Question 1

In a deposits-only monetary system with a 5% required reserve ratio, a bank deposit of $1,000 could increase the total amount of bank deposits by up to:

Accepted Answer

In a deposits-only monetary system, the formula for calculating the maximum increase in the total amount of bank deposits is (1/reserve ratio) x initial deposit. Therefore, in this scenario, the maximum increase would be (1/0.05) x $1,000 = $20,000. Option C is the closest choice to the correct answer.

Question 2

Suppose that the banking system does NOT hold excess reserves and the reserve ratio is 25%. If Molly deposits $1,000 cash in her checking account, the banking system can increase the money supply by an additional:

Accepted Answer

The reserve ratio is 25%, which means that the bank is required to hold 25% of any deposit as reserves and can lend out the other 75%. When Molly deposits $1,000, the bank can lend out $750 of it (75% of $1,000) and must hold the remaining $250 as reserves. The person who borrows the $750 will deposit it in another bank account, and that bank can lend out 75% of that deposit, which is $562.50. This process can continue, with each bank holding 25% of the deposit as reserves and lending out 75% of it, until the total increase in the money supply is $3,000. Therefore, the correct answer is C) $3,000.

Question 3

Suppose that your grandma sends you $100 for your birthday and you deposit that $100 in your checking account. The reserve ratio is 10%. Based upon this deposit, the bank's excess reserves have increased by _____, and if the bank lends these new excess reserves, the money supply could eventually grow by as much as an additional _____.

Accepted Answer

The bank's excess reserves increase by $90 because it must keep 10% ($10) as required reserves. The money supply could grow by $900 because the $90 can be loaned out and re-deposited, creating a money multiplier effect (1/0.10 = 10; $90 * 10 = $900).

Question 4

Use the following to answer questions: 
-(Scenario: Assets and Liabilities of the Banking System) Refer to Scenario: Assets and Liabilities of the Banking System. If the reserve ratio is 8% and the banking system does NOT want to hold excess reserves, how much more can be added to the money supply?

Accepted Answer

The answer of Use the following to answer questions: 
-(Scenario:...

Question 5

The money multiplier and the required reserve ratio are:

Accepted Answer

The money multiplier and the required reserve ratio are inversely related. This means that as the required reserve ratio increases, the money multiplier decreases, and vice versa. This is because the required reserve ratio determines the amount of money that banks can lend out; the higher the required reserve ratio, the less money banks have available to lend out and therefore the lower the money multiplier.

Question 6

Use the following to answer questions: 
-(Scenario: Assets and Liabilities of the Banking System) Refer to Scenario: Assets and Liabilities of the Banking System. If the reserve ratio is 6% and the banking system does NOT want to hold excess reserves, how much more can be added to the money supply?

Accepted Answer

The money multiplier formula is 1/reserve ratio. With a 6% reserve ratio, the multiplier is 1/0.06 = 16.67. If banks do not want to hold excess reserves, every dollar of reserves can support $16.67 in deposits. For an initial increase in reserves, the maximum addition to the money supply is the increase in reserves times the multiplier. Without the specific increase in reserves provided, we cannot calculate the exact amount, but option A suggests a typical scenario where an initial reserve increase leads to a larger increase in the money supply through the multiplier effect.

Question 7

Use the following to answer questions: 
-(Scenario: Assets and Liabilities of the Banking System) Refer to Scenario: Assets and Liabilities of the Banking System. If the reserve ratio is 9% and the banking system does NOT want to hold excess reserves, how much more can be added to the money supply?

Accepted Answer

The answer of Use the following to answer questions: 
-(Scenario:...

Question 8

Suppose the banking system does NOT hold excess reserves and the reserve ratio is 20%. If Sam deposits $500 cash in his checking account, the banking system can increase the money supply by an additional:

Accepted Answer

The reserve ratio is 20%, meaning banks must keep 20% of deposits as reserves. For a $500 deposit, $100 is kept as reserves, and $400 can be loaned out. This $400 can be re-deposited and loaned out repeatedly, creating a money multiplier effect. The money multiplier is 1/reserve ratio = 1/0.2 = 5. Therefore, the banking system can increase the money supply by $400 * 5 = $2,000.

Question 9

Use the following to answer questions: 
-(Scenario: Assets and Liabilities of the Banking System) Refer to Scenario: Assets and Liabilities of the Banking System. If the reserve ratio is 5% and the banking system does NOT want to hold excess reserves, how much more can be added to the money supply?

Accepted Answer

The money multiplier is 1/reserve ratio, which is 1/0.05 = 20. If the banking system does not hold excess reserves, the entire amount of new reserves can be multiplied by the money multiplier to increase the money supply. Therefore, $50,000 in new reserves can increase the money supply by $50,000 * 20 = $1 million.

Question 10

Assume that the banks do not hold any excess reserves and the reserve ratio is 20%. If Sarah deposits $5,000 in cash in her checking account, the money supply can potentially increase by an additional:

Accepted Answer

The potential increase in the money supply due to Sarah's deposit can be calculated using the money multiplier formula, which is 1/reserve ratio. With a reserve ratio of 20% (or 0.2), the money multiplier is 1/0.2 = 5. Therefore, Sarah's $5,000 deposit can potentially increase the money supply by 5 * $5,000 = $25,000. However, since the original $5,000 is part of this total increase, the additional increase in the money supply, beyond her initial deposit, is $20,000.

Question 11

The _____ multiplier is equal to _____.

Accepted Answer

The money multiplier is equal to 1 divided by the required reserve ratio. This means that for every dollar of reserves held by banks, the money supply can increase by a multiple of the initial dollar. For example, if the required reserve ratio is 10%, then the money multiplier is 1/0.1 = 10. This means that for every $1 of reserves held by banks, the money supply can increase by up to $10.

Question 12

Suppose that an economy has $200,000 of demand deposits and $40,000 of excess reserves, with a 10% required reserve ratio. If the monetary authorities raise the required reserve ratio to 20%:

Accepted Answer

Currently, the required reserves are 10% of demand deposits, or $20,000 ($200,000 x 10%). Excess reserves are $40,000 - $20,000 = $20,000. If the required reserve ratio is raised to 20%, then the required reserves will be $40,000 ($200,000 x 20%). This means that the amount of required reserves will increase by $20,000, thus leaving no more excess reserves and decreasing the excess reserves by $20,000.

Question 13

Suppose that a bank gets a new deposit of $100 cash and it has a 20% required reserve ratio. If the bank lends the maximum amount of money allowed, then the money supply (including the original deposit) increases by:

Accepted Answer

With a 20% reserve ratio, the bank must keep $20 of the $100 deposit in reserve but can lend out $80. The $80 lent out can then be deposited in a bank, which can lend out 80% of that, and so on. This process continues, creating a multiplier effect. The formula for the maximum increase in the money supply is 1/reserve ratio, which in this case is 1/0.20 = 5. Therefore, the original $100 deposit can increase the money supply by up to $500 (5 times the original deposit), including the original deposit.

Question 14

Suppose that there are no excess reserves in the banking system and the current amount of demand deposits is $100,000. If the monetary authorities lower the required reserve ratio from 10% to 5%:

Accepted Answer

Lowering the required reserve ratio means banks are required to hold a smaller percentage of deposits in reserve, leaving them with more money to lend out. This increases the money-creating potential of the banking system, as they can now create more loans and therefore more deposits through the process of fractional reserve banking. Therefore, the amount of excess reserves in the banking system may fall, but the money-creating potential will rise.

Question 15

Suppose that a bank receives a $5,000 deposit and the reserve ratio is 25%. The bank is required to keep in reserve:

Accepted Answer

The reserve ratio is the percentage of deposits that a bank is required to keep in reserve. In this case, the reserve ratio is 25%, which means that the bank must keep 25% of the $5,000 deposit in reserve.

To calculate the required reserve amount, we can use the formula:

Required reserve = deposit * reserve ratio

Plugging in the numbers, we get:

Required reserve = $5,000 * 0.25 = $1,250

Therefore, the bank is required to keep $1,250 in reserve. The other answer choices do not accurately reflect the required reserve amount.

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

In a deposits-only monetary system with a 5% required reserve ratio, a bank deposit of $1,000 could increase the total amount of bank deposits by up to:

Suppose that the banking system does NOT hold excess reserves and the reserve ratio is 25%. If Molly deposits $1,000 cash in her checking account, the banking system can increase the money supply by an additional:

Use the following to answer questions: -(Scenario: Assets and Liabilities of the Banking System) Refer to Scenario: Assets and Liabilities of the Banking System. If the reserve ratio is 8% and the banking system does NOT want to hold excess reserves, how much more can be added to the money supply?

The money multiplier and the required reserve ratio are:

Use the following to answer questions: -(Scenario: Assets and Liabilities of the Banking System) Refer to Scenario: Assets and Liabilities of the Banking System. If the reserve ratio is 6% and the banking system does NOT want to hold excess reserves, how much more can be added to the money supply?

Use the following to answer questions: -(Scenario: Assets and Liabilities of the Banking System) Refer to Scenario: Assets and Liabilities of the Banking System. If the reserve ratio is 9% and the banking system does NOT want to hold excess reserves, how much more can be added to the money supply?