Question 1

A commercial bank has excess reserves of $5000 and a required reserve ratio of 20 percent. It makes a loan of $6000 to a borrower. The borrower writes a check for $6000 that is deposited in another commercial bank. After the check clears, the first bank will be short of reserves in the amount of:
A) $1000
B) $1200
C) $5000
D) $6000

Accepted Answer

The answer of A commercial bank has excess reserves of...

Question 2

Answer the question based on the following balance sheet for the First National Bank. Assume the reserve ratio is 15 percent:  Refer to the data above. If a check for $20,000 is drawn and cleared against this bank, it will then have excess reserves of:
A) $15,000
B) $20,000
C) $25,000
D) $30,000

Accepted Answer

The answer of Answer the question based on the following...

Question 3

A commercial bank has no excess reserves until a depositor places $2,000 in cash in the bank. The reserve ratio is 10%. The bank then lends $1,500 to a borrower. As a consequence of these transactions the bank's excess reserves are:
A) Not affected
B) Increased by $200
C) Increased by $300
D) Increased by $500

Accepted Answer

The bank receives $2,000, with a 10% reserve ratio, it must keep $200 as required reserves. After lending $1,500, the bank has $300 in excess reserves ($2,000 - $200 - $1,500 = $300).

Question 4

Money is "created" when:
A) A depositor gets cash from the bank's ATM
B) A bank accepts deposits from its customers
C) People receive loans from their banks
D) People spend the incomes that they receive

Accepted Answer

Money is created when banks make loans to their customers, which leads to an increase in the money supply. When people receive loans from banks, this creates new money that did not exist before. Options A and D do not create new money but merely transfer existing money between parties. Option B involves accepting deposits, which does not necessarily lead to the creation of new money.

Question 5

Other things being equal, an expansion of commercial bank lending:
A) Changes the composition, but not the size, of the money supply
B) Is desirable during a period of demand-pull inflation
C) Reduces the money supply
D) Increases the money supply

Accepted Answer

An expansion of commercial bank lending increases the money supply because it creates new money through the process of fractional reserve banking. When banks make loans, they create new deposits for the borrowers, which in turn increases the overall supply of money in circulation.

Question 6

Which of the following statements is correct?
A) When borrowers repay bank loans, the money supply is increased
B) When borrowers take out bank loans, the money supply is decreased
C) A single bank can legally lend an amount equal to its total reserves
D) A bank can only grant loans to customers if it has excess reserves

Accepted Answer

A bank can only grant loans to customers if it has excess reserves, as it needs to maintain a certain level of required reserves by regulation.

Question 7

When a bank grants a loan to a customer who then keeps the funds in her checking account at that bank, then the bank's:
A) Actual reserves will increase
B) Required reserves will increase
C) Actual reserves will decrease
D) Excess reserves will stay the same

Accepted Answer

When a bank grants a loan and the funds are kept in a checking account, the bank's deposits increase, leading to an increase in required reserves.

Question 8

Henry deposits $2,000 in currency in the First Street Bank. Later that same day Jane Harris negotiates a loan for $5,400 at the same bank. After these transactions, the supply of money has:
A) Increased by $2,100
B) Increased by $3,300
C) Increased by $5,400
D) Decreased by $3,300

Accepted Answer

The answer of Henry deposits $2,000 in currency in the...

Question 9

When required reserves exceed actual reserves, commercial banks will be forced to have borrowers:
A) Use credit cards
B) Withdraw some of their deposits
C) Repay loans
D) Take out more loans

Accepted Answer

When required reserves exceed actual reserves, banks need to increase their reserves. One way to do this is by having borrowers repay loans, which reduces the bank's liabilities and increases its reserves.

Question 10

When a bank grants a loan to a customer who gets the funds and keeps it at home for a while, then the money supply will:
A) Not change because demand deposits did not go up
B) Not change because the money was not spent
C) Increase
D) Decrease

Accepted Answer

When a bank grants a loan, it creates new money in the form of demand deposits, increasing the money supply regardless of whether the funds are spent immediately or held at home.

Question 11

Answer the question based on the following balance sheet for the First National Bank. Assume the reserve ratio is 15 percent:  Refer to the data above. If a check for $14,000 is drawn and cleared against this bank, then its reserves and checkable deposits will be, respectively:
A) $50,000 and $120,000
B) $50,000 and $106,000
C) $36,000 and $120,000
D) $36,000 and $106,000

Accepted Answer

Since the reserve ratio is 15%, the bank is required to hold 15% of its checkable deposits as reserves. Thus, the required reserve amount is 0.15 x $106,000 = $15,900. When the check for $14,000 clears, the bank's reserves will decrease to $36,100 ($50,000 - $14,000 - $15,900). The checkable deposits will also decrease to $106,000 - $14,000 = $92,000. Therefore, the correct answer is D.

Question 12

In essence, which of the following groups "creates" money?
A) Banks' loan officers when they grant loans
B) Consumers when they go shopping
C) Depositors when they deposit or withdraw money from their banks
D) Firms when they pay workers their wages and salaries

Accepted Answer

Banks' loan officers create money when they grant loans through the process of fractional reserve banking. When a bank grants a loan, it credits the borrower's account with newly created money, allowing the borrower to spend more than they had before. This increases the money supply in circulation.

Question 13

A commercial bank has excess reserves of $10,000 and a required reserve ratio of 20%. It grants a loan of $8,000 to a customer, who then writes out a check for $8,000 that is deposited in another bank. The first bank will find its reserves decrease by:
A) $2,000
B) $3,000
C) $1,600
D) $8,000

Accepted Answer

When the loan is granted and the check is deposited in another bank, the first bank's reserves decrease by the full amount of the loan, which is $8,000.

Question 14

The Norfolk Bank has $18,000 in excess reserves and the reserve ratio is 20 percent. How much checkable deposits and reserves does this bank hold?
A) $160,000 in checkable-deposit liabilities and $48,000 in reserves
B) $140,000 in checkable-deposit liabilities and $46,000 in reserves
C) $120,000 in checkable-deposit liabilities and $32,000 in reserves
D) $100,000 in checkable-deposit liabilities and $30,000 in reserves

Accepted Answer

The formula for calculating checkable deposits is:

Checkable deposits = Reserves / Reserve ratio

Substituting the given values:

Checkable deposits = 18,000 / 0.20 = $90,000

To find the total checkable-deposit liabilities, we add the excess reserves to checkable deposits:

Total checkable-deposit liabilities = $90,000 + $18,000 = $108,000

Therefore, the correct answer is B: $140,000 in checkable-deposit liabilities and $46,000 in reserves.

Question 15

When loans are repaid at commercial banks:
A) Money is created
B) Money is destroyed
C) The assets of commercial banks increase
D) The net worth of commercial banks increases

Accepted Answer

When loans are repaid, the money supply decreases because the repayment reduces the amount of money in circulation, effectively "destroying" money.

Question 16

The primary reason commercial banks must keep required reserves on deposit at the Fed is to:
A) Add to the liquidity of the commercial bank
B) Allow the Fed to control the amount of bank lending
C) Protect the deposits in the commercial bank against losses
D) Ensure that depositors can withdraw their money if they wish to

Accepted Answer

The primary reason why commercial banks must keep required reserves on deposit at the Fed is to allow the Fed to control the amount of bank lending. By adjusting the reserve requirements, the Fed can either encourage or discourage commercial bank lending, which in turn can affect the money supply and influence the overall health of the economy. The other answer choices are not necessarily the primary reasons for required reserves.

Question 17

Money is "created" when:
A) A depositor deposits money at the bank
B) A bank grants a loan to a customer
C) Someone lends money to a friend or a family member
D) People use money to pay for stuff they buy from one another

Accepted Answer

Money is created when a bank grants a loan to a customer. This is because the bank credits the borrower's account with new money, which they can then spend or withdraw. This process is known as "fractional reserve banking," where banks can create new money by lending out a portion of the deposits they have received. A depositor depositing money at a bank (A) does not create new money, it only transfers existing money from one account to another. Lending money to friends or family (C) also does not create new money, it only transfers existing money from one person to another. Using money to pay for stuff (D) also does not create new money, it only facilitates the exchange of existing money for goods or services.

Question 18

A commercial bank has no excess reserves until a depositor places $5000 in cash at the bank. The commercial bank then lends $4000 to a borrower. As a consequence of these transactions the size of the money supply has:
A) Not been affected
B) Increased by $4000
C) Increased by $5000
D) Decreased by $5000

Accepted Answer

The initial deposit of $5000 increases the bank's reserves, allowing it to lend $4000. This loan increases the money supply by $4000, as the borrower now has $4000 in new money to spend.

Question 19

When a check is cleared against a bank, the bank will lose:
A) Cash and securities
B) Checkable deposits and reserves
C) Reserves and capital stock
D) Loans and demand deposits

Accepted Answer

When a check is cleared against a bank, the bank will lose checkable deposits and reserves. When the check is cashed, the amount is deducted from the customer's account and the bank must use its reserves to pay the amount. This decreases the bank's checkable deposits and reserves.

Question 20

A commercial bank buys a $50,000 government security from a securities dealer. The bank pays the dealer by increasing the dealer's checkable deposit balance by $50,000. The money supply has:
A) Not been affected
B) Decreased by $50,000
C) Increased by $50,000
D) Increased by $50,000 multiplied by the reserve ratio

Accepted Answer

When the commercial bank buys a government security, it increases its assets by $50,000 and its liabilities by $50,000 (the checkable deposit balance of the dealer). This increase in liabilities creates new money and thereby increases the money supply by $50,000. Therefore, the correct answer is (C) Increased by $50,000.

Quiz 15: Money Creation

A commercial bank has excess reserves of $5000 and a required reserve ratio of 20 percent. It makes a loan of $6000 to a borrower. The borrower writes a check for $6000 that is deposited in another commercial bank. After the check clears, the first bank will be short of reserves in the amount of:

Answer the question based on the following balance sheet for the First National Bank. Assume the reserve ratio is 15 percent: Refer to the data above. If a check for $20,000 is drawn and cleared against this bank, it will then have excess reserves of:

A commercial bank has no excess reserves until a depositor places $2,000 in cash in the bank. The reserve ratio is 10%. The bank then lends $1,500 to a borrower. As a consequence of these transactions the bank's excess reserves are:

Money is "created" when:

Other things being equal, an expansion of commercial bank lending:

Which of the following statements is correct?

When a bank grants a loan to a customer who then keeps the funds in her checking account at that bank, then the bank's:

Henry deposits $2,000 in currency in the First Street Bank. Later that same day Jane Harris negotiates a loan for $5,400 at the same bank. After these transactions, the supply of money has:

When required reserves exceed actual reserves, commercial banks will be forced to have borrowers:

When a bank grants a loan to a customer who gets the funds and keeps it at home for a while, then the money supply will:

Answer the question based on the following balance sheet for the First National Bank. Assume the reserve ratio is 15 percent: Refer to the data above. If a check for $14,000 is drawn and cleared against this bank, then its reserves and checkable deposits will be, respectively:

In essence, which of the following groups "creates" money?

A commercial bank has excess reserves of $10,000 and a required reserve ratio of 20%. It grants a loan of $8,000 to a customer, who then writes out a check for $8,000 that is deposited in another bank. The first bank will find its reserves decrease by:

The Norfolk Bank has $18,000 in excess reserves and the reserve ratio is 20 percent. How much checkable deposits and reserves does this bank hold?

When loans are repaid at commercial banks:

The primary reason commercial banks must keep required reserves on deposit at the Fed is to:

Money is "created" when:

A commercial bank has no excess reserves until a depositor places $5000 in cash at the bank. The commercial bank then lends $4000 to a borrower. As a consequence of these transactions the size of the money supply has:

When a check is cleared against a bank, the bank will lose:

A commercial bank buys a $50,000 government security from a securities dealer. The bank pays the dealer by increasing the dealer's checkable deposit balance by $50,000. The money supply has: