Question 1

If Matt Taylor gets his $800 loan from the Paris First National Bank in cash rather than in the form of a new checkable deposit, the:

Accepted Answer

When Matt Taylor gets his $800 loan in cash, the bank's reserves don't change because the bank is simply exchanging one asset (cash) for another asset (loan). Therefore, the Paris First National Bank will not get $800 in new reserves.

Question 2

Imagine that Odyssey National is a brand new bank, and that its required reserve ratio is 10 percent. If it accepts a $1,000 cash deposit, then, excluding the $1,000 initial deposit, the banking system can increase the money supply by:

Accepted Answer

The banking system can increase the money supply by $9,000 because with a 10% reserve ratio, the bank can lend out $900 of the $1,000 deposit. This $900 can be deposited in another bank, which can then lend out 90% of it, and so on. This process continues, creating a money multiplier effect. The money multiplier is 1/reserve ratio, which is 10 in this case, so the total increase in the money supply is $1,000 * (10 - 1) = $9,000.

Question 3

Assume we have a simplified banking system in balance-sheet equilibrium. Also assume that all banks are subject to a uniform 10 percent reserve requirement and checkable deposits are the only form of money. A commercial bank receiving a new checkable deposit of $100 would be able to extend new loans in the amount of:

Accepted Answer

The bank is required to hold 10% of the new deposit ($10) in reserves and can lend out the rest ($90). This is because of the 10% reserve requirement. The bank cannot lend out the entire new deposit of $100 because it must hold the required amount of reserves. Therefore, the correct answer is B.

Question 4

Jeff Kaufman decides to bank with Paris First National Bank (PFN). He opens a checking account by depositing $1,000. According to the PFN balance sheet, after this initial $1,000 checkable deposit, there are $1,000 in:

Accepted Answer

When Jeff Kaufman deposited $1,000 in his checking account at PFN, the bank's reserves increased by $1,000 because they now hold more money in their vault. At the same time, Jeff Kaufman's account now has a balance of $1,000, which counts as checkable deposits on the bank's balance sheet. Therefore, the correct option is A) reserves and $1,000 in checkable deposits.

Question 5

If a bank has actual reserves of $40,000 and a 20 percent reserve requirement, then the maximum amount of checkable deposits the bank can have if excess reserves are zero is:

Accepted Answer

The answer of If a bank has actual reserves of...

Question 6

A bank currently has checkable deposits of $100,000, total reserves of $30,000, and loans of $70,000. If the required reserve ratio is lowered from 20 percent to 15 percent, this bank can increase its loans by:

Accepted Answer

We can use the formula for maximum potential change in loans to find out how much the bank can increase its loans by:

ΔLoans = ΔDeposits × (1/Required Reserve Ratio)

Initial deposits = $100,000
Initial required reserve ratio = 20% = 0.20
Initial reserves = $30,000

So, initially: 
Maximum potential change in loans = ΔDeposits × (1/Required Reserve Ratio)
= ($100,000 - $30,000) × (1/0.20)
= $70,000 × 5
= $350,000

If the required reserve ratio is lowered to 15%, then the new reserve requirement becomes:

New reserve requirement = 15% × $100,000
= $15,000

The bank already has reserves of $30,000, so it has excess reserves of:

Excess reserves = $30,000 - $15,000
= $15,000

The bank can use these excess reserves to create more loans. The maximum potential change in loans is:

ΔLoans = ΔDeposits × (1/New Required Reserve Ratio)
= ($100,000 - $30,000 + $15,000) × (1/0.15)
= $85,000 × (1/0.15)
= $566,667

So, the bank can increase its loans by:
$566,667 - $70,000 = $496,667

However, the question asks us how much the bank can increase its loans by, relative to the initial level of loans. The initial level of loans is $70,000, so the increase in loans is:

$496,667 - $70,000 = $426,667

This is not one of the options given, but the closest one is B) $15,000. This is the increase in loans that can be directly attributed to the reduction in the reserve requirement, without taking into account any other factors that may affect the bank's lending decisions.

Question 7

A bank creates money when it:

Accepted Answer

When a bank makes a loan from its excess reserves, it creates new money. This is because the borrower can then deposit the funds into another account, increasing the overall money supply. Option A is incorrect because it merely transfers existing cash into a deposit account, not creating new money. Option B is also incorrect because paying off a loan reduces the money supply by restoring excess reserves to the bank. Options D and E have to do with changes in the required reserve ratio, which can affect the amount of excess reserves banks hold, but do not directly create new money.

Question 8

Imagine that Odyssey National is a brand new bank, and that its required reserve ratio is 10 percent. If it accepts a $1,000 deposit, then its loan balance can increase by a maximum of:

Accepted Answer

The required reserve ratio is 10%, meaning the bank must keep $100 (10% of $1,000) in reserves. Therefore, it can loan out the remaining $900.

Question 9

Imagine that Odyssey National is a brand new bank, and that its required reserve ratio is 10 percent. If it accepts a $1,000 deposit, then Odyssey National can increase the money supply by:

Accepted Answer

The required reserve ratio is 10%, so Odyssey National must hold $100 in reserve. This means that it can lend out $900. The money supply increases by the amount of new loans made, so the correct answer is A.

Question 10

If a bank that is subject to a 10 percent required reserve ratio has $20,000 in excess reserves, it can make new loans of:

Accepted Answer

Excess reserves are the funds a bank has beyond the required reserve ratio. If a bank has $20,000 in excess reserves, it can loan out the entire $20,000.

Question 11

Suppose the required reserve ratio is 3 percent, and currency and reserves total $10 million. The maximum money supply that can be supported is:

Accepted Answer

The money multiplier is 1/0.03 = 33.33. Therefore, the maximum money supply is 33.33 times the reserves, which is $333.3 million.

Question 12

When new checkable deposits are created through loans,

Accepted Answer

When new checkable deposits are created through loans, the money supply expands. This is because the loans create new deposits, which are counted as part of the money supply. The banks are required to hold only a fraction of the new deposits as reserves, allowing them to lend out the rest and expand the money supply.

Question 13

If a bank receives a new checkable deposit of $10,000, and the required reserve ratio is 20 percent, then the bank can lend out:

Accepted Answer

If the required reserve ratio is 20%, the bank is required to hold onto 20% of the new deposit. In this case, that would be $2,000. Therefore, the maximum amount the bank can lend out is $8,000.

Question 14

Assume a simplified banking system in which all banks are subject to a uniform reserve requirement of 20 percent and checkable deposits are the only from of money. A bank that received a new checkable deposit of $10,000 would be able to extend new loans up to a maximum of:

Accepted Answer

With a reserve requirement of 20%, the bank must keep 20% of the deposit ($2,000) in reserve and can loan out the remaining 80%, which is $8,000.

Question 15

Best National Bank is subject to a 20 percent required reserve ratio. If this bank received a new checkable deposit of $1,000, it could make new loans of:

Accepted Answer

The required reserve ratio is 20%, which means that out of the $1,000 deposit, the bank must keep a required reserve of $200 (20% of $1,000). The bank can then lend out the remaining $800 ($1,000 - $200) as new loans. Therefore, the best choice is B.

Question 16

Suppose a bank has checkable deposits of $100,000 and the required reserve ratio is 20 percent. If the bank currently has $100,000 in reserves, it could expand the money supply by as much as:

Accepted Answer

The bank is required to keep 20% of $100,000, which is $20,000, as reserves. Since it has $100,000 in reserves, it has $80,000 in excess reserves that can be loaned out, thus expanding the money supply by $80,000.

Question 17

If your bank faces a 20 percent required reserve ratio and receives a cash deposit of $4,000 into a checkable deposit account, the maximum total amount of money possible after the banking system makes all loans is:

Accepted Answer

The answer of If your bank faces a 20 percent...

Question 18

If banks are fully loaned up, have no excess reserves, and the required reserve ratio is raised, the amount that banks can lend is:

Accepted Answer

If banks are fully loaned up and have no excess reserves, then increasing the required reserve ratio will reduce the amount that banks can lend. This, in turn, will lead to a contraction in the money supply as there will be less money circulating in the economy.

Question 19

If a single banks faces a required reserve ratio of 20 percent, has total reserves of $500,000, and checkable deposit liabilities of $400,000, what is the maximum amount of money this bank could create (add to the money supply)?

Accepted Answer

The answer of If a single banks faces a required...

Question 20

Best National Bank operates with a 20 percent required reserve ratio. One day a depositor withdraws $500 from his or her checking account at this bank. As a result, the bank's excess reserves:

Accepted Answer

With a 20 percent required reserve ratio, the bank must keep $100 of the $500 as required reserves (20% of $500). The remaining $400 would have been part of the bank's excess reserves. When the depositor withdraws $500, the bank loses that amount in reserves entirely, impacting its excess reserves directly. Therefore, the bank's excess reserves fall by the full amount withdrawn, $500, not just the portion beyond the required reserves.

Quiz 19: Money Creation