Question 1

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...

Question 2

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 because the desired reserve ratio is the minimum amount of reserves that banks are required to hold and the reciprocal of it gives the maximum amount of money that can be created through the money multiplier effect.

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...

Question 4

Assume that Johnson deposits $350 of his currency in his account in the XYZ bank. Later the same day Swanson negotiates a loan for $2,000 at the same bank. In what direction and by what amount has this single transaction changed the supply of money?

Accepted Answer

The loan taken by Swanson increases the money supply by $2,000, while Johnson's deposit, although increasing the total amount of money in the bank, does not directly affect the money supply. Therefore, the net increase in the money supply is $2,000.

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 is D = E × m, where E is the amount of excess reserves and m is the money multiplier. Therefore, choice B is the correct answer.

Question 6

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 bank's excess reserves are equal to its actual reserves minus its required reserves. The required reserves for this bank is 20% of its deposits, which is $30,000 billion. Therefore, the required reserves are $6,000 billion, and the excess reserves are $1,000 billion ($7,000 billion - $6,000 billion). The maximum amount that this bank can lend out is equal to the excess reserves, which is $1,000 billion.

For the banking system as a whole, the total excess reserves that can be lent out is equal to the total reserves minus the required reserves for the entire system. From the balance sheet, the total reserves for the banking system is $140,000 billion ($100,000 billion in actual reserves and $40,000 billion in excess reserves). The required reserves for the banking system is 20% of the total deposits, which is $150,000 billion. Therefore, the excess reserves that can be lent out by the banking system as a whole is $10,000 billion ($140,000 billion - $150,000 billion).

Therefore, the single chartered bank can increase loans by $1,000 billion, and the banking system as a whole can increase loans by $10,000 billion. The best choice is B.

Question 7

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

Accepted Answer

Individual banks are limited in their ability to create money by lending because when they make loans, they must transfer reserves to the borrower's bank, which reduces the lending bank's ability to make further loans. This can lead to a reduction in the bank's reserves and limit its ability to make loans in the future.

Question 8

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...

Question 9

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

The demand deposit created by the loan increases the supply of money.

Question 10

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 11

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 12

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 required reserves that the bank must hold are 20% of its demand-deposit liabilities, which is $100,000 ($500,000 x 0.20). Since the bank currently holds $150,000 in reserves, it already exceeds the required reserves by $50,000.

This means that the excess reserves that can be used to create loans is $50,000. However, since banks are required to hold a fraction of deposits as reserves, the money that is loaned out will eventually end up back in the banking system as deposits.

Assuming a desired reserve ratio of 20% for the entire banking system, the total amount of deposits that can be created by the system is $250,000 ($50,000 / 0.20). Therefore, the banking system as a whole can increase loans by $250,000.

So, the amount by which this single chartered bank can increase loans is $50,000 and the amount by which the banking system can increase loans is $250,000. Therefore, the best choice is B.

Question 13

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 14

Assume Company X deposits $100,000 in cash in chartered Bank A. If no excess reserves exist at the time this deposit is made and the desired reserve ratio is 20, Bank A can increase the money supply by a maximum of:

Accepted Answer

The desired reserve ratio is 20%, so Bank A must keep 20% of the $100,000 deposit in reserves, which is $20,000. The maximum amount that Bank A can increase the money supply is the difference between the initial deposit and the required reserves, which is $80,000. Therefore, the correct answer is C) $80,000.

Question 15

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

The formula for determining the maximum amount of dollar that can be created from a single dollar of excess reserves is m = 1/R, where R is the desired reserve ratio. This means that as the reserve ratio decreases, the potential money multiplier effect increases, allowing banks to create more money through the lending process. Therefore, D is the correct choice as it uses this formula to relate m and R.

Question 16

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 percentage of deposits that banks choose to hold in reserve. The formula for the money multiplier is 1/Desired Reserve Ratio, so the correct choice is D.

Question 17

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 18

The following is a consolidated balance sheet for the chartered banking system. All figures are in billions. Assume that the desired reserve ratio is 20 percent.
 
-Refer to the above information. If there is a deposit of $10 billion of new currency into chequing accounts in the banking system, excess reserves will increase by:

Accepted Answer

The answer of The following is a consolidated balance sheet...

Question 19

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 by increasing her account balance by $5,400. This increases the overall supply of money by the same amount, so the correct answer is (C) increase the supply of money by $5,400.

Question 20

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...

Quiz 12: Money, Banking, and Money Creation