20%, then the bank:

Accepted Answer

The bank's total reserves are the sum of cash in vault and deposits at the Federal Reserve, which is $10,000+$15,000 = $25,000.
The required reserves would be 20% of the deposits, which is 20%*$100,000 = $20,000.
Therefore, the required reserves are $20,000 and the actual reserves held by the bank are $25,000.
This means that the bank has excess reserves of $5,000 ($25,000 - $20,000).

Question 6

Assume that the banks do not hold any excess reserves and the reserve ratio is 20%. If Sarah deposits $5,000 in cash in her checking account, the money supply can potentially increase by:

Accepted Answer

The money multiplier is 1 divided by the reserve ratio, which is 1/0.20 = 5. The initial deposit of $5,000 can increase the money supply by $5,000 * 5 = $25,000. However, since the initial deposit is already part of the money supply, the net increase is $20,000.

Question 7

If banks were required to keep 100% of deposits in reserves, they could:

Accepted Answer

If banks were required to keep 100% of deposits in reserves, they would not be able to make any loans as all of their funds would be tied up in reserves.

Question 8

Use the following to answer questions: 
-(Scenario: Assets and Liabilities of the Banking System) Look at the scenario Assets and Liabilities of the Banking System. If the reserve ratio is 6% and the banking system does NOT want to hold excess reserves, how much more can be added to the money supply?

Accepted Answer

If the reserve ratio is 6%, then the maximum potential money multiplier is 1/0.06 = 16.67. If the banking system does not want to hold excess reserves, then the actual money multiplier is equal to the potential money multiplier. Therefore, the amount of new money that can be created is equal to the initial deposit multiplied by the money multiplier (1 x 16.67), which is approximately $667,000.

Question 9

Suppose an economy has $200,000 of demand deposits and $40,000 of excess reserves, with a 10% required reserve ratio. If the monetary authorities raise the required reserve ratio to 20%:

Accepted Answer

With a required reserve ratio of 10%, the required reserves would be $20,000 ($200,000 x 0.1). Since there are $40,000 of excess reserves, the total reserves in the system are $60,000 ($20,000 required reserves + $40,000 excess reserves). If the required reserve ratio is raised to 20%, the required reserves would now be $40,000 ($200,000 x 0.2). This means that there will be a shortfall of $20,000 in reserves, and the excess reserves will decrease by $20,000 to zero.

Question 10

Use the following to answer questions: 
-(Scenario: Assets and Liabilities of the Banking System) Look at the scenario Assets and Liabilities of the Banking System. If the reserve ratio is 9% and the banking system does NOT want to hold excess reserves, how much more can be added to the money supply?

Accepted Answer

The answer of Use the following to answer questions: 
-(Scenario:...

Question 11

The _____ multiplier is equal to _____.

Accepted Answer

The money multiplier is equal to 1 divided by the required reserve ratio. This is because the required reserve ratio determines how much banks can lend out, which in turn leads to the creation of new money through the money creation process. The higher the required reserve ratio, the lower the money multiplier and the less new money can be created.

Question 12

Suppose that there are no excess reserves in the banking system and the current amount of demand deposits is $100,000. If the monetary authorities lower the required reserve ratio from 10% to 5%:

Accepted Answer

Lowering the required reserve ratio from 10% to 5% will decrease the amount of required reserves that banks must hold, which means they will have more excess reserves to lend out. This will increase the money-creating potential of the banking system, allowing banks to create more loans and increase the money supply. Therefore, the correct answer is D.

Question 13

The money multiplier is equal to:

Accepted Answer

The money multiplier is calculated as the inverse of the reserve ratio, which is 1 divided by the reserve ratio.

Question 14

Use the following to answer questions: 
-(Scenario: Assets and Liabilities of the Banking System) Look at the scenario Assets and Liabilities of the Banking System. If the reserve ratio is 8% and the banking system does NOT want to hold excess reserves, how much more can be added to the money supply?

Accepted Answer

The answer of Use the following to answer questions: 
-(Scenario:...

Question 15

Suppose the banking system does NOT hold excess reserves and the reserve ratio is 20%. If Sam deposits $500 cash in his checking account, the banking system can increase the money supply by:

Accepted Answer

The money multiplier is 1/reserve ratio, which is 1/0.20 = 5. The banking system can increase the money supply by the deposit amount multiplied by the money multiplier: $500 * 5 = $2,500. However, since the initial deposit is not new money, the increase in money supply is $2,500 - $500 = $2,000.

Question 16

The money multiplier and the required reserve ratio are:

Accepted Answer

The required reserve ratio and the money multiplier are inversely related. The money multiplier is the amount by which the money supply can increase as a result of each unit of reserves that banks are required to hold by the central bank. The formula for the money multiplier is 1/reserve ratio. Therefore, as the reserve ratio increases, the money multiplier decreases, and vice versa.

Question 17

Use the following to answer questions: 
-(Scenario: Assets and Liabilities of the Banking System) Look at the scenario Assets and Liabilities of the Banking System. If the reserve ratio is 5% and the banking system does NOT want to hold excess reserves, how much more can be added to the money supply?

Accepted Answer

The reserve ratio of 5% means banks must hold $5 in reserves for every $100 deposited. If banks do not hold excess reserves, they can lend out 95% of deposits. The money multiplier is 1/0.05 = 20. Therefore, $50,000 in new reserves can support $1 million in new money supply (20 times $50,000).

Question 18

Suppose the reserve ratio is 25%; the money multiplier is:

Accepted Answer

The money multiplier formula is 1/reserve ratio. So, the money multiplier in this case would be 1/0.25 = 4.

Question 19

In a deposits-only monetary system with a 5% required reserve ratio, a bank deposit of $1,000 will increase the total amount of bank deposits by:

Accepted Answer

In a deposits-only monetary system with a required reserve ratio of 5%, each $1,000 deposit will create $20,000 of total bank deposits. This is because the bank must hold $50 in reserve ($1,000 x 0.05 = $50) and can lend out $950, which then becomes another deposit in another bank, and that bank must then hold $47.50 in reserve ($950 x 0.05 = $47.50) and can lend out $902.50, which then becomes another deposit in another bank, and so on. This process continues until the total amount of bank deposits equals $20,000 ($1,000 ÷ 0.05 = $20,000). Therefore, the correct answer is C ($20,000).

Question 20

Suppose a bank receives a $5,000 deposit and the reserve ratio is 25%. The bank is required to keep in reserve:

Accepted Answer

The reserve requirement is calculated by multiplying the deposit amount by the reserve ratio. $5,000 * 25% = $1,250.

Quiz 14: Money, Banking, and the Federal Reserve System