Question 1

The commercial banking system has excess reserves of $200,000.Then new loans of $800,000 are made, and the system ends up just meeting its reserve requirements.The required reserve ratio must be

Accepted Answer

Excess reserves are the amount of funds that banks hold in addition to the required reserves. In this case, the commercial banking system has excess reserves of $200,000.

When new loans of $800,000 are made, this reduces the excess reserves of the banking system by $800,000, leaving them with only the required reserves.

We can use the formula to calculate the required reserve ratio:

Required Reserve Ratio = Required Reserves / Total Deposits

Since the banking system just meets its reserve requirements after the new loans are made, the required reserves must be equal to the reserves held by the banks before the new loans were made, which is $200,000.

Total Deposits = New Loans + Excess Reserves before New Loans

Total Deposits = $800,000 + $200,000 = $1,000,000

Required Reserve Ratio = $200,000 / $1,000,000 = 0.25

Therefore, the required reserve ratio must be 25 percent.

Question 2

The two major income-earning assets of commercial banks are

Accepted Answer

Commercial banks earn income primarily through two assets: loans and securities. Loans generate interest income for the bank, while securities can either produce interest income or capital gains if the bank sells them at a higher price than they were purchased for. Checkable deposits and reserves are important for the liquidity and safety of the bank, but they do not generate income in and of themselves.

Question 3

A banker must strike a balance in the pursuit of two conflicting goals: profits and liquidity.In terms of asset management, this translates into achieving a balance between holding

Accepted Answer

Banks need to balance between loans and securities, which generate income, and reserves, which provide liquidity.

Question 4

When people withdraw money from their deposits in the banking system, the

Accepted Answer

When people withdraw money from their deposits, banks have less money to lend out, which decreases their excess reserves.

Question 5

If Bank A has excess reserves of $1 million and all other banks in the system do not have any excess reserves, then the amount of additional loans that can be made by the banking system will be

Accepted Answer

The banking system can create loans amounting to a multiple of Bank A's excess reserves due to the money multiplier effect. When Bank A lends out its excess reserves, the money deposited by borrowers into other banks increases those banks' reserves, allowing them to lend further, thus multiplying the initial amount of excess reserves throughout the banking system.

Question 6

The fact that reserves lost by any particular bank will be gained by some other bank explains why the commercial banking system

Accepted Answer

The banking system can lend out a portion of deposits, which then get deposited in other banks, effectively allowing the system as a whole to increase its demand deposits by a multiple of its excess reserves. This process is known as the money multiplier effect in fractional reserve banking.

Question 7

Which of the following transactions has the immediate effect of increasing the money supply M1?

Accepted Answer

When a commercial bank buys government securities from the general public, the seller receives payment in the form of a check drawn against the commercial bank. This increases the amount of deposits in the banking system and thus increases the money supply M1.

Question 8

The multiple by which the commercial banking system can expand the supply of money is equal to

Accepted Answer

The multiple by which the commercial banking system can expand the supply of money is equal to the reciprocal of the reserve ratio, also known as the money multiplier. This is because banks can lend out a portion of the deposits they receive, which can then become someone else's deposit in another bank, and so on. The reserve ratio determines how much of a deposit a bank must hold in reserves, thus limiting the amount that can be lent out and the potential increase in the money supply.

Question 9

A commercial bank sells a $10,000 government bond to a securities dealer.The dealer pays for the bond in cash, which the bank adds to its vault cash.The money supply has

Accepted Answer

The answer of A commercial bank sells a $10,000 government...

Question 10

If the Federal Reserve System sells $5 billion of government securities to commercial banks, the banks' reserves would

Accepted Answer

When the Federal Reserve System sells government securities to commercial banks, the banks pay for these securities by decreasing their reserves. Therefore, banks' reserves would decrease by $5 billion.

Question 11

If the required reserve ratio is 20 percent and commercial bankers decide to hold additional excess reserves equal to 5 percent of any newly acquired checkable deposits, then the effective monetarymultiplier for the bankingsystemwill be

Accepted Answer

The effective monetary multiplier is calculated as 1 divided by the sum of the required reserve ratio and the excess reserve ratio. Here, it is 1 / (0.20 + 0.05) = 1 / 0.25 = 4.

Question 12

In the federal funds market, a bank that needs to meet reserve requirements can borrow reserves, usually for

Accepted Answer

Banks typically borrow reserves in the federal funds market for overnight loans to meet their reserve requirements. Borrowing periods longer than overnight are less common and often require collateral.

Question 13

When banks borrow and lend reserves in the federal funds market,

Accepted Answer

When banks borrow and lend reserves in the federal funds market, the total reserves of the system stay the same. This is because the lending bank loses reserves while the borrowing bank gains reserves, resulting in no overall change in the total reserves of the system.

Question 14

The federal funds rate is the rate that banks pay for loans from

Accepted Answer

The federal funds rate is the interest rate at which depository institutions (banks and credit unions) lend reserve balances to other depository institutions overnight on an uncollateralized basis.

Question 15

Maximum checkable-deposit expansion in the banking system is equal to

Accepted Answer

Maximum checkable-deposit expansion in the banking system is equal to excess reserves times the monetary multiplier. This is because excess reserves are the funds available for banks to lend out to create more deposits, and the monetary multiplier shows the maximum amount of money that can be created by the banking system through the lending process. Therefore, the product of excess reserves and the monetary multiplier represents the maximum checkable-deposit expansion possible in the banking system.

Question 16

Assume the required reserve ratio is 16.67 percent and that the commercial banking system has $110 million in excess reserves.The maximum amount of new money that the banking system could create is about

Accepted Answer

The answer of Assume the required reserve ratio is 16.67...

Question 17

A commercial bank has checkable-deposit liabilities of $500,000, reserves of $150,000, and a required reserve ratio of 20 percent.The amount by which a single commercial bank and the amount by which the banking system can increase loans are

Accepted Answer

The bank must hold 20% of $500,000 in reserves, which is $100,000. With $150,000 in reserves, it has $50,000 in excess reserves to lend. The banking system can increase loans by the excess reserves multiplied by the money multiplier (1/0.20), which is $250,000.

Question 18

The commercial banking system can lend by a multiple of its excess reserves primarily because

Accepted Answer

The fractional reserve banking system allows banks to lend out a multiple of their excess reserves, which is why they can create money through the process of lending. Required reserves are only a fraction of deposits, allowing banks to lend out the remainder as long as they maintain required reserves.

Question 19

A bank can get additional excess reserves by doing any of the following except

Accepted Answer

Buying Treasury securities from the Fed does not increase a bank's excess reserves; instead, it swaps one asset (reserves) for another (securities), without altering the total amount of reserves in the banking system.

Question 20

Banks can lend their excess reserves to other banks in the

Accepted Answer

Banks lend their excess reserves to other banks in the federal funds market, which is a market where banks borrow and lend reserves from each other overnight. This allows banks to maintain their reserve requirements and manage their liquidity needs. The mutual funds market, Treasury funds market, and bank funds market are not typically used for interbank lending of excess reserves.

Quiz 35: Money Creation