Question 1

According to the equation of exchange, if the economy is at full employment and M is increased while V is held constant:

Accepted Answer

The equation of exchange is MV = PQ, where M is the money supply, V is the velocity of money, P is the price level, and Q is the quantity of goods and services produced (real GDP). If the economy is at full employment, increasing M while holding V constant means Q cannot increase further due to the economy operating at its maximum capacity. Therefore, the increase in M leads to an increase in P, reflecting inflation.

Question 2

Suppose that in the equation of exchange M = $1 trillion, V = 8, P = 1.0 and Q = $8 trillion. If the money supply is increased by $1 trillion, velocity is constant and the economy is at full employment then:

Accepted Answer

Given the equation of exchange MV = PQ, where M is the money supply, V is the velocity of money, P is the price level, and Q is the output. Initially, M = $1 trillion, V = 8, P = 1.0, and Q = $8 trillion. If the money supply increases to $2 trillion (M = $2 trillion) and velocity (V) remains constant at 8, with the economy at full employment (meaning Q cannot increase), the entire effect of the increased money supply will be on the price level (P). The new equation becomes 2 trillion * 8 = P * $8 trillion. Solving for P gives P = 2.0, indicating that the price level will double to 2.0, reflecting inflation without an increase in output.

Question 3

Suppose that in the equation of exchange M = $1 trillion, V = 6, P = 1.0 and Q = $6 trillion. If the money supply is increased by $1 trillion and V is constant, then:

Accepted Answer

The equation of exchange is MV = PQ, where M is the money supply, V is the velocity of money, P is the price level, and Q is the quantity of goods and services produced (real GDP). If the money supply increases from $1 trillion to $2 trillion while V remains constant, the right side of the equation (PQ) must also double to maintain equality. This means that both the price level (P) and the quantity of goods and services produced (Q) could increase, depending on the economic conditions such as whether the economy is at full employment or not. If the economy is at full employment, increases would primarily be in P, leading to inflation. If the economy is not at full employment, increases could be in Q without causing inflation. Therefore, all of the statements A, B, and C are possible outcomes, making D the correct answer.

Question 4

The correct policy to expand the level of economic activity would be to:

Accepted Answer

Increasing the money supply typically lowers interest rates, making borrowing cheaper. This encourages spending and investment, thereby expanding economic activity.

Question 5

Money is created when:

Accepted Answer

Money creation in modern economies primarily occurs through the lending activities of commercial banks. When banks provide loans to their customers, they create new bank deposits in the process, effectively increasing the money supply. This process is distinct from the physical printing of money, which is done by a country's mint on behalf of the treasury and does not in itself increase the money supply in the banking system.

Question 6

A financial depository institution's actual reserves are equal to the:

Accepted Answer

Actual reserves in a financial depository institution consist of the funds held in its reserve account at the central bank plus the cash it holds in its vault. These reserves are used to meet the institution's obligations to its depositors and to comply with regulatory reserve requirements.

Question 7

A financial depository institution's actual reserves are equal to its:

Accepted Answer

Actual reserves in a financial depository institution consist of the reserve account balance held at the central bank plus the vault cash it has on hand. These are the physical and electronic funds available to meet withdrawal demands and reserve requirements.

Question 8

A financial depository institution's reserve account balance plus vault cash equal its:

Accepted Answer

Actual reserves of a financial depository institution consist of the balance in its reserve account at the central bank plus the cash it holds in its vault.

Question 9

A financial depository institution's reserve requirement is a specific percentage of:

Accepted Answer

The reserve requirement is the fraction of deposits that a financial depository institution must hold in reserve and not lend out. This means that a certain percentage of the deposits received by the bank must be kept as actual reserves, either in its vaults or at the central bank, to ensure that the bank can meet its depositor's demands.

Question 10

A financial depository institution's required reserves are:

Accepted Answer

Required reserves are the amount of actual reserves that a financial depository institution must hold to back its deposits, as mandated by the central bank.

Question 11

Excess reserves are equal to:

Accepted Answer

Excess reserves are the amount of reserves banks hold over the minimum required by the central bank. This is calculated as the actual reserves a bank holds minus the required reserves, hence option C is correct.

Question 12

Excess reserves:

Accepted Answer

Excess reserves are indeed the actual reserves minus required reserves, determine the value of new loans that can be made by a depository institution, and are actual reserves over and above the amount a depository institution is required to hold as actual reserves.

Question 13

Assume that your bank has no excess reserves when you deposit a check for $500 in your account. How much in excess reserves will this check create for your bank?

Accepted Answer

The answer of Assume that your bank has no excess...

Question 14

The CC&S Bank has $800 million in deposits, a 20 percent reserve requirement, and $400 million in actual reserves. How much must CC&S keep in required reserves?

Accepted Answer

The required reserves are calculated as 20 percent of the total deposits, which is 20% of $800 million = $160 million.

Question 15

The B&L Bank has $120 million in deposits, a 15 percent reserve requirement, and $24 million in actual reserves. How much does B&L have in excess reserves?

Accepted Answer

The bank's required reserves are 15% of $120 million, which equals $18 million. Since it has $24 million in actual reserves, the excess reserves are $24 million - $18 million = $6 million.

Question 16

The RDW Bank has deposits of $250 million, excess reserves of $50 million, and a reserve requirement of 20 percent. RDW Bank's actual reserves are:

Accepted Answer

RDW Bank's actual reserves include its excess reserves plus the required reserves. The required reserves can be calculated as 20% of the deposits, which is 0.20 * $250 million = $50 million. Therefore, the actual reserves are the excess reserves ($50 million) plus the required reserves ($50 million), totaling $100 million.

Question 17

The OBL bank has $320 million in deposits, $80 million in actual reserves, and a reserve requirement of 20 percent. How much must OBL keep in required reserves?

Accepted Answer

The reserve requirement is 20% of the $320 million in deposits, which equals $64 million.

Question 18

The CKN Bank has actual reserves of $240 million, deposits of $800 million, and a reserve requirement of 10 percent. CKN Bank's excess reserves are:

Accepted Answer

The answer of The CKN Bank has actual reserves of...

Question 19

The P&LK Bank has actual reserves of $80 million, excess reserves of $20 million, and deposits of $400 million. What is P&LK Bank's reserve requirement?

Accepted Answer

The answer of The P&LK Bank has actual reserves of...

Question 20

What is CCIM Bank's reserve requirement if it has actual reserves of $72 million, excess reserves of $24 million, and deposits of $240 million?

Accepted Answer

The reserve requirement is calculated as (Actual Reserves - Excess Reserves) / Deposits. Here, it is ($72 million - $24 million) / $240 million = $48 million / $240 million = 0.20 or 20 percent.

Quiz 8: Money Creation, Monetary Theory, and Monetary Policy