Question 1

Suppose the required reserve ratio is 10 percent,and banks hold no excess reserves.If an individual withdraws $20 million from Bank Zip,then the amount of reserves held by Bank Zip will
A)decrease by $20 million.
B)decrease by $2 million.
C)increase by $2 million.
D)increase by $20 million.
E)not change.

Accepted Answer

The bank must maintain reserves equal to 10 percent of its deposits. When an individual withdraws $20 million, the bank's deposits decrease by that amount, so the required reserves are now $2 million (10 percent of $20 million). However, if the bank held no excess reserves prior to the withdrawal, it must now adjust by reducing its reserves by $2 million, the minimum required amount to maintain the required reserve ratio. Therefore, the amount of reserves held by Bank Zip will decrease by $2 million.

Question 2

Suppose banks desire to keep 5 percent of their deposits on reserve.If the Fed purchases $20 million worth of government bonds from Bank INF,the amount of bonds and loans Bank INF holds will
A)decrease by $15 million.
B)decrease by $20 million.
C)increase by $15 million.
D)remain unchanged.
E)increase by $20 million.

Accepted Answer

The answer of Suppose banks desire to keep 5 percent...

Question 3

What do commercial banks have in common with all other firms in a market economy?

Accepted Answer

The answer of What do commercial banks have in common...

Question 4

An increase in reserves leads to an even larger increase in deposits because banks have an incentive to lend their excess reserves.

Accepted Answer

When banks have excess reserves, they can lend them out to customers, which increases the money supply and creates additional deposits. This process is known as the money multiplier effect, which explains why an increase in reserves can lead to a larger increase in deposits.

Question 5

The buying and selling of bonds by the Fed to change bank reserves is referred to as
A)financial intermediation.
B)reserve accounting.
C)speculation.
D)open market operations.
E)asset and liability management.

Accepted Answer

The buying and selling of bonds by the Fed to change bank reserves is a process called open market operations. This tool is used by the Federal Reserve to influence the money supply in the economy and achieve its monetary policy objectives.

Question 6

If the Fed purchases $20 million worth of government bonds from Bank Zip,Bank Zip will be able to increase its loans as a result of the bond purchase.

Accepted Answer

When the Fed purchases government bonds from a bank, it increases the bank's reserves (the money it holds with the Fed). With more reserves, the bank can increase its lending by a certain multiple of the reserve increase (known as the money multiplier effect). Therefore, Bank Zip would be able to increase its loans after the bond purchase.

Question 7

Suppose the required reserve ratio is 10 percent,and banks hold no excess reserves.If the Fed purchases $10 million worth of government bonds from Bank INF,the amount of reserves held by Bank INF will
A)not change.
B)increase by $1 million.
C)decrease by $10 million.
D)decrease by $1 million.
E)increase by $10 million.

Accepted Answer

When the Fed purchases government bonds, it pays for them by crediting the account of the bank that sold the bonds (in this case, Bank INF) at the Fed. This increases the reserves held by Bank INF by $10 million. Since the required reserve ratio is 10 percent, Bank INF is required to hold $1 million of these new reserves as required reserves, and can loan out the remaining $9 million. This increases the money supply in the economy.

Question 8

Suppose the required reserve ratio is 10 percent,and banks hold no excess reserves.If the Fed purchases $10 million worth of government bonds from Bank INF,the amount of loans held by Bank INF will
A)increase by $10 million.
B)decrease by $100 million.
C)increase by $100 million.
D)decrease by $10 million.
E)not change.

Accepted Answer

When the Fed purchases $10 million worth of government bonds from Bank INF, the bank's reserves increase by $10 million. With a 10% reserve ratio, the bank can lend out the remaining 90%, which is $9 million. However, the question asks about the immediate change in loans held by Bank INF, which increases by the full $10 million initially, as the bank's reserves increase by that amount.

Question 9

If the Fed sells $1 million of government bonds to a bank,it has the same effect on deposits and reserves as if the Fed sold $1 million of government bonds to the general public.

Accepted Answer

The answer of If the Fed sells $1 million of...

Question 10

Suppose banks desire to keep 5 percent of all deposits on reserve,and the Fed purchases $10 million of government securities from a private securities dealer.Then,
A)there cannot be any change in bank deposits.
B)the maximum amount that deposits in the economy can decrease will be $10 million.
C)the maximum amount that deposits can decrease will be $200 million.
D)the maximum amount that deposits in the economy can increase will be $10 million.
E)the maximum amount that deposits can increase will be $200 million.

Accepted Answer

When the Fed purchases $10 million of government securities, this injects $10 million into the banking system. With a reserve requirement of 5%, banks can lend out 95% of any new deposits. This creates a multiplier effect, where the initial $10 million can increase total deposits in the economy by up to $200 million ($10 million / 0.05 = $200 million), as banks lend out 95%, those funds are deposited, and the process repeats.

Question 11

To affect bank reserves and deposits,the Fed has to buy securities directly from a bank.

Accepted Answer

The Fed can affect bank reserves and deposits through open market operations by buying or selling securities to or from a wide range of financial institutions, not just banks. This indirectly influences the amount of reserves banks hold.

Question 12

Suppose the required reserve ratio is 10 percent,and banks hold no excess reserves.If the Fed purchases $10 million worth of government bonds from Bank INF,the amount of deposits held by the entire banking system will ultimately
A)increase by $100 million.
B)decrease by $10 million.
C)decrease by $100 million.
D)not change.
E)increase by $10 million.

Accepted Answer

When the Fed purchases $10 million worth of government bonds, the money supply increases because Bank INF now has an additional $10 million in reserves. With a 10 percent reserve requirement, this initial increase in reserves can support up to $100 million in new deposits across the banking system through the money multiplier effect (1/Reserve Requirement = 1/0.10 = 10, so $10 million * 10 = $100 million).

Question 13

Suppose the Fed purchases $100 million dollars worth of government bonds from a bond dealer who then deposits the proceeds at Bank INF.
(A)If the required reserve ratio is 10 percent,what is the maximum amount of loans that Bank INF can make?
(B)What is the maximum amount of deposits that the banking system as a whole can create? What is the maximum amount of loans that can be created?

Accepted Answer

The answer of Suppose the Fed purchases $100 million dollars...

Question 14

The formula that shows the relationship between reserves and deposits is
A)deposits = reserve ratio $\times$ reserves.
B)  .
C)  .
D)  .
E)  .

Accepted Answer

The answer of The formula that shows the relationship between...

Question 15

Suppose banks desire to keep 5 percent of all deposits on reserve,and the Fed sells $10 billion of government securities to Bank INF.As a result,
A)the maximum amount that deposits in the economy can increase is $10 million.
B)the maximum amount that deposits in the economy can decrease is $10 million.
C)the maximum amount that deposits in the economy can decrease is $200 million.
D)the amount of deposits in the economy cannot change.
E)the maximum amount that deposits in the economy can increase is $200 million.

Accepted Answer

When the Fed sells $10 billion of government securities, it reduces the reserves in the banking system. With a reserve requirement of 5%, the money multiplier is 1/0.05 = 20. Therefore, the maximum decrease in deposits is $10 billion * 20 = $200 million.

Question 16

For an individual bank,does it make a difference in terms of loan creation whether the Fed buys the government bond directly from the bank or from a private bond dealer who deposits the proceeds in the bank?

Accepted Answer

The answer of For an individual bank,does it make a...

Question 17

When the Fed sells government bonds to banks,reserves increase.

Accepted Answer

When the Fed sells government bonds to banks, banks' reserves decrease. This is because banks use their reserves to purchase the bonds from the Fed.

Question 18

Which of the following statements is true when the Fed increases reserves by buying a government bond from a bank?
A)The amount of reserves in the banking system will increase by an amount greater than the amount of the bond purchase.
B)The amount of loans made by the banking system will increase by the amount of the bond purchase.
C)The amount of loans made by that bank will be greater than the increase in reserves.
D)The amount of deposits made by the banking system will increase by the amount of the bond purchase.
E)The amount of reserves in the banking system will increase by the amount of the bond purchase.

Accepted Answer

When the Fed buys a government bond from a bank, it pays for the bond with newly created reserves. This increases the amount of reserves held by the bank, but the total amount of reserves in the banking system remains the same. Therefore, the amount of reserves in the banking system will increase by the amount of the bond purchase. None of the other options are accurate.

Question 19

Suppose the required reserve ratio is 10 percent,and banks hold no excess reserves.If an individual withdraws $20 million from Bank Zip,
A)the amount of loans or bonds must decrease by $18 million.
B)the amount of loans must increase by $20 million.
C)the amount of loans or bonds must decrease by $20 million.
D)the amount of loans or bonds must increase by $18 million.
E)the amount of loans must decease by $20 million.

Accepted Answer

When an individual withdraws $20 million from Bank Zip and the required reserve ratio is 10 percent, the bank's reserves decrease by $20 million. Since banks hold no excess reserves, this withdrawal directly impacts the bank's ability to lend. For every dollar of reserves, banks can lend out $10 (given a 10% reserve ratio). Therefore, a $20 million reduction in reserves means the bank must decrease its lending by $200 million (10 times the withdrawn amount). However, the question seems to contain a mistake in its options, as none directly reflect this calculation. The closest option, suggesting a decrease in loans or bonds, is A) by $18 million, but this does not accurately represent the typical multiplier effect in banking. The correct theoretical decrease should be much larger, given the reserve ratio.

Question 20

Is the Federal Reserve system a federal government agency? Explain.

Accepted Answer

The answer of Is the Federal Reserve system a federal...

Quiz 22: Money and Inflation

Suppose the required reserve ratio is 10 percent,and banks hold no excess reserves.If an individual withdraws $20 million from Bank Zip,then the amount of reserves held by Bank Zip will

Suppose banks desire to keep 5 percent of their deposits on reserve.If the Fed purchases $20 million worth of government bonds from Bank INF,the amount of bonds and loans Bank INF holds will

What do commercial banks have in common with all other firms in a market economy?

An increase in reserves leads to an even larger increase in deposits because banks have an incentive to lend their excess reserves.

The buying and selling of bonds by the Fed to change bank reserves is referred to as

If the Fed purchases $20 million worth of government bonds from Bank Zip,Bank Zip will be able to increase its loans as a result of the bond purchase.

Suppose the required reserve ratio is 10 percent,and banks hold no excess reserves.If the Fed purchases $10 million worth of government bonds from Bank INF,the amount of reserves held by Bank INF will

Suppose the required reserve ratio is 10 percent,and banks hold no excess reserves.If the Fed purchases $10 million worth of government bonds from Bank INF,the amount of loans held by Bank INF will

If the Fed sells $1 million of government bonds to a bank,it has the same effect on deposits and reserves as if the Fed sold $1 million of government bonds to the general public.

Suppose banks desire to keep 5 percent of all deposits on reserve,and the Fed purchases $10 million of government securities from a private securities dealer.Then,

To affect bank reserves and deposits,the Fed has to buy securities directly from a bank.

Suppose the required reserve ratio is 10 percent,and banks hold no excess reserves.If the Fed purchases $10 million worth of government bonds from Bank INF,the amount of deposits held by the entire banking system will ultimately

The formula that shows the relationship between reserves and deposits is

Suppose banks desire to keep 5 percent of all deposits on reserve,and the Fed sells $10 billion of government securities to Bank INF.As a result,

For an individual bank,does it make a difference in terms of loan creation whether the Fed buys the government bond directly from the bank or from a private bond dealer who deposits the proceeds in the bank?

When the Fed sells government bonds to banks,reserves increase.

Which of the following statements is true when the Fed increases reserves by buying a government bond from a bank?

Suppose the required reserve ratio is 10 percent,and banks hold no excess reserves.If an individual withdraws $20 million from Bank Zip,

Is the Federal Reserve system a federal government agency? Explain.