Deck 15: Money Creation

Question 1

A bank has $2 million in checkable deposits. In the bank's balance sheet, this would be part of:

A) Assets
B) Liabilities
C) Capital stock
D) Net worth

Answer 1

Liabilities

Question 2

The claims of creditors of a bank against the bank's assets are called:

A) Loans
B) Net worth
C) Liabilities
D) Required reserves

Answer 2

Liabilities

Question 3

When a bank sells capital stock (equity shares) in return for cash:

A) The capital stock increases the assets side and the cash increases the liabilities side
B) The capital stock decreases the liabilities and the cash increases the assets side
C) The capital stock increases the net worth and the cash increases the liabilities
D) The capital stock increases the net worth and the cash increases the assets side

Answer 3

The capital stock increases the net worth and the cash increases the assets side

Question 4

A checkable deposit at a commercial bank is a(n):

A) Liability to the depositor and an asset to the bank
B) Liability to both the depositor and the bank
C) Asset to the depositor and a liability to the bank
D) Asset to both the depositor and the bank

Question 5

Refer to the table above. If a bank has $60 million in savings deposits and $40 million in checkable deposits, then its required reserves are:

A) $30 million
B) $3 million
C) $1.8 million
D) $1.2 million

Question 6

Cash held by a bank in its vault is a part of the bank's:

A) Reserves
B) Liabilities
C) Money supply
D) Net worth

Question 7

Which of the following are liabilities to a bank?

A) Capital stock and reserves
B) Property and capital stock
C) Vault cash and demand deposits
D) Demand and time deposits

Question 8

Fractional reserve banking refers to a system where banks:

A) Grant loans to their borrowing customers
B) Deposit a fraction of their reserves at the central bank
C) Hold only a fraction of their deposits in their reserves
D) Accept a portion of their deposits in checkable accounts

Question 9

A bank owns a 10-story office building. In the bank's balance sheet, this would be listed as part of:

A) Assets
B) Liabilities
C) Capital stock
D) Net worth

Question 10

The fractional reserve system of banking started when goldsmiths began:

A) Accepting deposits of gold for safe storage
B) Charging people who deposited their gold
C) Using deposited gold to produce products for sale to others
D) Issuing paper receipts in excess of the amount of gold held

Question 11

When a bank accepts a checkable deposit from a customer, its deposits will increase and its excess reserves will:

A) Increase by the same amount as deposits
B) Increase by less than the deposits
C) Increase by more than the deposits
D) Decrease

Question 12

The required-reserve ratio is equal to:

A) A commercial bank's checkable-deposit liabilities divided by its required reserves
B) A commercial bank's required reserves divided by its checkable-deposit liabilities
C) A commercial bank's checkable-deposit liabilities multiplied by its excess reserves
D) A commercial bank's excess reserves divided by its required reserves

Question 13

One major component of money supply M1 is part of a bank's:

A) Assets
B) Reserves
C) Liabilities
D) Net worth

Question 14

What is one significant characteristic of fractional reserve banking?

A) Banks hold a fraction of their loans in reserve
B) Banks use deposit insurance for loans to customers
C) Bank loans will be equal to the amount of gold on deposit
D) Banks can create money through lending their reserves

Question 15

A bank's net worth is the:

A) Measure of its profitability
B) Value of its vault cash and loan portfolio
C) Claims of its owners against the bank's assets
D) Claims of its creditors against the bank's assets

Question 16

When cash is deposited in a checkable-deposit account at a bank, there is:

A) A decrease in the money supply M1
B) An increase in the money supply M1
C) An increase in the bank's net worth
D) An increase in the bank's liabilities

Question 17

A bank's required reserves can be calculated by:

A) Dividing its excess reserves by its required reserves
B) Dividing its required reserves by its excess reserves
C) Multiplying its checkable-deposit liabilities by the reserve ratio
D) Multiplying its checkable-deposit liabilities by its excess reserves

Question 18

When cash is withdrawn from a checkable-deposit account at a bank:

A) The money supply M1 increases
B) The money supply M1 decreases
C) The money supply M1 does not change but its composition changes
D) The composition of money supply M1 does not change

Question 19

A bank's net worth is equal to its:

A) Assets plus its liabilities
B) Assets minus its liabilities
C) Liabilities minus its assets
D) Profits plus its assets

Question 20

What is one significant consequence of fractional reserve banking?

A) Banks are vulnerable to "panics" or "bank runs"
B) Banks can only lend an amount equal to its deposits
C) Banks hold a portion of their deposits in gold
D) Banks can serve the withdrawals of all their depositors

Question 21

Suppose that the reserve ratio is 6%, and applies only to checkable deposits. A bank has non-checkable time deposits of $300 million, checkable deposits of $100 million, and reserves of $8 million. What are the excess reserves of this bank?

A) $5.6 million
B) $6 million
C) $2 million
D) $2.4 million

Question 22

The figures in the table below are for a single commercial bank. All figures are in thousands of dollars. Refer to the data given above. This bank has liabilities and net worth totaling:

A) $400 million
B) $440 million
C) $550 million
D) $580 million

Question 23

A depositor places $10,000 in cash in a commercial bank, where the required reserve ratio is 10 percent. The bank sends the $10,000 to its Federal Reserve Bank. As a result, the actual reserves, required reserves, and excess reserves of the bank have been increased by:

A) $10,000, $9000, and $1000 respectively
B) $10,000, $500, and $4500 respectively
C) $10,000, $1000, and $9000 respectively
D) $1000, $10,000, and $9000 respectively

Question 24

Refer to the table above. If a bank has checkable deposits of $45 million and reserves of $2 million, then its excess reserves are:

A) $0.35 million
B) $0.65 million
C) $1.35 million
D) $1.65 million

Question 25

Suppose the Northwestern Bank has excess reserves of $12,000 and checkable deposits of $125,000. If the reserve requirement is 20 percent, what are the bank's actual reserves?

A) $25,000
B) $37,000
C) $44,000
D) $47,000

Question 26

An individual deposits $12,000 in a commercial bank. The bank is required to hold 10 percent of all deposits on reserve at the regional Federal Reserve Bank. The deposit increases the loan capacity of the bank by:

A) $11,000
B) $10,800
C) $9,600
D) $6,000

Question 27

A bank has excess reserves of $5,000 and demand deposits of $50,000; the required reserve ratio is 20 percent. If the reserve ratio is raised to 25 percent, then this bank can lend a maximum of:

A) $1,000
B) $1,500
C) $2,000
D) $2,500

Question 28

The figures in the table below are for a single commercial bank. All figures are in thousands of dollars. Refer to the data given above. If the required reserve ratio is 10 percent, the bank has excess reserves of:

A) $28,000
B) $22,000
C) $18,000
D) $16,000

Question 29

The figures in the table below are for a single commercial bank. All figures are in thousands of dollars. Refer to the data given above. If the reserve ratio is 10 percent and a check for $10,000 is drawn and cleared in favor of another bank, then the bank above will end up with excess reserves of:

A) $8,000
B) $12,000
C) $13,000
D) $18,000

Question 30

A bank's checkable deposits shrinks from $40 million to $33 million. What happens to its required reserves if the required reserve ratio is 3%?

A) They fall by about $1.2 million
B) They fall by about $10 million
C) They fall by about $7 million
D) They fall by about $0.2 million

Question 31

A bank is in the position to make loans when required reserves:

A) Equal actual reserves
B) Equal excess reserves
C) Are less than actual reserves
D) Are greater than actual reserves

Question 32

A commercial bank has required reserves of $60 million and the reserve ratio is 20 percent. How much are the commercial bank's checkable-deposit liabilities?

A) $120 million
B) $900 million
C) $300 million
D) $1,200 million

Question 33

A commercial bank has checkable-deposit liabilities of $50,000 and a required-reserve ratio of 20 percent. What is the amount of required reserves?

A) $10,000
B) $50,000
C) $250,000
D) $1 million

Question 34

A commercial bank has actual reserves of $1 million and checkable-deposit liabilities of $9 million, and the required reserve ratio is 10 percent. The excess reserves of the bank are:

A) $50,000
B) $100,000
C) $900,000
D) $1 million

Question 35

The figures in the table below are for a single commercial bank. All figures are in thousands of dollars. Refer to the data given above. If the reserve ratio is 10 percent and a check for $10,000 is drawn and cleared in favor of another bank, then the actual reserves of the bank above will:

A) Still be $40,000
B) Decrease $10,000
C) Decrease $11,000
D) Decrease $9,000

Question 36

Assume that the required reserve ratio is 5 percent. If a commercial bank has $2 million cash in its vault, $1 million in government securities, $3 million on deposit at the Fed, and $60 million in checkable deposits, then its excess reserves equal:

A) $0 million
B) $2 million
C) $5 million
D) $6 million

Question 37

The figures in the table below are for a single commercial bank. All figures are in thousands of dollars. Refer to the data given above. This bank has total assets of:

A) $340 million
B) $440 million
C) $520 million
D) $580 million

Question 38

Sharon sells a government security worth $4,600,000 to the Federal Reserve Bank of Kansas City. She then deposits the funds in her checking account at First Commerce Bank. Her checking account had a $150,000 balance before this deposit. The reserves of First Commerce Bank would:

A) Increase by $4,750,000
B) Increase by $4,600,000
C) Decrease by $4,600,000
D) Decrease by $4,450,000

Question 39

A depositor places $5,000 in cash in a commercial bank, and the reserve ratio is 20 percent; the bank sends the $5,000 to the Federal Reserve Bank. As a result, the reserves and excess reserves of the bank have been increased, respectively, by:

A) $5,000 and $1,000
B) $5,000 and $4,000
C) $5,000 and $5,000
D) $4,000 and $4,000

Question 40

A commercial bank's checkable-deposit liabilities can be estimated by:

A) Dividing its required reserves by its excess reserves
B) Dividing its required reserves by the reserve ratio
C) Multiplying its required reserves by its excess reserves
D) Multiplying its required reserves by the reserve ratio

Question 41

A commercial bank has excess reserves of $5000 and a required reserve ratio of 20 percent. It makes a loan of $6000 to a borrower. The borrower writes a check for $6000 that is deposited in another commercial bank. After the check clears, the first bank will be short of reserves in the amount of:

A) $1000
B) $1200
C) $5000
D) $6000

Question 42

Answer the question based on the following balance sheet for the First National Bank. Assume the reserve ratio is 15 percent: Refer to the data above. If a check for $20,000 is drawn and cleared against this bank, it will then have excess reserves of:

A) $15,000
B) $20,000
C) $25,000
D) $30,000

Question 43

A commercial bank has no excess reserves until a depositor places $2,000 in cash in the bank. The reserve ratio is 10%. The bank then lends $1,500 to a borrower. As a consequence of these transactions the bank's excess reserves are:

A) Not affected
B) Increased by $200
C) Increased by $300
D) Increased by $500

Question 44

Money is "created" when:

A) A depositor gets cash from the bank's ATM
B) A bank accepts deposits from its customers
C) People receive loans from their banks
D) People spend the incomes that they receive

Question 45

Other things being equal, an expansion of commercial bank lending:

A) Changes the composition, but not the size, of the money supply
B) Is desirable during a period of demand-pull inflation
C) Reduces the money supply
D) Increases the money supply

Question 46

Which of the following statements is correct?

A) When borrowers repay bank loans, the money supply is increased
B) When borrowers take out bank loans, the money supply is decreased
C) A single bank can legally lend an amount equal to its total reserves
D) A bank can only grant loans to customers if it has excess reserves

Question 47

When a bank grants a loan to a customer who then keeps the funds in her checking account at that bank, then the bank's:

A) Actual reserves will increase
B) Required reserves will increase
C) Actual reserves will decrease
D) Excess reserves will stay the same

Question 48

Henry 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. After these transactions, the supply of money has:

A) Increased by $2,100
B) Increased by $3,300
C) Increased by $5,400
D) Decreased by $3,300

Question 49

When required reserves exceed actual reserves, commercial banks will be forced to have borrowers:

A) Use credit cards
B) Withdraw some of their deposits
C) Repay loans
D) Take out more loans

Question 50

When a bank grants a loan to a customer who gets the funds and keeps it at home for a while, then the money supply will:

A) Not change because demand deposits did not go up
B) Not change because the money was not spent
C) Increase
D) Decrease

Question 51

Answer the question based on the following balance sheet for the First National Bank. Assume the reserve ratio is 15 percent: Refer to the data above. If a check for $14,000 is drawn and cleared against this bank, then its reserves and checkable deposits will be, respectively:

A) $50,000 and $120,000
B) $50,000 and $106,000
C) $36,000 and $120,000
D) $36,000 and $106,000

Question 52

In essence, which of the following groups "creates" money?

A) Banks' loan officers when they grant loans
B) Consumers when they go shopping
C) Depositors when they deposit or withdraw money from their banks
D) Firms when they pay workers their wages and salaries

Question 53

A commercial bank has excess reserves of $10,000 and a required reserve ratio of 20%. It grants a loan of $8,000 to a customer, who then writes out a check for $8,000 that is deposited in another bank. The first bank will find its reserves decrease by:

A) $2,000
B) $3,000
C) $1,600
D) $8,000

Question 54

The Norfolk Bank has $18,000 in excess reserves and the reserve ratio is 20 percent. How much checkable deposits and reserves does this bank hold?

A) $160,000 in checkable-deposit liabilities and $48,000 in reserves
B) $140,000 in checkable-deposit liabilities and $46,000 in reserves
C) $120,000 in checkable-deposit liabilities and $32,000 in reserves
D) $100,000 in checkable-deposit liabilities and $30,000 in reserves

Question 55

When loans are repaid at commercial banks:

A) Money is created
B) Money is destroyed
C) The assets of commercial banks increase
D) The net worth of commercial banks increases

Question 56

The primary reason commercial banks must keep required reserves on deposit at the Fed is to:

A) Add to the liquidity of the commercial bank
B) Allow the Fed to control the amount of bank lending
C) Protect the deposits in the commercial bank against losses
D) Ensure that depositors can withdraw their money if they wish to

Question 57

Money is "created" when:

A) A depositor deposits money at the bank
B) A bank grants a loan to a customer
C) Someone lends money to a friend or a family member
D) People use money to pay for stuff they buy from one another

Question 58

A commercial bank has no excess reserves until a depositor places $5000 in cash at the bank. The commercial bank then lends $4000 to a borrower. As a consequence of these transactions the size of the money supply has:

A) Not been affected
B) Increased by $4000
C) Increased by $5000
D) Decreased by $5000

Question 59

When a check is cleared against a bank, the bank will lose:

A) Cash and securities
B) Checkable deposits and reserves
C) Reserves and capital stock
D) Loans and demand deposits

Question 60

A commercial bank buys a $50,000 government security from a securities dealer. The bank pays the dealer by increasing the dealer's checkable deposit balance by $50,000. The money supply has:

A) Not been affected
B) Decreased by $50,000
C) Increased by $50,000
D) Increased by $50,000 multiplied by the reserve ratio

Question 61

A bank can get additional excess reserves by doing any of the following, except:

A) Borrowing from other banks
B) Buying Treasury securities from the Fed
C) Receiving additional deposits
D) Borrowing from the Fed

Question 62

Banks can lend their excess reserves to other banks in the:

A) Mutual funds market
B) Treasury funds market
C) Federal funds market
D) Bank funds market

Question 63

If Bank A has excess reserves of $1 million and all other banks in the system do not have any excess reserves, then the amount of additional loans that can be made by the banking system will be:

A) $1 million also
B) A fraction of $1 million
C) A multiple of $1 million
D) $1 million times the required-reserve ratio

Question 64

In the Federal funds market, a bank that needs to meet reserve requirements can borrow reserves, usually for a period:

A) Overnight
B) Of a week
C) Of a month
D) Of six months

Question 65

Maximum checkable-deposit expansion in the banking system is equal to:

A) Actual reserves minus required reserves
B) Assets plus net worth and liabilities
C) Excess reserves times the monetary multiplier
D) Excess reserves divided by the monetary multiplier

Question 66

The multiple by which the commercial banking system can expand the supply of money is equal to:

A) The ratio of actual reserves to required reserves
B) The reciprocal of the federal funds rate
C) The reciprocal of the reserve ratio
D) The ratio of required reserves to actual reserves

Question 67

If the reserve ratio is 25 percent, what level of excess reserves does a bank acquire when a customer deposits a $12,000 check drawn on another bank?

A) $3,000
B) $6,000
C) $9,000
D) $12,000

Question 68

If the required reserve ratio is 20 percent and commercial bankers decide to hold additional excess reserves equal to 5 percent of any newly acquired checkable deposits, then the effective monetary multiplier for the banking system will be:

A) 3
B) 4
C) 5
D) 6

Question 69

The relative importance of various asset items on a commercial bank's balance sheet reflects a bank's pursuit of which two conflicting goals?

A) Profits and risk
B) Liquidity and profits
C) Assets and liabilities
D) Buying and selling government securities

Question 70

The commercial banking system can lend by a multiple of its excess reserves primarily because:

A) Its reserves are on deposit with the Federal Reserve Banks
B) Its reserves are highly liquid assets
C) It loses reserves when it extends credit
D) Its required reserves are fractional

Question 71

A single commercial bank must meet a 25 percent reserve requirement. If it initially has no excess reserves and then $2,000 in cash is deposited in the bank, it can increase its loans by a maximum of:

A) $2,000
B) $1,500
C) $1,250
D) $1,750

Question 72

A commercial bank has checkable-deposit liabilities of $500,000, reserves of $150,000, and a required reserve ratio of 20 percent. The amount by which a single commercial bank and the amount by which the banking system can increase loans are respectively:

A) $30,000 and $150,000
B) $50,000 and $250,000
C) $50,000 and $500,000
D) $100,000 and $500,000

Question 73

When people withdraw money from their deposits in the banking system, the:

A) Excess reserves of the banking system will decrease
B) Excess reserves of the banking system will increase
C) Excess reserves of the banking system will not be affected
D) Money supply will immediately decrease

Question 74

In an unregulated environment, the commercial banking system would tend to vary the supply of money in a way that:

A) Increased the money supply to the maximum at all times
B) Decreased the money supply to the minimum at all times
C) Emphasized the use of currency over demand deposits
D) Reinforced cyclical variations in the economy

Question 75

The Federal funds rate is the rate that banks pay for loans from:

A) The Fed
B) The U.S. Treasury
C) Other banks
D) Large Corporations

Question 76

Assume the required reserve ratio is 16.67 percent and that the commercial banking system has $110 million in excess reserves. The maximum amount of new money which the banking system could create is about:

A) $110 million
B) $330 million
C) $660 million
D) $1,353 million

Question 77

The basic purpose of imposing legal reserve requirements on commercial banks is to:

A) Assure the liquidity of commercial banks
B) Provide a device through which the credit-creating activities of banks can be controlled
C) Provide a proper ratio between earning and no earning bank assets
D) Provide the central banks with necessary working capital

Question 78

The fact that reserves lost by any particular bank will be gained by some other bank explains why the commercial banking system:

A) Has been able to reduce the vulnerability of banks to "runs" or "panics"
B) Can increase its demand deposits by a multiple of its excess reserves
C) Cannot increase its demand deposits by a multiple of its excess reserves
D) Has been based on the fractional reserve system of banking

Question 79

If the Federal Reserve System sells $5 billion of government securities to commercial banks, the banks' reserves would:

A) Increase by $5 billion
B) Decrease by $5 billion
C) Be added to net worth
D) Remain the same

Question 80

A commercial bank sells a $10,000 government bond to a securities dealer. The dealer pays for the bond in cash, which the bank adds to its vault cash. The money supply has:

A) Decreased by $10,000 multiplied by the reciprocal of the required reserve ratio
B) Decreased by $10,000
C) Increased by $10,000
D) Not been affected