Question 1

Assume the reserve requirement is 10 percent. First National Bank has vault cash and deposits with the Fed of $40 million, loans and securities of $360 million, and demand deposits of $400 million. First National:

Accepted Answer

The answer of Assume the reserve requirement is 10 percent....

Question 2

Exhibit 17-2
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A bank's assets consist of $1,000,000 in total reserves, $2,100,000 in loans, and a building worth $1,200,000. Its liabilities and capital consist of $3,000,000 in demand deposits and $1,300,000 in capital.
-Refer to Exhibit 17-2. If the bank is required to keep reserves equal to one-third of deposits, what is the level of the bank's excess reserves? How much money could the excess reserves be used to create in the banking system as a result?

Accepted Answer

The answer of Exhibit 17-2
​
A bank's assets consist of $1,000,000...

Question 3

What is the initial impact on reserves of a $2,000 deposit if the reserve ratio is 10%?

Accepted Answer

If the reserve ratio is 10%, the required reserves will be 10% * $2,000 = $200. Therefore, the remaining $1,800 will be excess reserves. Choice A is incorrect because it has excess reserves and required reserves switched. Choice C is incorrect because it has excess reserves but no required reserves, which is not possible under the reserve ratio system. Choice D is incorrect because it has zero excess reserves, which would only happen if all of the deposit was required reserves.

Question 4

Suppose all banks are subject to a uniform reserve requirement of 20 percent and that the Gamblers Last Chance Bank of Las Vegas has zero excess reserves. If a new customer deposits $10,000, the bank can now extend new loans up to a maximum of:

Accepted Answer

The bank is subject to a reserve requirement of 20%, which means it must hold 20% of the new deposit ($10,000) as reserves and can lend out the remaining 80%. Therefore, the bank can lend up to $8,000 ($10,000 x 0.80) in new loans.

Question 5

A reserve requirement of 10 percent means a money multiplier of:

Accepted Answer

The money multiplier is calculated as the reciprocal of the reserve requirement ratio. With a reserve requirement of 10 percent (or 0.10), the money multiplier is 1 / 0.10 = 10.

Question 6

If Billy Bob's National Bank of Slingblade confronts a 10 percent reserve requirement and has excess reserves of $20,000, what is the maximum amount of additional loans that the bank can extend?

Accepted Answer

The maximum amount of additional loans that the bank can extend is equal to its excess reserves, which is $20,000. This is because the bank can lend out its excess reserves without violating the reserve requirement.

Question 7

With of the following is true with regard to leverage?

Accepted Answer

Highly leveraged banks have the potential for greater profits but also face greater risk of losses. When losses occur, they can ripple throughout the financial system and impact other institutions. The U.S. banking system does use leverage, but there are regulations in place to limit excessive leverage and prevent a systemic collapse.

Question 8

The money ____ equals 1 divided by the reserve requirement. The larger the reserve requirement, the ____ the money multiplier.

Accepted Answer

The money multiplier is inversely proportional to the reserve requirement, meaning that as the reserve requirement increases, the money multiplier decreases. Therefore, the larger the reserve requirement, the smaller the money multiplier. The correct term for the first blank is "multiplier," not "supply."

Question 9

If the reserve requirement for a bank is $200,000 for a deposit of $1 million, then the money multiplier is:

Accepted Answer

The money multiplier is calculated as 1 divided by the reserve requirement ratio. Here, the reserve requirement ratio is $200,000 / $1,000,000 = 0.2 or 20%. Therefore, the money multiplier is 1 / 0.2 = 5.

Question 10

If the reserve requirement was 15% and a bank customer makes a deposit of $500, the initial result would be:

Accepted Answer

The required reserves is 15% of the deposit, which is $75 (15% of $500). The remaining $425 is the excess reserves.

Question 11

Exhibit 17-2
​
A bank's assets consist of $1,000,000 in total reserves, $2,100,000 in loans, and a building worth $1,200,000. Its liabilities and capital consist of $3,000,000 in demand deposits and $1,300,000 in capital.
-Refer to Exhibit 17-2. If the bank is required to keep reserves equal to one-third of deposits, what is the level of the bank's excess reserves? How much could it loan out as a result?

Accepted Answer

The answer of Exhibit 17-2
​
A bank's assets consist of $1,000,000...

Question 12

A reserve requirement of 50 percent means a money multiplier of:

Accepted Answer

The money multiplier can be calculated using the formula: 
Money multiplier = 1/reserve requirement. 
In this case, the reserve requirement is 50%, so: 
Money multiplier = 1/0.5 = 2. 
Therefore, the correct answer is B, which is 2.

Question 13

First Safety, a commercial bank, has $6,000,000 of outstanding demand deposits and actual reserves of $1,700,000. If the reserve ratio is 25 percent, what is the maximum amount of new loans the bank can extend?

Accepted Answer

The reserve ratio is given as 25 percent, which means that for every dollar of demand deposits, the bank is required to hold 25 cents in actual reserves.

Actual reserves = Reserve Ratio x Demand deposits

$1,700,000 = 0.25 x $6,000,000

To find the maximum amount of new loans that the bank can extend, we need to subtract the required reserves from the actual reserves:

Maximum new loans = Demand deposits - Required reserves

Maximum new loans = $6,000,000 - $1,500,000 (25% of $6,000,000)

Maximum new loans = $4,500,000

Therefore, the maximum new loans the bank can extend is $200,000 (Choice C).

Question 14

Exhibit 17-2
​
A bank's assets consist of $1,000,000 in total reserves, $2,100,000 in loans, and a building worth $1,200,000. Its liabilities and capital consist of $3,000,000 in demand deposits and $1,300,000 in capital.
-Refer to Exhibit 17-2. If the required reserve ratio is 20 percent, what is the level of the bank's excess reserves? How much could it loan out as a result?

Accepted Answer

Required reserves = total reserves * required reserve ratio 
= $1,000,000 * 0.20 
= $200,000 
Excess reserves = total reserves - required reserves 
= $1,000,000 - $200,000 
= $800,000 
The bank could loan out the excess reserves, which is $800,000 - $400,000 = $400,000. Therefore, the level of excess reserves is $400,000 and the amount it could loan out is also $400,000. Option C is the correct answer.

Question 15

Assume that the reserve requirement is 20 percent. First National Bank has vault cash and deposits with the Fed of $80 million, loans and securities of $320 million, and demand deposits of $400 million. First National:

Accepted Answer

First National Bank must maintain reserves of 20% of its demand deposits, which amounts to $80 million (20% of $400 million). Since it already has $80 million in reserves (vault cash and deposits with the Fed), it meets its reserve requirement exactly and cannot extend additional loans without acquiring more reserves.

Question 16

A reserve requirement of 12.5 percent implies a potential money multiplier of:

Accepted Answer

The money multiplier formula is 1/reserve requirement ratio. 
So, in this case, the potential money multiplier would be 1/0.125, which equals 8.

Question 17

Exhibit 17-2
​
A bank's assets consist of $1,000,000 in total reserves, $2,100,000 in loans, and a building worth $1,200,000. Its liabilities and capital consist of $3,000,000 in demand deposits and $1,300,000 in capital.
-Refer to Exhibit 17-2. If the required reserve ratio is 20 percent, what is the level of the bank's excess reserves? How much money could the excess reserves be used to create in the banking system as a result?

Accepted Answer

The bank's required reserves are 20% of its demand deposits ($3,000,000), which equals $600,000. Since the bank has $1,000,000 in total reserves, its excess reserves are $1,000,000 - $600,000 = $400,000. With a reserve ratio of 20%, the money multiplier is 1 / 0.20 = 5. Therefore, the excess reserves could be used to create $400,000 * 5 = $2,000,000 in the banking system.

Question 18

A commercial bank has $1,000,000 of outstanding demand deposits and actual reserves of $300,000. If the required reserve ratio is 20 percent, what is the maximum amount of new loans the bank can extend?

Accepted Answer

The maximum amount of new loans the bank can extend is determined by the excess reserves, which are the actual reserves minus the required reserves. The required reserves are 20% of $1,000,000, which is $200,000. The bank has actual reserves of $300,000, so the excess reserves are $300,000 - $200,000 = $100,000. This is the maximum amount of new loans the bank can extend.

Question 19

If the reserve requirement was 5% and a bank customer makes a deposit of $1,000, the initial result would be:

Accepted Answer

The correct answer is D because the initial result of a $1,000 deposit with a 5% reserve requirement would be a $50 increase in required reserves (5% of $1,000) and a $950 increase in excess reserves, which is not accurately described by any of the provided options.

Question 20

If a bank had the reserve requirement of 10 percent and excess reserves of $2,000, the largest loan it could legally extend would be:

Accepted Answer

Excess reserves are the amount of reserves a bank has beyond the required minimum. Since the bank has excess reserves of $2,000, this is the maximum amount it can lend out without breaching the reserve requirement.

Quiz 17: Income, Poverty and Health Care