Question 1

Which factor is NOT one of the main features designed to protect depositors and the economy against bank runs?

Accepted Answer

Interest rate ceilings on checkable deposits are not a feature designed to protect depositors and the economy against bank runs. Deposit insurance, capital requirements, and reserve requirements are all important safeguards to prevent bank runs and protect depositors and the economy.

Question 2

Suppose that a bank does NOT hold excess reserves and the reserve ratio is 20%. If Molly deposits $1,000 of cash in her checking account and the bank lends $600 to Freda, the bank can lend an additional:

Accepted Answer

The reserve ratio is 20%, so the bank is required to hold 20% of Molly's deposit in reserves, which is $200. The bank has lent out $600 to Freda, which reduces the amount of reserves held by the bank to $200 - $600 = -$400. This means that the bank is short of required reserves and cannot lend any further. Therefore, the bank can only lend the initial $600 to Freda and cannot lend any additional amount.

Question 3

The existence of banks:

Accepted Answer

Banks are able to create money through the process of lending and creating deposits. This results in the money supply being larger than the amount of physical currency in circulation.

Question 4

Suppose a bank has excess reserves of $50 and the reserve ratio is 20%. If Andy deposits $5,000 of cash in his checking account and the bank lends $2,500 to Molly, the money supply:

Accepted Answer

Andy's deposit of $5,000 increases the bank's reserves by $5,000, which gives the bank excess reserves of $5,050 ($50 + $5,000). The bank can lend out $2,500 (since the reserve ratio is 20%), which Molly takes out as a loan. This reduces the bank's excess reserves by $2,500 to $2,550 ($5,050 - $2,500). However, since Molly has the $2,500 as a deposit in her account, the money supply increases by $2,500. Therefore, the total change in the money supply is an increase of $2,500.

Question 5

Probably the most important feature of deposit insurance is that it:

Accepted Answer

Deposit insurance helps to prevent bank runs by reassuring depositors that their money will be safe even if the bank fails. This helps to maintain stability in the financial system and prevent widespread panic and economic turmoil.

Question 6

Suppose that the reserve ratio is 20%. If Holly deposits $1,000 of cash in her checking account and her bank lends $600 to Freda, the money supply:

Accepted Answer

When Holly deposits $1,000 in her checking account, the bank can hold 20% of that ($200) in reserve and loan out the remaining $800. If the bank lends $600 to Freda, the money supply increases by $600, because Freda now has $600 in her account, which she can spend or use to make further deposits. Thus, the initial deposit of $1,000 has resulted in a total increase in the money supply of $600, which is a multiple of the original deposit (in this case, a money multiplier of 3).

Question 7

The guarantee by the FDIC to reimburse bank customers up to $250,000 per deposit in the event of bank problems is called:

Accepted Answer

The guarantee described in the question is known as deposit insurance, which is provided by the Federal Deposit Insurance Corporation (FDIC) and protects bank customers in the event of bank failures. Fractional reserve banking and reserve requirements refer to the practice of banks keeping a fraction of deposits on reserve, while the discount rate is the interest rate at which banks can borrow from the Federal Reserve. Therefore, the correct answer is D) deposit insurance.

Question 8

Capital requirements for banks do NOT serve the purpose of:

Accepted Answer

Capital requirements do not serve the purpose of reducing deposits. Instead, they serve the purpose of ensuring that banks have enough capital to absorb losses and continue operating.

Question 9

Which example of bank regulations is NOT designed to prevent bank runs?

Accepted Answer

The federal funds rate is a monetary policy tool used by the Federal Reserve to influence interest rates and economic activity, but it is not specifically designed to prevent bank runs. Reserve requirements, deposit insurance, and capital requirements are all regulations aimed at preventing bank runs.

Question 10

Suppose that initially a bank has excess reserves of $800 and the reserve ratio is 20%. Then Andy deposits $1,000 of cash in his checking account and the bank lends $600 to Molly. That bank can lend an additional:

Accepted Answer

The answer of Suppose that initially a bank has excess...

Question 11

If a bank has deposits of $100,000, cash in its vault of $10,000, and $15,000 on deposit at the Federal Reserve and if the required reserve ratio is 20%, then the bank has:

Accepted Answer

The required reserves for the bank would be 20% of the $100,000 in deposits, which is $20,000. The bank currently has $25,000 in reserves ($10,000 in vault cash + $15,000 at the Federal Reserve), so it has excess reserves of $5,000 ($25,000 - $20,000 = $5,000).

Question 12

If banks were required to keep 100% of deposits in reserves, they could:

Accepted Answer

If banks were required to keep 100% of deposits in reserves, they would not be able to make any loans, as they would have no funds to lend out.

Question 13

Suppose that the reserve ratio is 20%. If Sam deposits $500 in his checking account, his bank can increase loans by:

Accepted Answer

With a reserve ratio of 20%, the bank must keep 20% of deposits as reserves and can loan out the remaining 80%. Therefore, from Sam's $500 deposit, the bank can loan out 80% of $500, which is $400.

Question 14

What would be the immediate effect if an individual made a $9,000 cash deposit in a bank?

Accepted Answer

A cash deposit does not affect the money supply immediately because it is simply a transfer of currency from one person to another, not a creation or destruction of money. However, if the bank lends out some of the deposited funds, then it could lead to an increase in the money supply.

Question 15

Suppose that a bank receives a $5,000 deposit and the reserve ratio is 25%. Based on this deposit alone, the bank can lend out:

Accepted Answer

The reserve ratio is 25%, so the bank must keep 25% of the $5,000 deposit as reserves, which is $1,250. This means the bank can lend out the remaining $3,750.

Question 16

Suppose that initially a bank has excess reserves of $800 and the reserve ratio is 30%. Then Andy deposits $1,000 of cash in his checking account and the bank lends $600 to Molly. That bank can lend an additional:

Accepted Answer

Before the deposits and lending transactions, the bank has $800 excess reserves, which means it can potentially lend up to $2,666.67 (excess reserves divided by the reserve ratio of 30%).

After Andy's deposit, the bank's reserves increase by $1,000. The bank now has $1,800 in reserves. This means the bank can lend up to $4,285.71 (reserves of $1,800 divided by the reserve ratio of 30%).

If the bank lends $600 to Molly, the bank's excess reserves will decrease to $600 ($1,800 reserves - $1,200 required reserves). This means the bank can lend up to $2,000 more ($600 Molly's loan + $1,400 new potential loans based on new reserve levels).

Therefore, the bank can lend an additional $900 ($2,000 - $1,100 already lent to Andy and Molly). So the correct answer is C) $900.

Question 17

Suppose your grandma sends you $100 for your birthday and you deposit it in your checking account. The reserve ratio is 10%. Based upon this deposit, the bank's reserves have increased by _____ and the bank's checkable deposits have increased by _____.

Accepted Answer

When you deposit $100 in your checking account, the bank's reserves increase by the full amount of the deposit, which is $100, because this is the amount they now have on hand. Additionally, the bank's checkable deposits also increase by $100, as this is the amount credited to your account.

Question 18

Banks create money when they:

Accepted Answer

Banks create money when they make loans by increasing the amount of deposits in the borrower's account. The funds lent out by banks are not taken from other depositors' accounts but rather created as new money in the economy. The other options (B, C, and D) do not create new money but rather redistribute existing deposits or reserves.

Question 19

Which entity acts to protect depositors from a bank run by insuring all deposits up to $250,000?

Accepted Answer

The FDIC, or Federal Deposit Insurance Corporation, insures all deposits up to $250,000 in order to protect depositors in the event of a bank failure or run.

Question 20

If a bank has assets of $100 million, according to practice, its liabilities should NOT exceed:

Accepted Answer

According to the traditional banking model, the maximum liabilities of a bank should be 93% of its assets. Therefore, a bank with assets of $100 million should have liabilities of no more than $93 million.

Quiz 14: Money, Banking, and the Federal Reserve System