Question 1

A check for $10,000 drawn on Bank A and deposited at Bank B will increase the excess reserves in Bank B by $10,000.

Accepted Answer

The answer of A check for $10,000 drawn on Bank...

Question 2

One bank can borrow reserves from another bank, and the interest on the loan is called the federal funds rate.

Accepted Answer

This is a correct statement. Banks can lend and borrow reserves from each other, and the interest rate at which they do so is called the federal funds rate.

Question 3

If banks borrow from the Fed, the banking system's reserves will increase, but if banks borrow from one another, the banking system's reserves will not change.

Accepted Answer

When banks borrow from the Federal Reserve, new reserves are created, increasing the total reserves in the banking system. However, when banks borrow from one another, they are merely transferring existing reserves, so the total reserves in the banking system remain unchanged.

Question 4

The federal funds rate is the interest rate that the Fed charges banks for its loans to them.

Accepted Answer

The federal funds rate is the interest rate at which depository institutions trade federal funds (balances held at Federal Reserve Banks) with each other overnight. It is not the rate the Fed charges banks for loans, which is the discount rate.

Question 5

When Bank A borrows reserves in the federal funds market, it causes the total reserves in the banking system to increase.

Accepted Answer

When Bank A borrows reserves in the federal funds market, it is simply transferring reserves from another bank (Bank B) to itself. This does not increase the total reserves in the banking system.

Question 6

A bank has reserves of $30,000 and deposits of $120,000.If the reserve ratio is 10 percent, then this bank can lend out a maximum of $12,000 in new loans.

Accepted Answer

The bank must maintain reserves of 10% of its deposits, which amounts to $12,000 ($120,000 * 10%). Since it already has $30,000 in reserves, it has $18,000 more than required ($30,000 - $12,000) and can lend out this excess amount, not just $12,000.

Question 7

If a bank has excess reserves of $100,000, then it can lend out only up to $100,000; but if the banking system has excess reserves of $100,000, then the system can make additional loans totaling more than $100,000.

Accepted Answer

The banking system can create more loans through the money multiplier effect, where the initial excess reserves are re-deposited and re-loaned multiple times, increasing the total amount of loans beyond the initial reserves.

Question 8

When a bank buys government securities from the Fed, then the bank's ability to "create money" will be reduced.

Accepted Answer

When a bank buys government securities from the Fed, it transfers its reserves to the Fed, and hence its ability to lend and create money is reduced.

Question 9

If the banking system has $20 billion in excess reserves and the reserve ratio is 10 percent, the system can increase its loans by a maximum of $22 billion.

Accepted Answer

With a reserve ratio of 10%, the maximum increase in loans is determined by the money multiplier, which is 1/reserve ratio = 1/0.10 = 10. Therefore, the banking system can increase its loans by a maximum of $20 billion in excess reserves * 10 = $200 billion.

Question 10

The maximum deposit creation that can be made in the banking system is equal to the excess reserves divided by the required reserve ratio.

Accepted Answer

This is known as the money multiplier formula, which shows that banks can create money by lending out a portion of their excess reserves. The higher the required reserve ratio, the lower the potential deposit creation.

Question 11

When a commercial bank buys government (Treasury) bonds from the general public, money is created.

Accepted Answer

When a commercial bank buys government bonds from the general public, it pays for these bonds by increasing the deposit balances of the sellers in their accounts, effectively creating new money in the economy. This process increases the money supply because the bank is creating deposits (which are part of the money supply) out of thin air.

Question 12

A bank can grant loans up to the amount of its actual reserves.Topic: Money-Creating Transactions of a Commercial Bank

Accepted Answer

A bank can grant loans up to the amount of its excess reserves, not its actual reserves. Actual reserves include both required and excess reserves, but only excess reserves are available for lending.

Question 13

During a recession, when banks tend to increase their excess reserves, the money supply M1 decreases.

Accepted Answer

When banks increase their excess reserves during a recession, it means they are holding on to more money and lending out less. This reduces the amount of money circulating in the economy and leads to a decrease in the money supply M1.

Question 14

When bank loans are repaid and the banks hold on to the funds as additional reserves, then the banking system's ability to "create" money decreases.

Accepted Answer

When banks hold on to funds as additional reserves, it decreases their ability to lend and create new money through the fractional reserve banking system.

Question 15

While the withdrawal of cash from banks does not affect money supply immediately, it will affect the banking system's lending capacity, which will eventually lead to a contraction in money supply.

Accepted Answer

When people withdraw cash from banks, the banks' reserves decrease. This, in turn, reduces the excess reserves available for lending. As a result, the banks reduce their lending activities, which lead to a contraction in money supply over time. Therefore, even though the withdrawal of cash does not affect money supply immediately, it indirectly affects it in the long run.

Question 16

If a commercial banking system has $200,000 in checkable deposits, actual reserves of $70,000, and a reserve ratio of 20 percent, then the banking system can expand the supply of money by a maximum of $180,000.Topic: The Monetary Multiplier

Accepted Answer

The banking system can expand the money supply by a maximum of $150,000, not $180,000. With a reserve ratio of 20%, required reserves are $40,000 ($200,000 * 0.20). Excess reserves are $30,000 ($70,000 - $40,000). The money multiplier is 5 (1/0.20), so the maximum expansion is $30,000 * 5 = $150,000.

Question 17

The monetary multiplier can also be called the spending multiplier.

Accepted Answer

The monetary multiplier refers to the process of banks lending and creating more money, while the spending multiplier relates to the increase in final income arising from any new injection of spending.

Quiz 35: Money Creation