Question 1

A small state bank currently has reserves equal to $300,000.If the state reserve requirement is 20%,but the bank currently maintains a 30% reserve,how much are the excess reserves the bank currently has?
A) $200,000
B) $100,000
C) $300,000
D) $500,000
E) None of the above.

Accepted Answer

Reserve requirement at 20% for a deposit of $300,000 would be:
$300,000 x 0.20 = $60,000 required reserves

The bank currently maintains a 30% reserve (more than the required 20%), which means:
$300,000 x 0.30 = $90,000 actual reserves

To find excess reserves, we subtract required reserves from actual reserves:
$90,000 - $60,000 = $30,000 excess reserves

Therefore, the bank currently has $30,000 excess reserves above the required 20% reserve.

Question 2

A small state bank currently has reserves equal to $300,000.If the state reserve requirement is 20%,but the bank currently maintains a 30% reserve,what amount of reserves would the bank need if it met the reserve requirements exactly?
A) $200,000
B) $100,000
C) $300,000
D) $1,000,000
E) None of the above.

Accepted Answer

The state reserve requirement is 20% of the bank's deposits. Since we do not know the bank's deposits, we cannot calculate the exact amount of reserves required to meet the reserve requirement. However, we do know that the bank currently maintains a 30% reserve, which is higher than the required 20% reserve.

To find out the amount of reserves needed to meet the reserve requirement exactly, we can use the following formula:

Reserves needed = Deposits x Reserve requirement percentage

Let R be the required reserves and D be the deposits.

We know that the current reserves, R, is equal to 30% of the deposits, so we can write:

R = 0.3D

We also know that the required reserves is 20% of the deposits, so we can write:

0.2D = R

Substituting the first equation into the second equation, we get:

0.2D = 0.3D
D = 0.2/0.3 x R
D = 0.67R

So, the deposits needed to meet the reserve requirement exactly is 0.67 times the required reserves.

Substituting the current reserves into the first equation, we get:

R = 0.3D
R = 0.3 x 300,000
R = 90,000

So, the current reserves of $300,000 is equivalent to a deposit of $900,000 ($300,000/0.3).

Therefore, the reserves needed to meet the reserve requirement exactly is:

R = 0.2 x $900,000
R = $180,000

So, the bank needs reserves of $180,000 to meet the reserve requirements exactly.

Subtracting the current reserves from the required reserves, we get:

$180,000 - $300,000 = -$120,000

This means that the bank has excess reserves of $120,000, which is 10% of the required reserves.

Therefore, the best choice is A) $200,000.

Question 3

The primary tools of the Federal Reserve monetary policy include all of the following except
A) changing the discount rates.
B) open market operations.
C) changes in reserve requirements.
D) changes in the Federal Funds rate.
E) All of the above are monetary policy tools used by the Fed.

Accepted Answer

The Federal Reserve does not directly change the Federal Funds rate; instead, it influences this rate through open market operations, changes in the discount rate, and reserve requirements. The Federal Funds rate is determined by the market, based on the supply and demand for reserves.

Question 4

All of the following are reasons to regulate depository institutions except
A) to promote safety and soundness.
B) to affect the structure of banking.
C) to make sure banks' earnings are competitive with other financial institutions.
D) to protect the interest of consumers.
E) None of the above.

Accepted Answer

Regulating depository institutions is not primarily aimed at ensuring competitive earnings for banks compared to other financial institutions. Rather, it is focused on promoting safety and soundness, protecting consumers, and influencing the structure of banking to support broader economic objectives.

Question 5

While the Treasury collects most of its receipts through commercial banks,its expenditures (checks)are drawn upon
A) the Federal Reserve Board of Governors.
B) national banks.
C) Federal Reserve banks.
D) federal financing banks.
E) None of the above.

Accepted Answer

The Treasury draws its expenditures (checks) upon Federal Reserve banks, which hold the Treasury's account and process its payments on an electronic basis.

Question 6

All else equal,the money supply should decrease when
A) banks withdraw currency from the Fed.
B) the Fed makes loans at the discount window.
C) the Fed sells securities on the open market.
D) the Fed buys securities on the open market.
E) None of the above

Accepted Answer

When the Fed sells securities on the open market, it decreases the amount of money available to banks and individuals in the economy. This decreases the money supply. The other choices either have no effect or increase the money supply.

Question 7

Suppose the Federal Reserve increases deposits at financial institutions by $50 billion through its open market operations.If the reserve requirement for all deposits is 8%,what is the maximum impact the Fed's actions can have on total deposits?
A) $575 billion increase
B) $54.3 billion increase
C) $625 billion increase
D) An increase greater than $1 trillion
E) Total deposits would decrease,but there is not enough information to compute the amount.

Accepted Answer

The maximum impact the Fed's actions can have on total deposits is $575 billion increase. This is because the Fed's increase in deposits at financial institutions by $50 billion will lead to an increase in excess reserves. These excess reserves can then be used by financial institutions to make new loans and investments, which will lead to an increase in the money supply. The maximum possible increase in the money supply is equal to the amount of excess reserves multiplied by the money multiplier. In this case, the money multiplier is 1/(reserve requirement) = 1/0.08 = 12.5. Therefore, the maximum possible increase in the money supply is $50 billion x 12.5 = $575 billion.

Question 8

Early goldsmiths began to function as modern banks when they began to operate under a fractional reserve policy and
A) loaned gold.
B) issued receipts for gold deposited.
C) issued deposit receipts to borrowers in return for a note (loan).
D) when they received a banking charter from the government.
E) All of the above.

Accepted Answer

Early goldsmiths began to function as modern banks when they issued deposit receipts to borrowers in return for a note (loan), effectively creating money through the fractional reserve system.

Question 9

All but which of the following financial institutions would you expect to be able to get federal deposit insurance for their customers?
A) bank holding companies
B) credit unions
C) commercial banks
D) savings and loan associations
E) None of the above.

Accepted Answer

Bank holding companies themselves do not accept deposits; rather, they own banks that accept deposits. Credit unions, commercial banks, and savings and loan associations can all get federal deposit insurance for their customers.

Question 10

The 1978 International Bank Act
A) prohibited foreign banks from establishing any new U.S.banking operations.
B) allowed U.S.banks to engage in a wider range of nonbanking activities overseas.
C) allowed U.S.banks to take equity positions in overseas business ventures.
D) reduced the competitive advantage of foreign banks over U.S.banks.
E) All of the above.

Accepted Answer

The 1978 International Bank Act aimed to level the playing field by reducing the competitive advantage that foreign banks had over U.S. banks in the United States.

Question 11

The largest amount of pension assets are associated with
A) private pension funds.
B) social security.
C) government-administered pension funds.
D) insured pension plans with life insurance companies.
E) None of the above.

Accepted Answer

Private pension funds hold the largest amount of pension assets, followed by government-administered pension funds and insured pension plans with life insurance companies. Social security is a government program that provides retirement benefits, but it is not considered a pension fund.

Question 12

Federal deposit insurance has
A) prevented bank depositor panics,but not bank failures.
B) prevented bank panic and bank failures.
C) prevented bank failures,but not bank depositor panic.
D) not prevented bank depositor panics,but has eliminated bank failures.
E) None of the above

Accepted Answer

Federal deposit insurance has indeed prevented bank depositor panics by ensuring that depositors do not lose their money if a bank fails. However, it has not prevented bank failures themselves, as banks can still fail for various reasons unrelated to depositor panic.

Question 13

The major regulator of investment companies is the
A) state in which they are incorporated.
B) bank holding companies that own them.
C) Securities and Exchange Commission.
D) Federal Reserve System.
E) U.S.Treasury.

Accepted Answer

The Securities and Exchange Commission (SEC) is the major regulator of investment companies. The SEC is responsible for registering investment companies, ensuring compliance with securities laws and regulations, and providing aid to investors who may have been harmed by fraudulent or illegal activities.

Question 14

Suppose the reserve requirement for transaction deposits is 10% and it is 5% for nontransaction deposits.What is the total reserve requirement for a bank with total deposits equal to $800 million,if $600 million of these deposits are classified as transaction deposits?
A) $80 million
B) $60 million
C) $70 million
D) $100 million
E) None of the above.

Accepted Answer

The reserve requirement for transaction deposits is 10%, so the total reserve requirement for the $600 million in transaction deposits is:

10% x $600 million = $60 million

The reserve requirement for nontransaction deposits is 5%, so the total reserve requirement for the $200 million in nontransaction deposits is:

5% x $200 million = $10 million

Therefore, the total reserve requirement for the bank is:

$60 million + $10 million = $70 million.

Hence, the correct answer is C) $70 million.

Question 15

A small state bank currently has reserves equal to $300,000.If the state reserve requirement is 20%,but the bank feels more comfortable with maintaining a 30% reserve,what amount of deposits does the bank currently have?
A) $1,500,000
B) $600,000
C) $1,000,000
D) $300,000
E) None of the above.

Accepted Answer

The bank maintains a 30% reserve, so $300,000 is 30% of the deposits. Therefore, the total deposits are $300,000 / 0.30 = $1,000,000.

Question 16

The most frequent common bond for credit union formation is
A) occupational.
B) church-related or religious affiliation.
C) geographical.
D) ethnicity factors.
E) political affiliation.

Accepted Answer

Occupational bonds are the most common basis for forming credit unions, as they often serve employees of a particular company or industry.

Question 17

The Federal Reserve System established
A) a system for federal chartering of banks.
B) a system for controlling bank note issuance.
C) a source of liquidity for the banking system.
D) the beginning of demand deposit accounts.
E) None of the above.

Accepted Answer

The Federal Reserve System was established to create a central banking system that would provide a source of liquidity for the banking system. This was achieved through the ability of the Fed to control the money supply and provide reserves to banks when needed. While the Fed also had the power to regulate and supervise banks, it did not establish a system for federal chartering of banks (which was already in place at the state level) or the beginning of demand deposit accounts (which came about through market innovation). The Fed did have the ability to control bank note issuance, but this was not the primary reason for its establishment.

Question 18

The original purpose of deposit insurance was to
A) prevent bank runs by large depositors.
B) increase the regulatory monitoring of banks.
C) force the banks to invest in less risky investments.
D) prevent bank panics by insuring the small deposits of many people.
E) All of the above.

Accepted Answer

The original purpose of deposit insurance was to prevent bank panics by insuring the small deposits of many people. This was implemented after a series of bank panics during the Great Depression, which resulted in the loss of many people's life savings. By providing deposit insurance, the government aimed to restore confidence in the banking system and prevent future bank panics. The other options listed were not the primary purpose of deposit insurance.

Question 19

Which of the following is not a reason for the rapid expansion of U.S.banks overseas?
A) the establishment of the Edge Act
B) overall expansion of U.S.world trade
C) the growth of multinational corporations
D) the International Bank Act of 1978
E) None of the above.

Accepted Answer

The International Bank Act of 1978 actually facilitated the expansion of U.S. banks by permitting them to establish foreign branches without prior approval from the Federal Reserve. Therefore, option D is not a reason for the rapid expansion of U.S. banks overseas. The other options - A, B, and C - all played a role in the expansion of U.S. banks overseas by creating a favorable regulatory and economic environment.

Question 20

The primary responsibility of the Federal Open Market Committee (FOMC)is to
A) establish a level and growth of the money supply through open market operations to produce a stable economic environment.
B) supervise the examination of state member banks.
C) change the reserve requirements of banks.
D) determine the level of Federal Reserve notes allowed in circulation.
E) None of the above.

Accepted Answer

The primary responsibility of the FOMC is to establish a level and growth of the money supply through open market operations to produce a stable economic environment. This includes setting interest rates and adjusting the money supply to maintain price stability and promote maximum employment. Supervision of state member banks and changing reserve requirements are responsibilities of other Federal Reserve departments. Determining the level of Federal Reserve notes allowed in circulation is also not a primary responsibility of the FOMC.

Quiz 4: Financial Intermediaries and the Banking System

A small state bank currently has reserves equal to $300,000.If the state reserve requirement is 20%,but the bank currently maintains a 30% reserve,how much are the excess reserves the bank currently has?

A small state bank currently has reserves equal to $300,000.If the state reserve requirement is 20%,but the bank currently maintains a 30% reserve,what amount of reserves would the bank need if it met the reserve requirements exactly?

The primary tools of the Federal Reserve monetary policy include all of the following except

All of the following are reasons to regulate depository institutions except

While the Treasury collects most of its receipts through commercial banks,its expenditures (checks) are drawn upon

All else equal,the money supply should decrease when

Suppose the Federal Reserve increases deposits at financial institutions by $50 billion through its open market operations.If the reserve requirement for all deposits is 8%,what is the maximum impact the Fed's actions can have on total deposits?

Early goldsmiths began to function as modern banks when they began to operate under a fractional reserve policy and

All but which of the following financial institutions would you expect to be able to get federal deposit insurance for their customers?

The 1978 International Bank Act

The largest amount of pension assets are associated with

Federal deposit insurance has

The major regulator of investment companies is the

Suppose the reserve requirement for transaction deposits is 10% and it is 5% for nontransaction deposits.What is the total reserve requirement for a bank with total deposits equal to $800 million,if $600 million of these deposits are classified as transaction deposits?

A small state bank currently has reserves equal to $300,000.If the state reserve requirement is 20%,but the bank feels more comfortable with maintaining a 30% reserve,what amount of deposits does the bank currently have?

The most frequent common bond for credit union formation is

The Federal Reserve System established

The original purpose of deposit insurance was to

Which of the following is not a reason for the rapid expansion of U.S.banks overseas?

The primary responsibility of the Federal Open Market Committee (FOMC) is to