Question 1

A commercial bank can expand its excess reserves by
A) demanding and receiving payment on an overdue loan.
B) buying bonds from a Federal Reserve Bank.
C) buying bonds from the public.
D) paying back money borrowed from a Federal Reserve Bank.

Accepted Answer

When a commercial bank demands and receives payment on an overdue loan, it increases its reserves, which can then be used to expand its excess reserves.

Question 2

$$\begin{array} { | c | c | c | c | c | } 
\hline & \text { Reserve Requirement (\%) } & \text { Checkable Deposits } & \text { Actual Reserves } & \text { Excess Reserves } \
\hline ( 1 ) & \underline { W } & \$ 100,000 & \$ 10,000 & \$ 0 \
\hline ( 2 ) & 8 & \underline { X } & 20,000 & 12,000 \
\hline ( 3 ) & 12 & 200,000 & \underline { Y } & 8,000 \
\hline ( 4 ) & 20 & 300,000 & 70,000 & \underline { Z } \
\hline
\end{array}$$ The accompanying table gives data for a commercial bank or thrift. In row 4, the number appropriate for space Z is
A) $10,000.
B) $70,000.
C) $48,000.
D) zero.

Accepted Answer

The answer of \[\begin{array} { | c | c |...

Question 3

Assume Company X deposits $100,000 in cash in commercial Bank A. If no excess reserves exist at the time this deposit is made and the reserve ratio is 20 percent, Bank A can increase the money supply by a maximum of
A) $50,000.
B) $180,000.
C) $80,000.
D) $500,000.

Accepted Answer

With a reserve ratio of 20 percent, Bank A is required to hold 20% of $100,000 which is $20,000 as reserves. This leaves Bank A with $80,000 in excess reserves. Using the money multiplier formula (1/reserve ratio), we can calculate the maximum potential increase in the money supply as follows:
1/0.2 = 5
$80,000 x 5 = $400,000
Therefore, Bank A can increase the money supply by a maximum of $400,000, but since they already have the initial deposit of $100,000, the actual maximum increase is $80,000.

Question 4

Commercial banks create money when they
A) accept cash deposits from the public.
B) purchase government securities from the central banks.
C) create checkable deposits in exchange for IOUs.
D) raise their interest rates.

Accepted Answer

Commercial banks create money when they create checkable deposits in exchange for IOUs. This process is known as credit creation, as the bank is effectively creating new money by extending credit to borrowers. When a borrower takes out a loan from a bank, they receive the funds in the form of a check or through a deposit into their account, creating new money in the system.

Question 5

Assume that a bank initially has no excess reserves. If it receives $5,000 in cash from a depositor and the bank ﬁnds that it can safely lend out $4,500, the reserve requirement must be
A) zero.
B) 10 percent.
C) 20 percent.
D) 25 percent.

Accepted Answer

The bank can safely lend out $4,500, which means that it needs to hold back 10% of the deposit ($5,000 x 0.10 = $500) as required reserves. Therefore, the reserve requirement must be 10 percent.

Question 6

Assume the Standard Internet Company negotiates a loan for $5,000 from the Metro National Bank and receives a checkable deposit for that amount in exchange for its promissory note (IOU). As a result of this transaction,
A) the supply of money is increased by $5,000.
B) the supply of money declines by the amount of the loan.
C) a claim has been "demonetized."
D) the Metro Bank acquires reserves from other banks.

Accepted Answer

When the Standard Internet Company receives a checkable deposit from the Metro National Bank, the supply of money is increased by the amount of the loan, which is $5,000. This is because checkable deposits are included in the definition of the money supply, and they can be used to make purchases just like cash. Therefore, there is an increase in the money supply when a loan is taken out and a deposit is made.

Question 7

When a check is drawn and cleared, the
A) reserves and deposits of both the bank against which the check is cleared and the bank receiving the check are unchanged by this transaction.
B) bank against which the check is cleared loses reserves and deposits equal to the amount of the check.
C) bank receiving the check loses reserves and deposits equal to the amount of the check.
D) bank against which the check is cleared acquires reserves and deposits equal to the amount of the check.

Accepted Answer

When a check is cleared, the bank against which the check is drawn loses reserves and deposits equal to the amount of the check. This is because the bank has to transfer funds from the account of the check writer to the account of the recipient of the check, reducing the amount of reserves and deposits held by the bank. The reserves and deposits of the bank receiving the check are unchanged by this transaction.

Question 8

Suppose the ABC bank has excess reserves of $4,000 and outstanding checkable deposits of $80,000. If the reserve requirement is 25 percent, what is the size of the bank's actual reserves?
A) $16,000
B) $84,000
C) $24,000
D) $20,000

Accepted Answer

The reserve requirement is 25%, so the required reserves are 25% of $80,000, which is $20,000. The bank has excess reserves of $4,000, so its actual reserves must be the sum of its required reserves and its excess reserves, which is $20,000 + $4,000 = $24,000. Therefore, choice C is the correct answer.

Question 9

The reserve ratio refers to the ratio of a bank's
A) reserves to its liabilities and net worth.
B) capital stock to its total assets.
C) checkable deposits to its total liabilities.
D) required reserves to its checkable-deposit liabilities.

Accepted Answer

The reserve ratio refers specifically to the amount of required reserves that a bank must hold against its checkable-deposit liabilities. Required reserves are a percentage of the bank's checkable-deposit liabilities that must be held in reserve either as vault cash or on deposit with the Federal Reserve. Therefore, the correct answer is D - required reserves to its checkable-deposit liabilities.

Question 10

Assume the Continental National Bank's balance statement is as shown in the accompanying table. Assuming a legal reserve ratio of 20 percent, how much in excess reserves would this bank have after a check for $10,000
Was drawn and cleared against it?
A) $3,000
B) $24,000
C) $6,000
D) $16,000

Accepted Answer

The legal reserve ratio is 20%, which means the bank must keep 20% of its deposits as reserves.

Total deposits = $100,000 
Required reserves = 20% x $100,000 = $20,000

Before the check is cleared, the bank has excess reserves of:
Excess reserves = actual reserves - required reserves
Excess reserves = $30,000 - $20,000 = $10,000

When the $10,000 check is cleared, the bank's total reserves (actual reserves) will decrease by $10,000, as it will need to pay out this amount to the person who deposited the check.

The required reserves will remain the same, as they are calculated based on total deposits.

After the check is cleared, the bank will have excess reserves of:
Excess reserves = actual reserves - required reserves
Excess reserves = ($30,000 - $10,000) - $20,000 = $6,000

Therefore, the correct answer is C) $6,000.

Question 11

Refer to the accompanying balance sheet for the ABC National Bank. Assume the required reserve ratio is 20 percent. This commercial bank has excess reserves of
A) $0.
B) $3,000.
C) $12,000.
D) $5,000.

Accepted Answer

The answer of  Refer to the accompanying balance sheet...

Question 12

$$\begin{array} { | c | c | c | c | c | } 
\hline & \text { Reserve Requirement (\%) } & \text { Checkable Deposits } & \text { Actual Reserves } & \text { Excess Reserves } \
\hline ( 1 ) & \underline { W } & \$ 100,000 & \$ 10,000 & \$ 0 \
\hline ( 2 ) & 8 & \underline { X } & 20,000 & 12,000 \
\hline ( 3 ) & 12 & 200,000 & \underline { Y } & 8,000 \
\hline ( 4 ) & 20 & 300,000 & 70,000 & \underline { Z } \
\hline
\end{array}$$ The accompanying table gives data for a commercial bank or thrift. In row 3, the number appropriate for space Y is
A) $24,000.
B) $32,000.
C) $48,000.
D) $96,000.

Accepted Answer

The answer of \[\begin{array} { | c | c |...

Question 13

The amount that a commercial bank can lend is determined by its
A) required reserves.
B) excess reserves.
C) outstanding loans.
D) outstanding checkable deposits.

Accepted Answer

The amount a commercial bank can lend is primarily determined by its excess reserves, which are the reserves it holds above the minimum required by the central bank. These excess reserves can be used to extend new loans.

Question 14

Suppose that a bank's actual reserves are $5 million, its checkable deposits are $5 million, and its excess reserves are $3 million. The reserve requirement must be
A) 40 percent.
B) 20 percent.
C) 10 percent.
D) 5 percent.

Accepted Answer

The answer of Suppose that a bank's actual reserves are...

Question 15

cess reserves refer to the
A) difference between a bank's vault cash and its reserves deposited at the Federal Reserve Bank.
B) minimum amount of actual reserves a bank must keep on hand to back up its customers deposits.
C) difference between actual reserves and loans.
D) difference between actual reserves and required reserves.

Accepted Answer

Excess reserves are the amount by which a bank's or financial institution's actual reserves exceed the minimum required reserves. This is the difference between the actual reserves a bank holds and the reserves it is required by regulation to hold against deposits.

Question 16

Suppose the reserve requirement is 20 percent. If a bank has checkable deposits of $4 million and actual reserves of $1 million, it can safely lend out
A) $1 million.
B) $1.2 million.
C) $200,000.
D) $800,000.

Accepted Answer

The answer of Suppose the reserve requirement is 20 percent....

Question 17

Suppose the reserve requirement is 10 percent. If a bank has $5 million of checkable deposits and actual reserves of $500,000, the bank
A) can safely lend out $500,000.
B) can safely lend out $5 million.
C) can safely lend out $50,000.
D) cannot safely lend out more money.

Accepted Answer

With a reserve requirement of 10%, the bank is required to hold $500,000 (10% of $5 million) in reserves. Since it has exactly $500,000 in actual reserves, it meets the reserve requirement but has no excess reserves to lend out.

Question 18

Assume that Smith deposits $600 in currency into her checking account in the XYZ Bank. Later that same day, Jones negotiates a loan for $1,200 at the same bank. In what direction and by what amount has the supply of
Money changed?
A) decreased by $600
B) increased by $1,800
C) increased by $600
D) increased by $1,200

Accepted Answer

The loan of $1,200 increases the money supply because it creates new money in the form of a deposit in Jones's account, while Smith's deposit does not change the money supply as it is merely a transfer of existing currency into a deposit.

Question 19

A reserve requirement of 20 percent means a bank must have at least $1,000 of reserves if its checkable deposits are
A) $100.
B) $1,000.
C) $5,000.
D) $12,000.

Accepted Answer

The reserve requirement of 20 percent means that the bank must hold 20 percent of its checkable deposits in reserves. Therefore, for checkable deposits of $5,000, the bank would need to hold reserves of $1,000 (20% of $5,000).

Question 20

Commercial banks monetize claims when they
A) collect checks through the Federal Reserve System.
B) make loans to the public.
C) accept repayment of outstanding loans.
D) borrow from the Federal Reserve Banks.

Accepted Answer

Commercial banks monetize claims when they make loans to the public, which allows them to create new money by increasing the money supply. This process is known as credit creation or money creation. Collecting checks through the Federal Reserve System, accepting repayment of outstanding loans, and borrowing from Federal Reserve Banks do not necessarily involve the monetization of claims.

Quiz 15: Money Creation

A commercial bank can expand its excess reserves by

Assume Company X deposits $100,000 in cash in commercial Bank A. If no excess reserves exist at the time this deposit is made and the reserve ratio is 20 percent, Bank A can increase the money supply by a maximum of

Commercial banks create money when they

Assume that a bank initially has no excess reserves. If it receives $5,000 in cash from a depositor and the bank ﬁnds that it can safely lend out $4,500, the reserve requirement must be

Assume the Standard Internet Company negotiates a loan for $5,000 from the Metro National Bank and receives a checkable deposit for that amount in exchange for its promissory note (IOU) . As a result of this transaction,

When a check is drawn and cleared, the

Suppose the ABC bank has excess reserves of $4,000 and outstanding checkable deposits of $80,000. If the reserve requirement is 25 percent, what is the size of the bank's actual reserves?

The reserve ratio refers to the ratio of a bank's

Assume the Continental National Bank's balance statement is as shown in the accompanying table. Assuming a legal reserve ratio of 20 percent, how much in excess reserves would this bank have after a check for $10,000 Was drawn and cleared against it?

Refer to the accompanying balance sheet for the ABC National Bank. Assume the required reserve ratio is 20 percent. This commercial bank has excess reserves of

The amount that a commercial bank can lend is determined by its

Suppose that a bank's actual reserves are $5 million, its checkable deposits are $5 million, and its excess reserves are $3 million. The reserve requirement must be

cess reserves refer to the

Suppose the reserve requirement is 20 percent. If a bank has checkable deposits of $4 million and actual reserves of $1 million, it can safely lend out

Suppose the reserve requirement is 10 percent. If a bank has $5 million of checkable deposits and actual reserves of $500,000, the bank

Assume that Smith deposits $600 in currency into her checking account in the XYZ Bank. Later that same day, Jones negotiates a loan for $1,200 at the same bank. In what direction and by what amount has the supply of Money changed?

A reserve requirement of 20 percent means a bank must have at least $1,000 of reserves if its checkable deposits are

Commercial banks monetize claims when they