Question 1

If a bank has $500 in excess reserves and the reserve requirement is 20 percent, then the maximum amount by which this individual bank can increase the money supply is _____.

Accepted Answer

The answer of If a bank has $500 in excess...

Question 2

The maximum amount by which the entire banking system can create money is equal to:

Accepted Answer

The maximum amount of money that can be created by the entire banking system is based on the concept of the money multiplier, which is a multiple of the excess reserves held by banks. This means that every dollar of excess reserves can support multiple dollars of money creation. Therefore, D is the correct choice as it indicates that the maximum amount of money creation is a multiple of excess reserves.

Question 3

The table given below records the amount of new deposits, the value of required reserves, and total amount loaned out by Banks 1, 2, and 3.
Table 12.3
 $\begin{array}{l}
\begin{array}{|c|c|c|c|}
\hline \text { Bank } & \text { New Deposit } & \begin{array}{c}
\text { Required } \
\text { Reserves }
\end{array} & \text { Loans } \
\hline \text { Bank 1 } & \$ 10,000 & \$ 1,000 & \$ 9,000 \
\hline \text { Bank 2 } & \$ 9,000 & \$ 900 & \$ 8,100 \
\hline \text { Bank 3 } & \$ 8,100 & \$ 810 & \$ 7,290 \
\hline
\end{array}\
\text { *Assume all excess reserves are loaned out. }
\end{array}$
-Refer to Table 12.3. If the reserve requirement changed to 8 percent, then total deposits in the economy would be equal to:

Accepted Answer

The correct answer is A because the total deposits in the economy would be $125,000. This is calculated by dividing the total required reserves by the new reserve requirement. In this case, the total required reserves are $2,710 (1,000 + 900 + 810) and the new reserve requirement is 8 percent. Therefore, the total deposits in the economy would be $2,710 / 0.08 = $125,000.

Question 4

The money-creating ability of the banking system may be lowered by:

Accepted Answer

An increase in the reserve requirement would lower the money-creating ability of the banking system, as banks would have to hold more reserves and would therefore have less funds available to lend out or create new deposits. This would reduce the overall amount of money in circulation in the economy.

Question 5

The table given below records the amount of new deposits, the value of required reserves, and total amount loaned out by Banks 1, 2, and 3.
Table 12.3
 $\begin{array}{l}
\begin{array}{|c|c|c|c|}
\hline \text { Bank } & \text { New Deposit } & \begin{array}{c}
\text { Required } \
\text { Reserves }
\end{array} & \text { Loans } \
\hline \text { Bank 1 } & \$ 10,000 & \$ 1,000 & \$ 9,000 \
\hline \text { Bank 2 } & \$ 9,000 & \$ 900 & \$ 8,100 \
\hline \text { Bank 3 } & \$ 8,100 & \$ 810 & \$ 7,290 \
\hline
\end{array}\
\text { *Assume all excess reserves are loaned out. }
\end{array}$
-Refer to Table 12.3. If the reserve requirement changed to 8 percent, then total loans in the economy would be equal to _____.

Accepted Answer

Currently, the reserve requirement is 10%. If the reserve requirement changed to 8% then banks can loan out more money with the same level of reserves.

Bank 1: New deposit = $10,000
New required reserve = 10% × $10,000=$1,000
Excess reserves = $1,000 - $1,000 = $0
New loans = $10,000 - $1,000 = $9,000/$0
New loans = ∞

Bank 2: New deposit = $9,000
New required reserve = 8% × $9,000=$720
Excess reserves = $900 - $720 = $180
New loans = ($9,000 - $720) / ($900 - $720) x $180 =$1,260
New loans = $8,100 + $1,260 = $9,360

Bank 3: New deposit = $8,100
New required reserve = 8% × $8,100=$648
Excess reserves = $810 - $648 = $162
New loans = ($8,100 - $648) / ($810 - $648) x $162 =$1,142.40
New loans = $7,290 + $1,142.40 = $8,432.40

Total amount of loans = $9,000 + $9,360 + $8,432.40 = $26,792.40
Total amount of deposits =$10,000 + $9,000 + $8,100 = $27,100
Therefore, the answer is B) $115,000.

Question 6

Which of the following constitutes a currency drain from the banking system?

Accepted Answer

A banking panic that leads to large withdrawals from banks constitutes a currency drain from the banking system, as individuals withdraw cash from their accounts, reducing the amount of reserves held by banks. Purchases of government securities, new demand deposits, banks lending out all excess reserves, and lower required reserve holdings do not necessarily constitute a currency drain.

Question 7

An increase in the reserve requirement from 20 percent to 25 percent is most likely to:

Accepted Answer

When the reserve requirement increases, banks are required to hold a larger portion of their deposits in reserve and therefore have less money available to lend out. This reduces excess reserves and the deposit expansion multiplier, which refers to the amount of deposits that can be created from a given increase in reserves. So, the correct option is B.

Question 8

The use of money as a medium of exchange requires a double coincidence of wants.

Accepted Answer

The use of money eliminates the need for a double coincidence of wants as it is accepted as a standard medium of exchange.

Question 9

The higher the rate of inflation in Cuba, the greater the probability that Cuban residents will substitute U.S. currency for Cuban currency.

Accepted Answer

When there is high inflation, the value of a currency decreases, making it less valuable for purchasing goods and services. In such a scenario, people tend to switch to a more stable currency, such as the US dollar, for their transactions. So, higher inflation in Cuba increases the likelihood of Cuban residents using US currency as a substitute for Cuban currency.

Question 10

Other things equal, when U.S. money moves to other countries to take advantage of better foreign investment opportunities, then:

Accepted Answer

If U.S. money moves to other countries, then there will be a decrease in the U.S. money supply because money is leaving the country. This reduction in the money supply can have several effects, such as higher interest rates and a potential decrease in domestic investment. None of the other choices are likely to occur in this scenario.

Question 11

Scarcity and durability characterize the property of money as a medium of exchange.

Accepted Answer

The answer of Scarcity and durability characterize the property of...

Question 12

Suppose a bank has demand deposits of $2,500, excess reserves of $125, and a reserve requirement of 25 percent. What is the loss in the money expansion process of the whole banking system if the bank decides to lend out only $100?

Accepted Answer

The answer of Suppose a bank has demand deposits of...

Question 13

A $1,000 price tag on a stereo system is an example of money as a unit of account.

Accepted Answer

Money as a unit of account refers to the function of money in measuring the value of goods and services. The $1,000 price tag on the stereo system is an example of money being used as a unit of account because it represents the agreed-upon value of the stereo system in terms of money.

Question 14

Saltbricks will be considered as money if they are generally acceptable to sellers in exchange for goods and services.

Accepted Answer

According to the concept of money, any item that is generally acceptable as a medium of exchange in a given society can be considered as money, and this includes saltbricks if they are widely accepted by sellers in exchange for goods and services.

Question 15

When you save $1,500 for a spring-break vacation in Cancun, you are using money as a standard of deferred payment.

Accepted Answer

The answer of When you save $1,500 for a spring-break...

Question 16

If the reserve requirement is 33.3 percent, what is the approximate value of deposit expansion multiplier?

Accepted Answer

The deposit expansion multiplier is the reciprocal of the reserve requirement. Therefore, the approximate value of the deposit expansion multiplier would be:

1/0.333 = 3

Therefore, the best choice is B.

Question 17

Suppose that Mr. Chopp withdraws $500 from his checking account. If the reserve requirement is 5 percent, what will be the maximum potential change in the money supply forthcoming from Mr. Chopp's transaction?

Accepted Answer

The answer of Suppose that Mr. Chopp withdraws $500 from...

Question 18

If the deposit expansion multiplier is 20, what is the reserve requirement in the banking system?

Accepted Answer

The answer of If the deposit expansion multiplier is 20,...

Question 19

Using money as a unit of account lowers information costs compared to barter exchanges.

Accepted Answer

In a barter exchange, each party must know the value and desirability of the other party's goods or services, which requires a lot of information and communication. Using money as a unit of account simplifies this process and lowers information costs, as the value of goods and services can be easily compared and measured in a common currency.

Question 20

Stocks and bonds are considered to be highly illiquid assets while real estate is considered to be a liquid asset.

Accepted Answer

This statement is false. Stocks and bonds are generally more liquid than real estate, as they can be easily bought and sold on a public exchange. Real estate, on the other hand, can take much longer to sell and may involve more complex transactions.

Quiz 12: Money and Banking