Question 1

The reserve ratio is the fraction of its:

Accepted Answer

The reserve ratio is the percentage of a bank's deposits that it is required to hold as reserves (either in its own vault or at the central bank). This is a measure of the bank's ability to meet depositor demands for withdrawals and is regulated by the central bank.

Question 2

A reserve ratio is the:

Accepted Answer

A reserve ratio is the fraction of deposits that a bank is required to hold as reserves, which includes cash and securities. This helps ensure that the bank has enough funds to cover withdrawals and other obligations. The reserve ratio is set by the central bank, such as the Federal Reserve in the United States.

Question 3

Banks are illiquid because:

Accepted Answer

Banks hold illiquid assets such as loans and mortgages, while their liabilities are largely made up of deposits that can be withdrawn at any time. Therefore, if many depositors decide to withdraw their funds at once, a bank may not have enough liquid funds on hand to meet these obligations, leading to a liquidity crisis.

Question 4

In the nineteenth century before the Civil War, most commodity-backed money in the United States was:

Accepted Answer

In the nineteenth century before the Civil War, most commodity-backed money in the United States was issued by private banks and redeemable for silver coins. This was known as the "Free Banking Era," where banks could issue their own currency as long as they held a certain amount of silver or gold in reserve. This system was not regulated by the federal government, leading to issues of fraud and instability in the banking system.

Question 5

Use the following to answer questions:
Table: Balance Sheet 
-(Table: Balance Sheet) Look at the table Balance Sheet. If the reserve ratio is 25%, loans are:

Accepted Answer

If the reserve ratio is 25%, it means that 25% of deposits must be held as reserves. Therefore, 75% of deposits can be loaned out. If loans are $60,000, it implies that the total deposits are $80,000 (since $60,000 is 75% of $80,000).

Question 6

The reserve ratio is defined as the ratio of:

Accepted Answer

The reserve ratio is defined as the ratio of bank reserves to customers' checkable bank deposits. This ratio indicates the percentage of deposits that a bank is required to hold in reserve, either in their vaults or at the central bank. It is an important tool used by central banks to regulate the money supply in the economy. Choices A, B, and C do not accurately define the reserve ratio.

Question 7

A bank run can break a bank because:

Accepted Answer

A bank run occurs when many depositors withdraw their money from a bank at the same time, causing a liquidity crisis for the bank. Banks hold many illiquid loans, such as mortgages, that cannot be quickly converted to cash. If depositors demand their money back faster than a bank can sell its loans to meet those demands, the bank can't pay its depositors, and it may shut down. Therefore, banks cannot quickly convert illiquid loans to liquid assets without facing a large financial loss.

Question 8

If a bank has deposits of $100,000, loans of $75,000, cash on hand of $10,000, and $15,000 on deposit at the Federal Reserve, then its reserve ratio is:

Accepted Answer

The reserve ratio is calculated by dividing the bank's reserves (cash on hand + deposits at the Federal Reserve) by its total deposits. Here, reserves are $10,000 + $15,000 = $25,000. Total deposits are $100,000. Thus, the reserve ratio is $25,000 / $100,000 = 0.25 or 25%.

Question 9

Banks don't lend out all of the funds deposited because:

Accepted Answer

Banks have to maintain a certain level of reserves to satisfy any depositor who wants to withdraw funds, which is known as the reserve requirement set by the central bank. If they lend out all of the funds deposited, they would be unable to meet these demands for withdrawals.

Question 10

Among the assets of a bank are:

Accepted Answer

Loans are considered assets for a bank because they generate interest income. Customers' deposits are liabilities since the bank owes this money back to the depositors.

Question 11

Use the following to answer questions:
Table: Balance Sheet 
-(Table: Balance Sheet) Look at the table Balance Sheet. If the reserve ratio is 25%, deposits are:

Accepted Answer

The answer of Use the following to answer questions:
Table: Balance...

Question 12

Reserve requirements:

Accepted Answer

Reserve requirements set the minimum amount of reserves a bank must hold. This is determined by the central bank of the country, such as the Federal Reserve in the United States. Congress does not establish reserve requirements and they are not set by the American Bankers Association.

Question 13

Banks can lend money because:

Accepted Answer

Banks can lend money because they know that not everyone wants their deposits back at the same time, allowing them to use some of the funds to lend out to borrowers. This is known as fractional reserve banking. Choices A, C, and D do not accurately reflect the reasons why banks can lend money.

Question 14

Bank reserves are:

Accepted Answer

Bank reserves are the fraction of deposits kept in the form of very liquid assets, such as cash or deposits with the central bank, to ensure that banks have enough funds to cover withdrawals and liabilities. They are different from the deposits that banks lend out or invest in other assets. Gold reserves (A) and deposits lent for illiquid investments (B) are not the same as bank reserves. While some banks may hold gold or investments as part of their portfolio, this is not what is meant by bank reserves.

Question 15

Bank reserves are:

Accepted Answer

Bank reserves refer to the currency held in bank vaults plus bank deposits at the Federal Reserve. Option A is incorrect because bank reserves also include deposits at the Federal Reserve, not just cash in bank vaults. Option B is incorrect because bank reserves are not directly tied to FDIC insurance premiums. Option D is incorrect because checkable bank deposits are not the same as bank reserves.

Question 16

Which of the following was used as money by European settlers in the American colonies before the Revolutionary War ?
I. dixies
II. tobacco
III. paper money issued by the newly established Federal Reserve

Accepted Answer

European settlers in the American colonies before the Revolutionary War used tobacco as a form of money, as it was a valuable and widely traded commodity. Dixies and paper money issued by the Federal Reserve did not exist during this time period.

Question 17

Among the liabilities of banks are:

Accepted Answer

Customers' deposits are considered liabilities for banks because the bank owes these amounts to its depositors and must return the funds upon the customers' request.

Question 18

Bank runs in the United States during the 1930s damaged the economy because:

Accepted Answer

Bank runs occurred during the Great Depression era as people lost confidence in the stability of the banking system. As customers rushed to withdraw their funds, banks struggled to meet the demand for cash and had to liquidate assets, which further decreased their solvency. This phenomenon quickly spread to other banks, creating a ripple effect throughout the economy.

Question 19

The reserve ratio is the:

Accepted Answer

The reserve ratio is the fraction of deposits that banks hold in their vaults plus their deposits at the Federal Reserve. This reserve is kept to ensure that banks have enough funds to cover withdrawals by their customers.

Question 20

Which of the following about bank runs is FALSE?

Accepted Answer

Bank runs can happen to any bank, regardless of its size or financial assets. Large banks can also face bank runs if depositors lose faith in the banking system as a whole.

Quiz 14: Money, Banking, and the Federal Reserve System

The reserve ratio is the fraction of its:

A reserve ratio is the:

Banks are illiquid because:

In the nineteenth century before the Civil War, most commodity-backed money in the United States was:

Use the following to answer questions: Table: Balance Sheet -(Table: Balance Sheet) Look at the table Balance Sheet. If the reserve ratio is 25%, loans are:

The reserve ratio is defined as the ratio of:

A bank run can break a bank because:

If a bank has deposits of $100,000, loans of $75,000, cash on hand of $10,000, and $15,000 on deposit at the Federal Reserve, then its reserve ratio is:

Banks don't lend out all of the funds deposited because:

Among the assets of a bank are:

Use the following to answer questions: Table: Balance Sheet -(Table: Balance Sheet) Look at the table Balance Sheet. If the reserve ratio is 25%, deposits are:

Reserve requirements:

Banks can lend money because:

Bank reserves are:

Bank reserves are:

Which of the following was used as money by European settlers in the American colonies before the Revolutionary War ? I. dixies II. tobacco III. paper money issued by the newly established Federal Reserve

Among the liabilities of banks are:

Bank runs in the United States during the 1930s damaged the economy because:

The reserve ratio is the:

Which of the following about bank runs is FALSE?