Question 1

When a bank accepts additional deposits, its required reserves and excess reserves will both increase.

Accepted Answer

When a bank accepts additional deposits, it must keep a certain percentage of those deposits as required reserves. The rest is considered excess reserves. Therefore, both required and excess reserves will increase with additional deposits.

Question 2

When a bank's loan defaults, then the bank's reserves will decrease.

Accepted Answer

When a bank's loan defaults, it primarily affects the bank's assets side by increasing the bad debts or non-performing assets. Reserves are part of the liabilities and equity side of the balance sheet and are not directly affected by loan defaults.

Question 3

Banks' borrowed funds come mostly from

Accepted Answer

Banks primarily borrow funds through two channels: issuing bonds and accepting deposits. Therefore, option D is the best choice. Option A is also partially correct since banks can buy bonds and loans as a form of investment, but it is not their primary method of borrowing funds. Options B and C are incorrect as buying stocks and treasury bonds or issuing stocks and buying treasury bonds do not result in borrowed funds for the bank.

Question 4

"Leverage" in finance refers to the

Accepted Answer

Leverage in finance refers to the use of borrowed funds to increase the potential return on investment.

Question 5

What percentage of the money that a typical modern bank invests comes from borrowing?

Accepted Answer

Modern banks typically operate on a fractional reserve basis, meaning they keep a small fraction of deposits on hand as reserves and lend out the majority. This means that a significant portion of the money they invest or lend out comes from borrowing, often around 90% or more, making option D (about 95 percent) the most accurate.

Question 6

Assume that the reserve ratio is 20 percent and banks in the system are loaning out all their excess reserve.If people collectively cash out $10 billion from their checking accounts, then the lending ability of the banking system will be

Accepted Answer

When people cash out $10 billion from their checking accounts, the banks lose $10 billion in deposits. Since the reserve ratio is 20%, the banks must hold $2 billion in reserves, which means they can only lend out $8 billion of the $10 billion they lost. This means that the lending ability of the banking system will be decreased by $10 billion - $8 billion = $2 billion. However, since banks are loaning out all their excess reserves, the decrease in lending ability will be multiplied by the money multiplier, which is 1 / (reserve ratio) = 1 / 0.2 = 5. Therefore, the lending ability of the banking system will be decreased by $2 billion * 5 = $10 billion.

Question 7

When a bank grants a loan, the money supply M1 will increase, even if the funds from the loan are not spent.

Accepted Answer

When a bank grants a loan, it creates new money by increasing the borrower's deposit account. This increases the M1 money supply regardless of whether the borrower immediately spends the funds or not.

Question 8

The granting of a $10,000 loan and the purchase of a $10,000 government bond from a securities dealer by a commercial bank would have the same effect on the money supply.

Accepted Answer

Both actions result in an increase in the bank's assets of $10,000, which can then be used to create new loans or make additional investments, thereby increasing the money supply.

Question 9

The use of high leveraging by banks leads to the banking system's

Accepted Answer

High leveraging by banks can lead to instability in the banking system, as it increases the risk of default on loans and investments. This was evident during the 2008 financial crisis, where highly leveraged banks were severely impacted and some even had to be bailed out by the government.

Question 10

When you deposit money at a bank, the bank will normally turn around and lend most of it to a borrower.

Accepted Answer

Banks make money by lending out the money people deposit with them. Therefore, it is true that banks will lend most of the money deposited back out to borrowers.

Question 11

The amount of required reserves that a bank must hold is computed as a certain fraction of the bank's assets.

Accepted Answer

The required reserves a bank must hold are computed as a certain fraction of the bank's deposits, not its assets.

Question 12

When bankers hold excess reserves,

Accepted Answer

Excess reserves are funds that banks hold in addition to the reserves required by regulations. When banks hold excess reserves, they are not lending out as much money as they could be, reducing the money-creating potential of the banking system. Therefore, the money-creating potential of the banking system decreases.

Question 13

When cash is deposited at a bank, the composition of the money supply is changed but the total supply of money is not.

Accepted Answer

When cash is deposited at a bank, it increases the amount of demand deposits, which are included in the money supply. However, it does not affect the total supply of money in the economy since the total supply of money is determined by the monetary base and the money multiplier.

Question 14

One way to enhance the stability of the banking system is to

Accepted Answer

Requiring higher bank capitalization, or net worth, means that banks would have more funds available to cover potential losses, making them less likely to fail. This helps to enhance the stability of the banking system. The other options, such as increasing the federal funds rate or reducing the required reserve ratio, may have some impact on the banking system, but are not as effective in enhancing overall stability. Requiring more leveraging by banks would actually increase risk and instability.

Question 15

The primary purpose of the reserve requirements for banks is not really to ensure liquidity to meet withdrawals, but rather to allow the Fed some control over the money supply.

Accepted Answer

Reserve requirements are one of the tools used by the Federal Reserve to influence the money supply in the economy. By adjusting the required reserve ratio, the Fed can either increase or decrease the amount of money that banks are able to lend out, which in turn affects the overall level of economic activity. While reserve requirements can help ensure that banks have enough cash on hand to meet customer demand for withdrawals, their primary function is to enable the Fed to manage the money supply.

Question 16

The commercial banking system, because of a recent change in the required reserve ratio from 8 percent to 10 percent, finds that it is $50 million short of reserves.If it is unable to obtain anyadditional reserves, it mustreduce deposits andmoney supply by

Accepted Answer

The answer of The commercial banking system, because of a...

Question 17

Requiring banks to use less leveraging is equivalent to

Accepted Answer

Requiring banks to use less leveraging means that they are required to hold a higher level of net worth, which is the amount of equity that is invested in the bank by the shareholders. This reduces the risk of banks becoming insolvent and increases their ability to absorb losses. It does not necessarily lead to expanding the loan portfolio, reducing the reserve ratio, or accepting more deposits.

Question 18

If all depositors of a bank were to try withdrawing all their deposits at the same time, a good solid bank should be able to meet all the withdrawals.

Accepted Answer

If all depositors of a bank try to withdraw all their deposits at the same time, it would lead to a bank run where the bank may not have enough reserves to meet all the withdrawals. This is why governments have deposit insurance and central banks provide emergency lending facilities to prevent bank failures.

Question 19

Only one commercial bank in the banking system has an excess reserve, and its excess reserve is $400,000.This bank makes a new loan of $300,000 and keeps an excess reserve of $100,000.If the required reserve ratio for all banks is 12.5 percent, the potential expansion of the money supply from this new loan is

Accepted Answer

The potential expansion of the money supply is calculated using the money multiplier, which is 1 divided by the reserve ratio (1/0.125 = 8). The new loan of $300,000 can potentially expand the money supply by $300,000 * 8 = $2.4 million.

Question 20

Which of the following factors can contribute to a reduction in the money supply?

Accepted Answer

The answer of Which of the following factors can contribute...

Quiz 35: Money Creation