Question 1

The deposit multiplier is the inverse of
A) legal reserves.
B) excess reserves.
C) checkable deposits.
D) the required reserve ratio.

Accepted Answer

The deposit multiplier is defined as the potential amount of money that can be created by commercial banks through the process of deposit creation. It is calculated as the reciprocal of the reserve requirement ratio imposed by the central bank. Therefore, the correct answer is D, the required reserve ratio.

Question 2

What happens when you withdraw cash from a bank?
A) The bank's reserves are reduced.
B) The bank's reserves are increased.
C) The bank's reserves are not affected.
D) The bank's total reserves remain unchanged but the composition of required reserves and excess reserves change.

Accepted Answer

Withdrawing cash from a bank reduces the bank's reserves, as the bank is giving out physical currency to the customer. This decrease in reserves can potentially limit the bank's ability to lend money or meet its reserve requirements.

Question 3

Assume that the required reserve ratio is 10%. An increase of $1,000 in the banking system's excess reserves may result in a total expansion of new deposits for the banking system as a whole by as much as
A) $1,000.
B) $9,000.
C) $10,000.
D) $100,000.

Accepted Answer

The money multiplier formula is 1/reserve ratio. Therefore, with a required reserve ratio of 10%, the money multiplier is 1/0.1 = 10. This means that an increase of $1,000 in excess reserves can result in up to $10,000 in new deposits, as the banking system can lend out up to $10,000 of this new reserve amount.

Question 4

Which of the following are primary functions of a central bank?
I. act as a regulator of banks
II. issue government bonds
III. set monetary policy
IV. regulate dividend payments by corporations
A) I, II, III, and IV
B) I, II, and III
C) I and III
D) I and II

Accepted Answer

The primary functions of a central bank include acting as a regulator of banks and setting monetary policy. Issuing government bonds is typically a function of the treasury or finance ministry, and regulating dividend payments by corporations is generally not a central bank function.

Question 5

The Federal Reserve System
I. is the central bank for the United States.
II. is a United States government owned bank.
III. is a branch of the Treasury of the United States.
A) I only
B) I and II only
C) I and III only
D) I, II, and III

Accepted Answer

The Federal Reserve System is indeed the central bank of the United States, but it is not a government-owned bank nor is it a branch of the Treasury. It operates independently within the government framework.

Question 6

The maximum amount of increase in the money supply that can be caused by an increase in excess reserves is equal to the
A) deposit multiplier $\times$ the required reserve ratio.
B) loan multiplier $\times$ the change in excess reserves.
C) deposit multiplier ÷ the change in excess reserves.
D) deposit multiplier $\times$ the change in excess reserves.

Accepted Answer

The maximum amount of increase in the money supply that can be caused by an increase in excess reserves is equal to the deposit multiplier (1/RRR) multiplied by the change in excess reserves. Therefore, the correct answer is D.

Question 7

What is the value of the deposit multiplier in a 100-percent reserve banking system?
A) 0.
B) 1
C) a value between 0 and 1
D) a value greater than 1

Accepted Answer

The answer of What is the value of the deposit...

Question 8

Which of the following statements is true?
A) The higher the required reserve ratio, the higher the deposit multiplier.
B) The higher the excess reserves, the higher the deposit multiplier.
C) The value of the deposit multiplier falls if economic agents withdraw cash from the banking system.
D) The deposit multiplier only works to increase money supply, not to decrease money supply.

Accepted Answer

The deposit multiplier is inversely related to cash withdrawals from the banking system. When individuals withdraw cash, banks have less base money to support new loans, reducing the multiplier effect on the money supply.

Question 9

What happens to the value of the deposit multiplier when banks hold excess reserves?
A) It is larger than the value implied by the formula.
B) It is smaller than the value implied by the formula.
C) It is only affected by the amount of loans that banks are willing to make, not the amount of excess reserves held.
D) There is insufficient information to answer the question.

Accepted Answer

The deposit multiplier formula assumes that banks are not holding excess reserves. When banks do hold excess reserves, the actual amount of money created through the deposit multiplier will be smaller than the formula suggests.

Question 10

The Federal Depository Insurance Corporation (FDIC) has the power to close a bank when
A) the bank's net worth falls below a certain level.
B) the bank's excess reserves fall below a certain level.
C) the bank's total deposits fall below a certain level.
D) the bank has inadequate insurance.

Accepted Answer

The FDIC has the power to close a bank when the bank's net worth falls below a certain level. This is because net worth is a measure of a bank's overall financial health and ability to absorb losses. If a bank's net worth falls below a certain level, it may be considered at risk of failing, and the FDIC may step in to protect depositors by closing the bank and reimbursing insured deposits.

Question 11

Which of the following is not a function of the Federal Reserve System?
A) It acts as a central bank.
B) It acts as a banker to banks.
C) It determines tax levels in conjunction with the U.S. Treasury.
D) It sets monetary policy.

Accepted Answer

The Federal Reserve System does not determine tax levels in conjunction with the U.S. Treasury. Its main functions include acting as a central bank, controlling the money supply and setting monetary policy, and acting as a banker to banks.

Question 12

The deposit multiplier is given by the formula
A) change in checkable deposits ÷ change in required reserves.
B) change in checkable deposits ÷ change in reserves.
C) change in excess reserves ÷ change in checkable deposits.
D) change in legal reserves ÷ change in excess reserves.

Accepted Answer

The deposit multiplier measures the increase in money supply as a result of an increase in reserves. It is calculated as the change in checkable deposits divided by the change in reserves. Therefore, choice B is the correct formula for calculating the deposit multiplier.

Question 13

Assume that banks do not hold excess reserves, all deposits remain in the banking system and that the required reserve ratio is 20%. If one bank obtains excess reserves of $10,000, then the maximum increase in money supply is
A) $10,000.
B) $20,000.
C) $40,000.
D) $50,000.

Accepted Answer

The maximum increase in money supply is calculated using the money multiplier formula, which is 1/required reserve ratio. With a 20% reserve ratio, the multiplier is 1/0.20 = 5. Therefore, an excess reserve of $10,000 can increase the money supply by $10,000 * 5 = $50,000.

Question 14

Which of the following is a consequence of deposit insurance?
A) It may induce the officers of a bank to take more risks.
B) It encourages banks to make loans only to the most credit-worthy customers.
C) It minimizes the risk of defaulting on loans made to the bank's customers.
D) It encourages depositors to closely scrutinize a bank's lending activities.

Accepted Answer

Deposit insurance reduces the consequences of a bank failure for depositors. This may lead bank officers to take more risks since they are not as worried about losing deposits.

Question 15

Assume that the required reserve ratio is 20%. What is the maximum increase in money supply for the banking system as a whole following a $10,000 increase in excess reserves?
A) $5,000
B) $10,000
C) $40,000
D) $50,000

Accepted Answer

The answer of Assume that the required reserve ratio is...

Question 16

The Federal Reserve System was established in 1913 in response to the
A) First World War.
B) bank panic of 1907.
C) depression of 1883.
D) prosperity of the 1920s.

Accepted Answer

The establishment of the Federal Reserve System was a direct response to the bank panic of 1907, which highlighted the need for a centralized banking system with the ability to provide liquidity and stabilize the financial system. The First World War did not occur until several years later, and the depression of 1883 and prosperity of the 1920s were also not immediate factors in the creation of the Federal Reserve System.

Question 17

A primary function of a central bank is to
A) regulate dividend payments by corporations.
B) control the bond market.
C) set monetary policy.
D) publish statistics on banking and related financial matters.

Accepted Answer

The primary function of a central bank is to control monetary policy, which includes regulating the money supply, interest rates, and inflation targeting. The other options are not primary functions of a central bank.

Question 18

A primary function of a central bank is to
A) regulate dividend payments by corporations.
B) act as a regulator of banks.
C) control the bond market.
D) publish statistics on banking and related financial matters.

Accepted Answer

A central bank primarily acts as a regulator of banks, ensuring that they operate in a stable and secure manner. While central banks may also have some involvement in regulating other financial sectors, such as the bond market, this is not their primary function. Additionally, while central banks may publish statistics, this is not their main purpose either.

Question 19

The banking system is able to make new loans equal to
A) total legal reserves of the system.
B) total excess reserves of the system.
C) total required reserves of the system.
D) a multiple of total excess reserves of the system.

Accepted Answer

The banking system is able to make new loans by a multiple of its total excess reserves. This is known as the money multiplier effect. When a bank receives a deposit, it is required to hold a fraction of that deposit as reserves and is able to lend out the rest. This loan creates a new deposit, which again is subject to the reserve requirement and can be lent out. This process repeats itself, leading to an expansion of the money supply. The size of the expansion depends on the reserve requirement and the excess reserves held by banks.

Question 20

Which of the following is true?
A) A bank is solvent when its deposits become positive.
B) A bank is insolvent when its reserves become negative.
C) A bank is solvent when its excess reserves become negative.
D) A bank is insolvent when its net worth becomes negative.

Accepted Answer

Solvency refers to a bank's ability to meet its obligations and remain in business. Net worth represents the value of a bank's assets minus its liabilities. If net worth becomes negative, it means that the bank's liabilities exceed its assets, which is a clear indication that the bank is insolvent. Therefore, option D is the correct choice. Option A is incorrect because deposits alone do not determine a bank's solvency. Option B is incorrect because reserves alone do not determine a bank's solvency, although a lack of reserves can contribute to insolvency. Option C is incorrect because excess reserves becoming negative would be a concern for the bank's liquidity, not solvency.

Quiz 24: The Aggregate Demandaggregate Supply Model

The deposit multiplier is the inverse of

What happens when you withdraw cash from a bank?

Assume that the required reserve ratio is 10%. An increase of $1,000 in the banking system's excess reserves may result in a total expansion of new deposits for the banking system as a whole by as much as

Which of the following are primary functions of a central bank? I. act as a regulator of banks II. issue government bonds III. set monetary policy IV. regulate dividend payments by corporations

The Federal Reserve System I. is the central bank for the United States. II. is a United States government owned bank. III. is a branch of the Treasury of the United States.

The maximum amount of increase in the money supply that can be caused by an increase in excess reserves is equal to the

What is the value of the deposit multiplier in a 100-percent reserve banking system?

Which of the following statements is true?

What happens to the value of the deposit multiplier when banks hold excess reserves?

The Federal Depository Insurance Corporation (FDIC) has the power to close a bank when

Which of the following is not a function of the Federal Reserve System?

The deposit multiplier is given by the formula

Assume that banks do not hold excess reserves, all deposits remain in the banking system and that the required reserve ratio is 20%. If one bank obtains excess reserves of $10,000, then the maximum increase in money supply is

Which of the following is a consequence of deposit insurance?

Assume that the required reserve ratio is 20%. What is the maximum increase in money supply for the banking system as a whole following a $10,000 increase in excess reserves?

The Federal Reserve System was established in 1913 in response to the

A primary function of a central bank is to

A primary function of a central bank is to

The banking system is able to make new loans equal to

Which of the following is true?