Question 1

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 :...

Question 2

The money multiplier is equal to:

Accepted Answer

The answer of The money multiplier is equal to:
...

Question 3

The money multiplier and the required reserve ratio are:

Accepted Answer

The required reserve ratio is inversely related to the money multiplier. As the required reserve ratio increases, the money multiplier decreases, and vice versa. This is because the required reserve ratio determines how much of each deposit banks must hold in reserve, reducing the amount of money that can be lent out and thus limiting the money multiplier effect.

Question 4

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, the total amount of bank deposits is determined by dividing the initial deposit by the required reserve ratio. Therefore, a deposit of $1,000 would increase the total amount of bank deposits by $20,000 ($1,000/0.05 = $20,000).

Question 5

The _____ multiplier is equal to _____.

Accepted Answer

The money multiplier is equal to 1 divided by the required reserve ratio. This represents the maximum amount of money that can be created by the banking system through the process of deposit expansion.

Question 6

Suppose the required reserve ratio is 25% and a customer deposits $300 in her checkable deposit. The money supply will _____ if the banking system does NOT hold any excess reserves.

Accepted Answer

The required reserve ratio is 25%, meaning that the bank must hold $75 (25% of $300) in reserves and can loan out the remaining $225. When that $225 is deposited into another bank, that bank must hold $56.25 ($225 x 25%) in reserves and can loan out the remaining $168.75. This process continues until no more excess reserves are available. Therefore, the total increase in the money supply is $900 ($300/0.25).

Question 7

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

The initial required reserve ratio is 10%, which means that the required reserves held by banks are $20,000 ($200,000 x 10%). Since the banks have $40,000 in excess reserves initially, this means that they are holding twice the required reserves.

If the required reserve ratio is raised to 20%, this means that banks will now be required to hold $40,000 ($200,000 x 20%) in reserves. Since the banks currently only have $20,000 in required reserves ($200,000 x 10%), this means that they will need to increase their required reserves by $20,000.

Therefore, excess reserves will decrease by $20,000 (choice D).

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 8% and the banking system does NOT want to hold excess reserves, how much more can be added to the money supply?

Accepted Answer

To calculate how much additional money can be added to the money supply, we use the formula: 
Money Multiplier = 1 / Reserve Ratio 
= 1/0.08 
= 12.5

Then, we multiply the Money Multiplier by the excess reserves of $20,000 to get: 
Additional Money Supply = Money Multiplier x Excess Reserves 
= 12.5 x $20,000 
= $250,000

Therefore, the correct answer is C) $250,000.

Question 9

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 ratio of 25% means that the bank must keep 25% of the deposit in reserve. Therefore, the amount that the bank must keep in reserve is 0.25 x $5,000 = $1,250. So the correct choice is A).

Question 10

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 is required to hold 25% of deposits in reserves, leaving 75% available for lending. Molly's $1,000 deposit can therefore potentially increase the money supply by $3,000 (which is 75% of $1,000). Thus, the banking system can create new deposits worth up to $3,000.

Question 11

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 answer of Use the following to answer questions :...

Question 12

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:

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Question 13

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

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Question 14

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 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

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Question 16

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. This would severely restrict their ability to generate profits and provide financial services to customers.

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 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 18

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 required reserve ratio is 20% so the bank is required to hold reserves equal to 20% of its deposits ($100,000). This means the required reserves are $20,000 ($100,000 x 20%). The bank has $10,000 in cash and $15,000 on deposit at the Federal Reserve, for a total of $25,000 in reserves. Therefore, the bank has excess reserves of $5,000 ($25,000 - $20,000).

Question 19

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

The required reserve ratio is the percentage of demand deposits that banks are required to hold in reserve. When the required reserve ratio is lowered, banks are required to hold less in reserve and can lend out more, increasing the money supply. This means that the money-creating potential of the banking system will rise, as banks will be able to create more loans and increase the amount of money in circulation. Therefore, choice D is correct.

Question 20

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:

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Quiz 26: Money, Banking, and the Federal Reserve System