Question 1

The multiple by which the commercial banking system can expand the supply of money is equal to the reciprocal of
A) the MPS.
B) its actual reserves.
C) its excess reserves.
D) the reserve ratio.

Accepted Answer

The multiple by which the commercial banking system can expand the supply of money is determined by the reserve ratio. The reserve ratio is the fraction of deposits that commercial banks are required to hold as reserves. The reciprocal of the reserve ratio gives the multiple by which the commercial banking system can expand the money supply. For example, if the reserve ratio is 10%, the multiple by which the commercial banking system can expand the money supply is 1/0.1 = 10.

Question 2

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 would mean that banks have to hold fewer reserves and hence can lend out more money. This increases the size of the monetary multiplier, which determines the amount of money supply that can be generated from a given amount of reserves. Option A is incorrect because banks will have more funds to lend, not less. Option C is incorrect because the actual reserves of banks will decrease. Option D is incorrect because a decrease in the required reserve ratio is unlikely to have an effect on the federal funds interest rate.

Question 3

The last transaction in the federal funds market occurred in 2008 because
A) the Federal Reserve closed down the federal funds market.
B) in response to the ﬁnancial crisis, the Federal Reserve raised the reserve ratio to 100 percent.
C) the federal funds rate has been set too high.
D) since the ﬁnancial crisis, nearly every bank has signiﬁcant excess reserves.

Accepted Answer

Since the financial crisis, nearly every bank has significant excess reserves, meaning they do not need to borrow from the federal funds market. Therefore, the market has become largely inactive and the last transaction occurred in 2008.

Question 4

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% of $100,000, which is $20,000. The bank has $35,000 in actual reserves, so it has excess reserves of $15,000. With a reserve ratio of 20%, the money multiplier is 5 (1/0.20). Therefore, the banking system can expand the money supply by $15,000 * 5 = $75,000.

Question 5

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

When loans are taken as cash, they are not part of the checkable deposit system and cannot be used for further lending or creating additional deposits. Therefore, the money-creating potential of the banking system decreases.

Question 6

The multiple by which the commercial banking system can increase the supply of money on the basis of each dollar of excess reserves is equal to
A) the reciprocal of the required reserve ratio.
B) 1 minus the required reserve ratio.
C) the reciprocal of the income velocity of money.
D) 1/MPS.

Accepted Answer

The multiple by which the commercial banking system can increase the supply of money on the basis of each dollar of excess reserves is known as the money multiplier. The formula for the money multiplier is 1/rr, where rr is the required reserve ratio. This means that for every dollar of excess reserves held by banks, they can create a multiple of that amount in the money supply, based on the reserve ratio set by the central bank.

Question 7

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 formula for calculating the maximum amount of new money that can be created in the banking system is given as m = 1/R, where R is the reserve ratio. This means that for every $1 of excess reserves held in the banking system, a maximum of $m can be created through the process of lending and deposit creation. Therefore, the correct choice is D.

Question 8

The federal funds market is the market in which
A) banks borrow from the Federal Reserve Banks.
B) U.S. securities are bought and sold.
C) banks borrow reserves from one another on an overnight basis.
D) Federal Reserve Banks borrow from one another.

Accepted Answer

The federal funds market is the market where banks borrow reserves from one another on an overnight basis. It is a key tool for banks to maintain reserve requirements set by the Federal Reserve, and to manage their liquidity on a daily basis.

Question 9

Given a 25 percent reserve ratio, assume the commercial banking system is loaned up. Now assume the reserve ratio is reduced to 20 percent. As a result of this reduction,
A) we can expect bank lending and bank proﬁts to decline.
B) each dollar of bank reserves will now support a maximum of $5 of checkable deposits.
C) the banking system must now reduce outstanding loans by 5 percent.
D) the banking system can now increase lending by 5 percent.

Accepted Answer

When the reserve ratio is reduced from 25 percent to 20 percent, each dollar of reserves can now support $5 of checkable deposits, as the money multiplier is the reciprocal of the reserve ratio (1/0.20 = 5). This means that for every dollar held in reserve, banks can lend out $5, increasing the potential for checkable deposits in the banking system.

Question 10

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) 3?.
B) 4.
C) 5.
D) 6.67.

Accepted Answer

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

Question 11

Refer to the accompanying consolidated balance sheet for the commercial banking system. Assume the required reserve ratio is 30 percent. All ﬁgures are in billions. If the commercial banking system actually loans the maximum
Amount it is able to lend,
A) reserves and deposits equal to that amount will be gained.
B) excess reserves will be $2.6 billion.
C) excess reserves will fall to $1.7 billion.
D) excess reserves will be reduced to zero.

Accepted Answer

The maximum amount the commercial banking system can lend is determined by the required reserve ratio, which is 30%. This means that they must keep 30% of their deposits as reserves and can loan out the remaining 70%. The excess reserves can be calculated as the difference between the amount of reserves held by the banks and the required reserves. In this case, the required reserves would be 30% of $8.7 billion, which is equal to $2.61 billion. If the commercial banking system lends out the maximum amount it is able to lend, then the excess reserves will be reduced to zero ($5.2 billion - $2.6 billion = $2.6 billion - $0 = $2.6 billion). Therefore, the best choice is D, excess reserves will be reduced to zero.

Question 12

The basic reason why the commercial banking system can increase its checkable deposits by a multiple of itscess reserves is that
A) reserves lost by any particular bank will be gained by some other bank.
B) the central banks follow policies that prevent reserves from falling below the level required by law.
C) the MPC of borrowers is greater than zero but less than 1.
D) the banking system must keep reserves equal to 100 percent of its checkable-deposit liabilities.

Accepted Answer

The answer of The basic reason why the commercial banking...

Question 13

Refer to the accompanying consolidated balance sheet for the commercial banking system. Assume the required reserve ratio is 30 percent. All ﬁgures are in billions. The maximum amount by which the commercial banking
System can expand the supply of money by lending is
A) $30 billion.
B) $23.1 billion.
C) $27 billion.
D) $15 billion.

Accepted Answer

The answer of  Refer to the accompanying consolidated balance...

Question 14

A bank temporarily short of required reserves may be able to remedy this situation by
A) borrowing funds in the federal funds market.
B) granting new loans.
C) shifting some of its vault cash to its reserve account at the Federal Reserve.
D) buying bonds from the public.

Accepted Answer

A bank can borrow funds in the federal funds market to meet its reserve requirements temporarily.

Question 15

Refer to the accompanying consolidated balance sheet for the commercial banking system. Assume the required reserve ratio is 10 percent. All ﬁgures are in billions. The commercial banking system has excess reserves of
A) $0 billion.
B) $30 billion.
C) $60 billion.
D) $70 billion.

Accepted Answer

The answer of  Refer to the accompanying consolidated balance...

Question 16

Since 2009, how much has been borrowed through the federal funds market?
A) $0
B) $43 billion
C) $1,148 billion
D) $787 million

Accepted Answer

Since 2009, the federal funds market has seen essentially $0 borrowed, as the Federal Reserve has maintained the federal funds rate at or near zero, leading banks to rely on direct borrowing from the Federal Reserve rather than the federal funds market.

Question 17

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) $D = E \times m$
C) $D = E - 1 / m$
D) $D = m / E$

Accepted Answer

The formula for calculating D, 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, is D = E * m. Therefore, the correct choice is (B).

Question 18

Refer to the accompanying consolidated balance sheet for the commercial banking system. Assume the required reserve ratio is 30 percent. All ﬁgures are in billions. The commercial banking system has excess reserves of
A) $9 billion.
B) $7 billion.
C) $6.1 billion.
D) $5 billion.

Accepted Answer

The answer of  Refer to the accompanying consolidated balance...

Question 19

The market for immediately available reserve balances at the Federal Reserve is known as the
A) money market.
B) long-term bond market.
C) short-term bond market.
D) federal funds market.

Accepted Answer

The market for immediately available reserve balances at the Federal Reserve is known as the federal funds market. It is where banks and other depository institutions lend and borrow reserves from each other overnight to meet reserve requirements set by the Federal Reserve.

Question 20

The multiple by which the commercial banking system can expand the supply of money on the basis of excess reserves
A) is larger, the smaller the required reserve ratio.
B) is the reciprocal of the bank's actual reserves.
C) is directly or positively related to the size of the required reserve ratio.
D) will be zero when the required reserve ratio is 100 percent.

Accepted Answer

The multiple by which the commercial banking system can expand the supply of money on the basis of excess reserves is calculated as 1/required reserve ratio. Therefore, the smaller the required reserve ratio, the larger the multiple.

Quiz 15: Money Creation

The multiple by which the commercial banking system can expand the supply of money is equal to the reciprocal of

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

The last transaction in the federal funds market occurred in 2008 because

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 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

The multiple by which the commercial banking system can increase the supply of money on the basis of each dollar of excess reserves is equal to

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,

The federal funds market is the market in which

Given a 25 percent reserve ratio, assume the commercial banking system is loaned up. Now assume the reserve ratio is reduced to 20 percent. As a result of this reduction,

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

Refer to the accompanying consolidated balance sheet for the commercial banking system. Assume the required reserve ratio is 30 percent. All ﬁgures are in billions. If the commercial banking system actually loans the maximum Amount it is able to lend,

Refer to the accompanying consolidated balance sheet for the commercial banking system. Assume the required reserve ratio is 30 percent. All ﬁgures are in billions. The maximum amount by which the commercial banking System can expand the supply of money by lending is

A bank temporarily short of required reserves may be able to remedy this situation by

Refer to the accompanying consolidated balance sheet for the commercial banking system. Assume the required reserve ratio is 10 percent. All ﬁgures are in billions. The commercial banking system has excess reserves of

Since 2009, how much has been borrowed through the federal funds market?

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

Refer to the accompanying consolidated balance sheet for the commercial banking system. Assume the required reserve ratio is 30 percent. All ﬁgures are in billions. The commercial banking system has excess reserves of

The market for immediately available reserve balances at the Federal Reserve is known as the

The multiple by which the commercial banking system can expand the supply of money on the basis of excess reserves