Question 1

The greater the required reserve ratio, the
A)higher is the spending multiplier.
B)lower is the spending multiplier.
C)lower is the monetary multiplier.
D)higher is the monetary multiplier.

Accepted Answer

The required reserve ratio directly affects the monetary multiplier, which is the amount of money banks can effectively create with each dollar of reserves. A higher required reserve ratio means banks must hold more reserves and can lend out less of each deposit, leading to a lower monetary multiplier.

Question 2

If D equals the maximum amount of new demand-deposit money that can be created by the banking system on the basis of any given amount of excess reserves; E equals the amount of excess reserves; and m is the monetary multiplier, then
A)m = E/D.
B)D = E ×m.
C)D = E − 1/m.
D)D = m/E.

Accepted Answer

The answer of If D equals the maximum amount of...

Question 3

If actual reserves in the banking system are $8,000, checkable deposits are $70,000, and the legal reserve ratio is 10 percent, then excess reserves are
A)zero.
B)$1,000.
C)$2,000.
D)$500.

Accepted Answer

The required reserves are 10% of checkable deposits which are calculated by multiplying checkable deposits by the legal reserve ratio:
Required reserves = 0.10 x $70,000 = $7,000

Actual reserves are given as $8,000, so:
Excess reserves = Actual reserves - Required reserves
Excess reserves = $8,000 - $7,000
Excess reserves = $1,000

Therefore, the correct answer is B.

Question 4

Balance sheets always balance because reserves must always equal liabilities plus net worth.

Accepted Answer

Balance sheets always balance because the accounting equation ensures that assets equal liabilities plus equity (or net worth), not because reserves must equal liabilities plus net worth.

Question 5

(Last Word) The greater the leverage in the financial system, all else equal,
A)the smaller the monetary multiplier.
B)the smaller the profit and loss margins of financial firms.
C)the greater the stability of the financial system.
D)the greater the instability of the financial system.

Accepted Answer

Higher leverage in the financial system increases risk, making the system more unstable as firms are more vulnerable to losses and financial shocks.

Question 6

Actual reserves equal required reserves plus excess reserves.

Accepted Answer

This is the definition of actual reserves. Actual reserves are the total amount of funds that a bank has on hand, and they are made up of required reserves, which are the minimum amount of funds that a bank must keep on hand by law, and excess reserves, which are any additional funds that a bank chooses to hold beyond the required amount.

Question 7

Money is destroyed when
A)loans are made.
B)checks written on one bank are deposited in another bank.
C)loans are repaid.
D)the net worth of the banking system declines.

Accepted Answer

When loans are repaid, the money that was created when the loan was made is destroyed. It is important to note that money is not destroyed when loans are made or when checks are deposited in another bank (although the money's location may change). The net worth of the banking system declining may lead to the reduction of the money supply through a decrease in lending, but it does not directly result in the destruction of money.

Question 8

When a bank loan is repaid, the supply of money
A)is constant, but its composition will have changed.
B)is decreased.
C)is increased.
D)may either increase or decrease.

Accepted Answer

When a bank loan is repaid, the money that was created through the loan is extinguished, resulting in a decrease in the overall supply of money in the economy.

Question 9

If the reserve ratio is 15 percent and commercial bankers decide to hold additional excess reserves equal to 5 percent of any newly acquired checkable deposits, then the relevant monetary multiplier for the banking system will be
A)3½.
B)4.
C)5.
D)6.67.

Accepted Answer

The answer of If the reserve ratio is 15 percent...

Question 10

Other things equal, if the required reserve ratio was lowered,
A)banks would have to reduce their lending.
B)the size of the monetary multiplier would increase.
C)the actual reserves of banks would increase.
D)the federal funds interest rate would rise.

Accepted Answer

Lowering the required reserve ratio increases the excess reserves held by banks, and as a result, the size of the monetary multiplier increases. This means that each dollar of reserves can support more lending and create more money in the economy through the lending process. Therefore, the best choice is B.

Question 11

Suppose a commercial banking system has $100,000 of outstanding checkable deposits and actual reserves of $35,000.If the reserve ratio is 20 percent, the banking system can expand the supply of money by the maximum amount of
A)$122,000.
B)$175,000.
C)$300,000.
D)$75,000.

Accepted Answer

The reserve requirement is 20%, so required reserves are $20,000 (20% of $100,000). With actual reserves of $35,000, excess reserves are $15,000. The money multiplier is 1/0.2 = 5. Therefore, the maximum money supply expansion is $15,000 * 5 = $75,000.

Question 12

If the monetary authorities want to reduce the monetary multiplier, they should
A)lower the required reserve ratio.
B)raise the required reserve ratio.
C)increase bank reserves.
D)lower interest rates.

Accepted Answer

Raising the required reserve ratio would reduce the amount of money banks can create through lending, effectively reducing the monetary multiplier. The other options may have an effect on the money supply, but they would not directly impact the multiplier.

Question 13

If m equals the maximum number of new dollars that can be created for a single dollar of excess reserves and R equals the required reserve ratio, then for the banking system,
A)m = R − 1.
B)R = m/1.
C)R = m − 1.
D)m = 1/R.

Accepted Answer

The maximum money multiplier (m) is the reciprocal of the required reserve ratio (R), so m = 1/R. This formula shows how much the money supply can increase based on the reserve ratio.

Question 14

If the reserve ratio is 100 percent, the value of the monetary multiplier is
A)0.
B)1.
C) 10
D) 100

Accepted Answer

The monetary multiplier is calculated as 1 divided by the reserve ratio. If the reserve ratio is 100 percent, the monetary multiplier is 1/1 = 1.

Question 15

(Last Word) Leverage in the financial system
A)magnifies profits but reduces losses.
B)magnifies both profits and losses.
C)reduces profits but magnifies losses.
D)reduces both profits and losses.

Accepted Answer

Leverage in the financial system increases the potential for both higher profits and higher losses, as it involves using borrowed funds to amplify investment outcomes.

Question 16

If actual reserves in the banking system are $40,000, excess reserves are $10,000, and checkable deposits are $240,000, then the legal reserve requirement is
A)10 percent.
B)12.5 percent.
C)20 percent.
D)5 percent.

Accepted Answer

The legal reserve requirement is the percentage of checkable deposits that banks are required to hold as reserves. To calculate the reserve requirement, we need to divide actual reserves by checkable deposits:

reserve requirement = actual reserves / checkable deposits
reserve requirement = $40,000 / $240,000
reserve requirement = 0.1667 or 16.67%

However, we need to round up to the nearest 0.5% because legal reserve requirements are set in multiples of 0.5%. Therefore, the legal reserve requirement is 12.5%. Choice B is the correct answer.

Question 17

Commercial bank reserves are an asset to commercial banks but a liability to the Federal Reserve Bank holding them.

Accepted Answer

This is because commercial bank reserves represent deposits held by commercial banks at the Federal Reserve Bank, and thus they are considered a liability to the Federal Reserve Bank. However, commercial banks can use these reserves to meet their own cash demands or to make loans and investments, making them an asset to the commercial banks.

Question 18

Excess reserves are the amount by which required reserves exceed actual reserves.

Accepted Answer

Excess reserves are the amount by which actual reserves exceed required reserves.

Question 19

If a portion of the loans extended by commercial banks is taken as cash rather than as checkable deposits, the maximum money-creating potential of the commercial banking system will
A)be equal to twice the reciprocal of the reserve ratio.
B)be unaffected.
C)increase.
D)decrease.

Accepted Answer

Cash held by the public is not part of the checkable deposit created by the banking system, therefore if a portion of loans extended by commercial banks is taken as cash rather than checkable deposits, it decreases the amount of deposits and hence reduces the maximum money-creating potential of the commercial banking system.

Question 20

(Last Word) The term "leverage" refers to
A)using borrowed money in an attempt to increase profits.
B)the Fed's ability to control money creation through the reserve ratio.
C)investing in stocks from multiple companies in an effort to spread risk.
D)Fed sales and purchases of bonds to stabilize the money supply.

Accepted Answer

Leverage refers to the use of borrowed funds to increase the potential return on investment.

Quiz 35: Money Creation

The greater the required reserve ratio, the

If D equals the maximum amount of new demand-deposit money that can be created by the banking system on the basis of any given amount of excess reserves; E equals the amount of excess reserves; and m is the monetary multiplier, then

If actual reserves in the banking system are $8,000, checkable deposits are $70,000, and the legal reserve ratio is 10 percent, then excess reserves are

Balance sheets always balance because reserves must always equal liabilities plus net worth.

(Last Word) The greater the leverage in the financial system, all else equal,

Actual reserves equal required reserves plus excess reserves.

Money is destroyed when

When a bank loan is repaid, the supply of money

If the reserve ratio is 15 percent and commercial bankers decide to hold additional excess reserves equal to 5 percent of any newly acquired checkable deposits, then the relevant monetary multiplier for the banking system will be

Other things equal, if the required reserve ratio was lowered,

Suppose a commercial banking system has $100,000 of outstanding checkable deposits and actual reserves of $35,000.If the reserve ratio is 20 percent, the banking system can expand the supply of money by the maximum amount of

If the monetary authorities want to reduce the monetary multiplier, they should

If m equals the maximum number of new dollars that can be created for a single dollar of excess reserves and R equals the required reserve ratio, then for the banking system,

If the reserve ratio is 100 percent, the value of the monetary multiplier is

(Last Word) Leverage in the financial system

If actual reserves in the banking system are $40,000, excess reserves are $10,000, and checkable deposits are $240,000, then the legal reserve requirement is

Commercial bank reserves are an asset to commercial banks but a liability to the Federal Reserve Bank holding them.

Excess reserves are the amount by which required reserves exceed actual reserves.

If a portion of the loans extended by commercial banks is taken as cash rather than as checkable deposits, the maximum money-creating potential of the commercial banking system will

(Last Word) The term "leverage" refers to