Deck 18: Bank Reserves and the Money Supply

Question 1

A bank can safely lend an amount equal to its

A) excess reserves.
B) required reserves.
C) vault cash.
D) total reserves.

Answer 1

A

Question 2

If the required reserve ratio is .10, demand deposits are $200 million, and total reserves are $40 million, then excess reserves are

A) $20 million.
B) $40 million.
C) $400 million.
D) $2,000 million.

Answer 2

A

Question 3

Assume that excess reserves are $35 million, demand deposits are $500 million, and total reserves are $135 million. The required reserve ratio is

A) )07.
B) )2.
C) )25.
D) )27.

Answer 3

D

Question 4

Deposits with the Federal Reserve Bank are part of a commercial bank's

A) capital.
B) reserves.
C) loans.
D) liabilities.

Question 5

Assume that excess reserves are $10 million, demand deposits are $500 million, and total reserves are $135 million. The required reserve ratio is

A) )05.
B) )1.
C) )2.
D) )25.

Question 6

A commercial bank's reserves consist of

A) capital and U.S. Treasury securities.
B) vault cash and U.S. Treasury securities.
C) vault cash and deposits with the Federal Reserve.
D) deposits with the Federal Reserve and U.S. Treasury securities.

Question 7

Vault cash is part of a commercial bank's

A) demand deposits.
B) capital.
C) reserves.
D) liabilities.

Question 8

When a bank receives a check drawn on an account from another commercial bank, the bank gains

A) capital equal to the amount of the check.
B) capital equal to the required reserve ratio times the amount of the check.
C) reserves equal to the amount of the check.
D) reserves equal to the required reserve ratio times the amount of the check.

Question 9

Which of the following assets yields a 0 percent return?

A) U.S. Treasury Bills
B) Excess reserves
C) Deposits with correspondent banks
D) Municipal bonds

Question 10

If the required reserve ratio is .25, demand deposits are $400 million, and total reserves are $150 million, then excess reserves are

A) $25 million.
B) $50 million.
C) $75 million.
D) $125 million.

Question 11

A bank creates money

A) never since it only lends out money it owns.
B) when it makes loans.
C) when it prints bank notes.
D) when it pays out reserves.

Question 12

Which of the following is classified as a liability for a commercial bank?

A) Reserves
B) Commercial loans
C) Demand deposits
D) Deposits with the Federal Reserve

Question 13

Which of the following is classified as an asset for a commercial bank customer?

A) A car loan
B) A commercial loan
C) Demand deposits
D) Deposits with the Federal Reserve

Question 14

The Federal Reserve's ability to control the amount of demand deposits in the system depends on its ability to

A) clear checks.
B) charter national banks.
C) print currency.
D) regulate bank reserves.

Question 15

Banks prefer __________ hold excess reserves because __________.

A) not to; excess reserves earn no interest
B) not to; banks are not required to hold them
C) to; excess reserves earn interest
D) to; banks need them to prevent runs

Question 16

Assume that the required reserve ratio is 10 percent. A bank has deposits of $1,000,000 and cash of $500,000 in the Fed. The bank has demand deposits equal to $1,500,000. Given this information, the bank has excess reserves of

A) $850,000.
B) $350,000.
C) $1,350,000.
D) None of the above.

Question 17

A bank's excess reserves can be calculated as

A) total reserves times the reserve ratio.
B) demand deposits times the reserve ratio.
C) total reserves minus required reserves.
D) demand deposits minus total reserves.

Question 18

When a bank pays a check drawn on a customer's account to another bank, the bank loses

A) capital equal to the amount of the check.
B) capital equal to the required reserve ratio times the amount of the check.
C) reserves equal to the amount of the check.
D) reserves equal to the required reserve ratio times the amount of the check.

Question 19

The largest component of the money supply (M1)is

A) time deposits.
B) large CDs.
C) demand deposits.
D) coin and currency.

Question 20

Assume that excess reserves are $10 million, the required reserve ratio is 10 percent, and total reserves are $145 million. Demand deposits are

A) $135 million.
B) $1.35 billion.
C) $1.35 million.
D) $1.45 billion.

Question 21

If the required reserve ratio was 1, the demand deposit expansion multiplier would be

A) 0.
B) 1.
C) 1.2.
D) 5.

Question 22

If the ratio of net worth to vault cash is .2, the prime rate is .05, and the required reserve ratio is .25, the demand deposit expansion multiplier is

A) 2.
B) 4.
C) 5.
D) )25.

Question 23

If the required reserve ratio is .5, the deposit contraction multiplier is

A) )5.
B) 2.
C) 2.5.
D) 5.

Question 24

When banks make new loans, the effect on reserves is the same as

A) holding excess reserves.
B) expanding capital.
C) purchasing securities.
D) acquiring deposits.

Question 25

If a bank buys securities, its

A) net worth increases.
B) net worth decreases.
C) reserves increase.
D) reserves decrease.

Question 26

The demand deposit multiplier is equal to the

A) reciprocal of the reserve requirement ratio.
B) reciprocal of the discount rate.
C) inverse of the reserve requirement ratio.
D) inverse of the discount rate.

Question 27

An initial deficiency in reserves of $20 and a required reserve ratio of .5 lead to a maximum demand deposit contraction of

A) $8.
B) $40.
C) $50.
D) $80.

Question 28

The required reserve ratio is 10 percent, and the potential change in demand deposits is $100 million. What are original excess reserves?

A) $10 million
B) $100 million
C) $1 million
D) $1 billion

Question 29

If the required reserve ratio is decreased from .2 to .1 the demand deposit expansion multiplier

A) increases from 5 to 10.
B) increases from 4 to 4.5.
C) decreases from 5 to 2.5.
D) decreases from 2 to 1.

Question 30

If original excess reserves are $10 million, and if the potential change in demand deposits is $153 million, then the demand deposit expansion multiplier is

A) 1.53.
B) 0.65.
C) 10.0.
D) 0.07.

Question 31

Assume that there are no excess reserves, no savings accounts, and no currency held by the public. If the demand deposit expansion multiplier is 4, the required reserve ratio must be

A) also 4.
B) )2.
C) )25.
D) )5.

Question 32

If the required reserve ratio is .10, the demand deposit expansion multiplier is

A) )1.
B) 4.
C) 5.
D) 10.

Question 33

Assume a required reserve ratio of .4. An increase in excess reserves of $60 can potentially lead to a demand deposit expansion of

A) $50.
B) $100.
C) $125.
D) $150.

Question 34

A commercial bank's ability to lend is determined by its

A) required reserves.
B) excess reserves.
C) total reserves.
D) capital.

Question 35

If the required reserve ratio is increased from .1 to .2, the demand deposit expansion multiplier

A) increases from 10 to 5.
B) increases from 4 to 4.5.
C) decreases from 5 to 2.5.
D) decreases from 10 to 5.

Question 36

If the required reserve ratio is .2 and reserves initially decline by $25, demand deposits can decline by

A) $125.
B) $50.
C) $25.
D) $5.

Question 37

The demand deposit multiplier __________ as the required reserve ratio __________.

A) increases; increases
B) increases; decreases
C) does not change; increases
D) does not change; decreases

Question 38

Assume a required reserve ratio of .25 and a discount rate of .05. If excess reserves rise by $20, demand deposits can expand by a maximum of

A) $20.
B) $25.
C) $80.
D) $100.

Question 39

A bank can safely lend only an amount equal to its excess reserves because

A) all of its reserves are now required reserves.
B) borrowers will spend the proceeds of their loans, and the bank will lose all of its excess reserves.
C) the excess reserves will fall to zero when the bank makes the loans.
D) This is not true since a bank can safely lend an amount equal to its total reserves.

Question 40

Assume an economy with a single bank, no excess reserves, no savings accounts, and no currency held by the public. With a required reserve ratio of .4, the demand deposit expansion multiplier is

A) 20.
B) 10.
C) 4.
D) 2.5.

Question 41

Assume that the M1 multiplier is 3.0 and the monetary base is $200 billion. If M1 is currently equal to $600 billion and the Federal Reserve wishes to raise the level to $690 billion, the monetary base should be expanded by

A) $60 billion.
B) $30 billion.
C) $20 billion.
D) $10 billion.

Question 42

If the reserve requirement on checkable deposits is .25, the ratio of currency held by the public to demand deposits is .15, the ratio of time deposits to demand deposits is 3, the reserve requirement on time deposits is 0, and the ratio of excess reserves to demand deposits is 0, then the demand deposit multiplier is

A) 5.
B) 4.
C) 3.33.
D) 2.5.

Question 43

Assume that the ratio of excess reserves to demand deposits is 0, and the ratio of currency to demand deposits is .2. If the reserve requirement on demand deposits is .3 and there is no reserve requirement on savings accounts, the M1 multiplier is

A) 5.5.
B) 4.
C) 2.5.
D) 2.4.

Question 44

The change in demand deposits varies directly with

A) the currency ratio.
B) the reserve ratio on demand deposits.
C) the monetary base.
D) the reserve ratio on time deposits.

Question 45

A bank with excess reserves

A) cannot make new loans.
B) must make new loans.
C) may choose to make new loans equal to the amount of excess reserves.
D) can lend an amount equal to the amount of excess reserves multiplied by the inverse of the required reserve ratio.

Question 46

If there is a(n)__________ in reserves, the potential change in demand deposits is __________.

A) deficiency; 0
B) deficiency; positive
C) deficiency; negative
D) excess; negative

Question 47

Which of the following must decline if there is a reserve deficiency in the banking system?

A) Demand deposits
B) Reserves
C) Net worth
D) The demand deposit multiplier