Question 1

If the Fed injects additional reserves into the banking system,why will banks generally want to expand their loans and investments?
A)Banks are legally required to expand loans when the Fed creates excess reserves.
B)Maintaining reserves in excess of demand deposits is against the law.
C)Banks fear the Fed will remove the excess reserves.
D)Loans and investments generally earn more interest income for the banks than excess reserves.

Accepted Answer

Banks generally want to expand their loans and investments because loans and investments earn more interest income for the banks than excess reserves. When the Fed injects additional reserves into the banking system, it lowers the cost of borrowing for banks, making it more profitable for them to make loans and investments with the excess reserves. Therefore, banks will likely choose to expand their loans and investments rather than holding excess reserves. None of the other options are accurate; banks are not legally required to expand loans, maintaining reserves in excess of demand deposits is not against the law, and banks do not fear the Fed will remove excess reserves.

Question 2

Suppose all banks are subject to a uniform reserve requirement of 20 percent and that the First National Bank has no excess reserves.If a new customer deposits $50,000,the bank could extend new loans up to a maximum of
A)$10,000.
B)$40,000.
C)$50,000.
D)$250,000.

Accepted Answer

The reserve requirement of First National Bank is 20%, which means it needs to maintain a reserve of $10,000 (20% of $50,000 deposit). Therefore, it can only lend out $40,000 of the new deposit. This is calculated as:

Total reserves = Required reserves + Excess reserves
$0 = $10,000 + Excess reserves
Excess reserves = -$10,000

Since the bank has no excess reserves, it can only loan out up to the amount of required reserves, which is $10,000. Therefore, the maximum amount of new loans it can extend is $40,000 ($50,000 deposit - $10,000 required reserves).

Question 3

Excess reserves are
A)checking deposits that are included in the M1 money supply but not the M2.
B)savings deposits that are included in the M2 money supply but not the M1.
C)actual reserves held by banks that exceed the legal requirement.
D)the portion of deposits that banks are required by the Fed to hold as reserves against their deposits.

Accepted Answer

Excess reserves are actual reserves that a bank holds above and beyond the required reserves imposed by the Federal Reserve. This means that banks can hold excess reserves to provide a cushion against unexpected withdrawals, which reduces their risk of insolvency.

Question 4

Suppose that in a country people gain more confidence in the banking system and so hold relatively less currency and more deposits,then bank reserves will
A)decrease and the money supply will eventually decrease.
B)decrease and the money supply will eventually increase.
C)increase and the money supply will eventually decrease.
D)increase and the money supply will eventually increase.

Accepted Answer

The answer of Suppose that in a country people gain...

Question 5

Which of the following most clearly limits the ability of the commercial banking industry to expand the money supply?
A)the reserve requirements mandated by the Fed
B)the number of commercial bank charters issued by the Fed
C)the dollar value of the bonds issued by the U.S.Treasury
D)the federal funds interest rate that commercial banks pay (and receive)for short-term loanable funds

Accepted Answer

The reserve requirements mandated by the Fed limit the ability of commercial banks to lend out all of their deposited funds and thus expand the money supply. Commercial banks must keep a certain percentage of deposits on reserve, which limits the amount of money they can lend out. The other options have less of a direct impact on the commercial banking industry's ability to expand the money supply.

Question 6

Assuming a 20 percent legal reserve requirement,a new deposit of $10,000 in a commercial bank will place that bank in a position to lend out an additional
A)$2,000.
B)$8,000.
C)$10,000.
D)$50,000.

Accepted Answer

A 20 percent legal reserve requirement means that the bank must keep 20 percent of the deposited funds as a reserve and can lend out the remaining 80 percent. Therefore, the bank can lend out 80 percent of $10,000, which is $8,000. So, the correct answer is B.

Question 7

Suppose the Fed purchases $40,000 of U.S.Treasury bonds from Donald Trump,who deposits the money with First National Bank.If the required reserve ratio is 20 percent,this transaction will increase the excess reserves of First National Bank by
A)$8,000.
B)$32,000.
C)$40,000.
D)$200,000.

Accepted Answer

The purchase of $40,000 in Treasury bonds by the Fed increases the reserves of the banking system by $40,000. If the required reserve ratio is 20%, then First National Bank is required to hold 20% of the deposit as reserves and can lend out the remaining 80%. Therefore, the increase in excess reserves will be 80% of $40,000 which is $32,000.

Question 8

A bank that has $10,000 in excess reserves can extend new loans up to a maximum of
A)$1,000.
B)$9,000.
C)$10,000.
D)$100,000.

Accepted Answer

Excess reserves can be used to extend new loans. Since the bank has $10,000 in excess reserves, it can extend new loans up to a maximum of $10,000 without violating the reserve requirement.

Question 9

If First Guarantee Bank confronts a 10 percent reserve requirement and has excess reserves of $2,000,000,what is the maximum amount of additional loans that the bank can extend?
A)$200,000
B)$1,800,000
C)$2,000,000
D)$20,000,000

Accepted Answer

The bank can loan out its excess reserves entirely, which is $2,000,000, as this is the amount available beyond the required reserves.

Question 10

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
A)reserves and $1,000 in checkable deposits.
B)liabilities and $2,000 in checkable deposits.
C)checkable deposits and $0 in assets.
D)assets and $0 in liabilities.
E)reserves and $0 in liabilities.

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 11

If the public decides to hold less currency and more deposits in banks,bank reserves
A)decrease and the money supply eventually decreases.
B)decrease but the money supply does not change.
C)increase and the money supply eventually increases.
D)increase but the money supply does not change.

Accepted Answer

The answer of If the public decides to hold less...

Question 12

In order to increase the money supply,the banking system must have
A)required reserves.
B)the authority to buy corporate stocks.
C)the authority to print U.S.currency.
D)excess reserves.
E)the authority to engage in interstate banking.

Accepted Answer

Excess reserves refer to the amount of funds that banks hold in addition to the required reserves. By having excess reserves, banks can increase their lending and create new deposits, which ultimately increases the money supply. Therefore, in order to increase the money supply, the banking system must have excess reserves. The other options such as required reserves, buying corporate stocks, printing U.S. currency, and engaging in interstate banking are not directly related to increasing the money supply.

Question 13

Excess reserves of banks equal
A)actual reserves minus required reserves.
B)actual reserves minus demand deposits.
C)assets minus the liabilities of the banks.
D)required reserves minus actual reserves.

Accepted Answer

Excess reserves are the actual reserves held by a bank minus its required reserves.

Question 14

The immediate effect of a member bank's sale of U.S.government securities to the Fed is
A)an increase in that bank's required reserves.
B)a decrease in that bank's required reserves.
C)an increase in that bank's excess reserves.
D)a decrease in that bank's excess reserves.

Accepted Answer

The answer of The immediate effect of a member bank's...

Question 15

Best National Bank is subject to a 10 percent required-reserve ratio.If this bank received a new checkable deposit of $1,000,it could make new loans of
A)$100.
B)$900.
C)$1,000.
D)$10,000.

Accepted Answer

The required reserve ratio is 10%, which means the bank must keep 10% of the new deposit ($1,000) as reserves ($100) and can loan out the rest. Therefore, the bank can make new loans of $900 ($1,000 - $100).

Question 16

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
A)$100,000.
B)$80,000.
C)$300,000.
D)$20,000.
E)$200,000.

Accepted Answer

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

Question 17

When the actual reserves held by a bank exceed the legal requirement,the bank
A)will have to borrow from the Fed.
B)has excess reserves,which can be used to extend additional loans.
C)cannot extend additional loans.
D)will have to reduce its outstanding loans.

Accepted Answer

When a bank has excess reserves, it means that they have reserves above and beyond the legally required amount. These excess reserves can be used to extend additional loans, which can stimulate economic growth. Therefore, Option B is the correct answer. Option A is incorrect because if the bank has excess reserves, there is no need for it to borrow from the Fed. Option C is incorrect because the bank can use its excess reserves to extend additional loans. Option D is incorrect because the bank does not need to reduce its outstanding loans if it has excess reserves.

Question 18

The money multiplier will be
A)larger if banks hold on to excess reserves but smaller if private citizens hold on to cash.
B)smaller if banks hold on to excess reserves but larger if private citizens hold on to cash.
C)smaller if either banks hold on to excess reserves or private citizens hold on to cash.
D)larger if either banks hold on to excess reserves or private citizens hold on to cash.
E)constant whether or not banks and citizens try to alter their holdings of excess reserves and cash.

Accepted Answer

The answer of The money multiplier will be
A)larger if banks...

Question 19

If the public decides to hold more currency and fewer deposits in banks,bank reserves
A)decrease and the money supply eventually decreases.
B)decrease but the money supply does not change.
C)increase and the money supply eventually increases.
D)increase but the money supply does not change.

Accepted Answer

If the public holds more currency, banks will have fewer deposits and therefore less reserves. This will lead to a decrease in the money supply as banks will not have enough reserves to create new loans and deposits.

Question 20

An individual bank can lend out at most its
A)actual reserves.
B)fractional reserves.
C)legal reserves.
D)checkable deposits.
E)excess reserves.

Accepted Answer

An individual bank can lend out its excess reserves, which are the reserves above the required minimum that the bank must hold.

Quiz 13: Amoney and the Banking System

If the Fed injects additional reserves into the banking system,why will banks generally want to expand their loans and investments?

Suppose all banks are subject to a uniform reserve requirement of 20 percent and that the First National Bank has no excess reserves.If a new customer deposits $50,000,the bank could extend new loans up to a maximum of

Excess reserves are

Suppose that in a country people gain more confidence in the banking system and so hold relatively less currency and more deposits,then bank reserves will

Which of the following most clearly limits the ability of the commercial banking industry to expand the money supply?

Assuming a 20 percent legal reserve requirement,a new deposit of $10,000 in a commercial bank will place that bank in a position to lend out an additional

Suppose the Fed purchases $40,000 of U.S.Treasury bonds from Donald Trump,who deposits the money with First National Bank.If the required reserve ratio is 20 percent,this transaction will increase the excess reserves of First National Bank by

A bank that has $10,000 in excess reserves can extend new loans up to a maximum of

If First Guarantee Bank confronts a 10 percent reserve requirement and has excess reserves of $2,000,000,what is the maximum amount of additional loans that the bank can extend?

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

If the public decides to hold less currency and more deposits in banks,bank reserves

In order to increase the money supply,the banking system must have

Excess reserves of banks equal

The immediate effect of a member bank's sale of U.S.government securities to the Fed is

Best National Bank is subject to a 10 percent required-reserve ratio.If this bank received a new checkable deposit of $1,000,it could make new loans of

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

When the actual reserves held by a bank exceed the legal requirement,the bank

The money multiplier will be

If the public decides to hold more currency and fewer deposits in banks,bank reserves

An individual bank can lend out at most its