Question 1

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

Accepted Answer

When a bank grants a loan, its assets increase (the loan) and its liabilities also increase (the checking deposit made by the customer). This means that the bank's required reserves will also increase. Actual reserves are not directly affected by this transaction. Excess reserves may increase or decrease depending on whether the loan caused the bank's reserves to fall below or remain above the required reserve levels. But because the bank is required to hold additional reserves due to this loan, it is likely that excess reserves will decrease.

Question 2

The basic purpose of imposing legal reserve requirements on commercial banks is to

Accepted Answer

Legal reserve requirements are used as a tool by central banks to control the amount of credit that commercial banks can create. By requiring banks to hold a certain percentage of their deposits in reserve, the central bank can limit the amount of loan or credit creation that can occur. This helps to prevent excessive inflation or deflation in the economy.

Question 3

A commercial bank has no excess reserves until a depositor places $5,000 in cash at the bank.The commercial bank then lends $4,000 to a borrower.As a consequence of these transactions, the size of the money supply has

Accepted Answer

The answer of A commercial bank has no excess reserves...

Question 4

A single commercial bank must meet a 25 percent reserve requirement.If it initially has no excess reserves and then $2,000 in cash is deposited in the bank, it can increase its loans by a maximum of

Accepted Answer

The bank must keep 25% of the $2,000 deposit ($500) as required reserves, leaving $1,500 in excess reserves. The bank can increase its loans by a maximum of the excess reserves, which is $1,500. Therefore, the maximum increase in loans is $1,500.

Question 5

Money is "created" when

Accepted Answer

Money is created when a bank grants a loan to a customer. When a bank grants a loan, it creates a new deposit in the borrower's account, which increases the money supply. When the borrower spends the money, it circulates in the economy and can be used to make more purchases, further increasing the money supply. Deposits by themselves do not create new money but merely redistribute existing money, while lending increases the amount of money in circulation. Lending between individuals also does not create new money but only redistributes existing money. The use of money to pay for goods and services is simply the exchange of existing money for goods and services and does not create new money.

Question 6

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

Accepted Answer

When the commercial bank buys a government security from the securities dealer, it increases the dealer's checkable deposit balance by $50,000. This means that the money supply has increased by $50,000 because the dealer can now use that money for lending or other transactions. No other factors or calculations such as the reserve ratio affect the money supply in this scenario.

Question 7

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

Accepted Answer

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

Question 8

The relative importance of various asset items on a commercial bank's balance sheet reflects a bank's pursuit of which two conflicting goals?

Accepted Answer

Banks aim to balance liquidity, ensuring they can meet withdrawal demands, with profitability, which often involves investing in less liquid, higher-yielding assets.

Question 9

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

Accepted Answer

When a bank grants a loan, it creates money by increasing the customer's demand deposit. If the customer takes out the loan and keeps the funds at home, the money supply still increases because the demand deposit exists and can be lent out again by the bank. Therefore, the correct answer is C.

Question 10

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

Accepted Answer

When the depositor places $2,000 in the bank, the bank must keep 10% as required reserves, which is $200. The remaining $1,800 is excess reserves. After lending $1,500, the bank's excess reserves are reduced to $300 ($1,800 - $1,500).

Question 11

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

Accepted Answer

When a check is cleared against a bank, the bank will lose checkable deposits and reserves. Checkable deposits are the funds that the bank is holding on behalf of its customers and that can be easily withdrawn through writing a check or using a debit card. Reserves are the portion of these deposits that the bank is required to keep on hand in order to satisfy withdrawal requests. When a check is cleared, these funds are no longer available to the bank, which will have less checkable deposits and reserves as a result. The bank does not lose cash and securities, loans, or capital stock in this process.

Question 12

Other things being equal, an expansion of commercial bank lending

Accepted Answer

When commercial banks expand lending, they create new deposits in the banking system, which increases the money supply.

Question 13

Which of the following statements is correct?

Accepted Answer

When a bank grants loans, it does so based on its excess reserves—the funds it holds beyond the required reserve ratio set by the central bank. This process is part of how banks create money within the economy. Options A and B are incorrect because when borrowers take out loans, the money supply increases (not decreases), and when they repay loans, the money supply decreases (not increases) as the loan repayment reduces the amount of money in circulation. Option C is incorrect because a bank cannot lend an amount equal to its total reserves; it must keep a portion of deposits as reserves as mandated by the central bank's reserve requirement.

Question 14

In an unregulated environment, the commercial banking system would tend to vary the supply of money in a way that

Accepted Answer

In an unregulated environment, commercial banks may tend to reinforce cyclical variations in the economy by increasing money supply during economic booms and decreasing it during recessions. This would exacerbate the business cycle and lead to greater economic instability.

Question 15

A commercial bank has excess reserves of $5,000 and a required reserve ratio of 20 percent.It makes a loan of $6,000 to a borrower.The borrower writes a check for $6,000 that is deposited in another commercial bank.After the check clears, the first bank will be short of reserves in the amount of

Accepted Answer

The first bank had $5,000 in excess reserves and made a $6,000 loan, which means it used $1,000 more than its excess reserves. With a 20% reserve requirement, it needs to hold $1,200 (20% of $6,000) in reserves for the loan, making it short by $1,000.

Question 16

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

Accepted Answer

The primary reason 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 requirement, the Fed can effectively control the amount of money that banks are able to lend out, which in turn affects the broader economy. The other options listed are not the primary reason for required reserves at the Fed.

Question 17

Money is "created" when

Accepted Answer

Money is created when people receive loans from their banks. When banks issue loans, they add to the amount of money in circulation by creating new deposits in borrowers' accounts. This is known as "credit creation" and is a key function of banks in the modern economy. The other options listed involve the transfer or circulation of existing money, but do not involve the creation of new money.

Question 18

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

Accepted Answer

Banks create money through the process of granting loans, as they generate new deposits in the banking system, effectively increasing the money supply.

Question 19

A commercial bank has excess reserves of $10,000 and a required reserve ratio of 20 percent.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

Accepted Answer

When the customer writes a check for $8,000 and it is deposited in another bank, the first bank's reserves decrease by the full amount of the check, which is $8,000.

Question 20

When loans are repaid at commercial banks,

Accepted Answer

When loans are repaid at commercial banks, the money supply effectively decreases, which is conceptually similar to money being destroyed. This is because the repayment of loans reduces the amount of deposits in the banking system, which in turn reduces the money supply.

Quiz 35: Money Creation

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

The basic purpose of imposing legal reserve requirements on commercial banks is to

A commercial bank has no excess reserves until a depositor places $5,000 in cash at the bank.The commercial bank then lends $4,000 to a borrower.As a consequence of these transactions, the size of the money supply has

A single commercial bank must meet a 25 percent reserve requirement.If it initially has no excess reserves and then $2,000 in cash is deposited in the bank, it can increase its loans by a maximum of

Money is "created" when

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

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

The relative importance of various asset items on a commercial bank's balance sheet reflects a bank's pursuit of which two conflicting goals?

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

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

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

Other things being equal, an expansion of commercial bank lending

Which of the following statements is correct?

In an unregulated environment, the commercial banking system would tend to vary the supply of money in a way that

A commercial bank has excess reserves of $5,000 and a required reserve ratio of 20 percent.It makes a loan of $6,000 to a borrower.The borrower writes a check for $6,000 that is deposited in another commercial bank.After the check clears, the first bank will be short of reserves in the amount of

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

Money is "created" when

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 percent.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

When loans are repaid at commercial banks,