Question 1

Assume a simplified banking system in which all banks are subject to a uniform reserve requirement of 20 percent and checkable deposits are the only from of money. A bank that received a new checkable deposit of $10,000 would be able to extend new loans up to a maximum of:
A) $2,000.
B) $8,000.
C) $9,000.
D) $10,000.

Accepted Answer

According to the reserve requirement of 20 percent, the bank has to keep $2,000 (20% of $10,000) in reserves and can use the remaining $8,000 to extend new loans. So the maximum amount of new loans the bank can extend is $8,000.

Question 2

If your bank faces a 20 percent required reserve ratio and receives a cash deposit of $4,000 into a checkable deposit account, the maximum total amount of money possible after the banking system makes all loans is:
A) $3,200.
B) $4,000.
C) $16,000.
D) $20,000.

Accepted Answer

The answer of If your bank faces a 20 percent...

Question 3

Exhibit 19-2 Balance Sheet of Springfield National Bank $$\begin{array} { | l l | l l | } 
\hline { \text { Assets } } && { \text { Liabilities } } \
\hline \text { Total reserves } & \$ 500 & \text { Demand deposits } & \$ 1,000 \
 \text { Loans } & \$ 500 & & \
\hline
\end{array}$$ In Exhibit 19-2, if Springfield National's customers write checks for $200 and the required reserve ratio is 20 percent, then its required reserves fall to:
A) $0.
B) $40.
C) $160.
D) $460.

Accepted Answer

The required reserves are calculated as 20% of the demand deposits. If customers write checks for $200, the demand deposits decrease to $800. Therefore, the required reserves are 20% of $800, which is $160.

Question 4

Assume we have a simplified banking system in balance-sheet equilibrium. Also assume that all banks are subject to a uniform 10 percent reserve requirement and checkable deposits are the only form of money. A commercial bank receiving a new checkable deposit of $100 would be able to extend new loans in the amount of:
A) $10.
B) $90.
C) $100.
D) $1,000.

Accepted Answer

When a bank receives a new deposit of $100 and is subject to a 10 percent reserve requirement, it must keep $10 (10% of $100) as reserves and can lend out the remaining $90. This is because the reserve requirement dictates the fraction of deposits that must be kept on hand, with the rest available for loans.

Question 5

A bank creates money when it:
A) gets new checkable deposits which the depositor formerly held as cash.
B) has a loan paid off, which creates excess reserves for the bank.
C) makes a loan from its excess reserves.
D) holds back excess reserves because of an increase in the required reserve ratio.

Accepted Answer

When a bank makes a loan from its excess reserves, it creates new money in the form of a deposit for the borrower. This is known as the money multiplier effect. Choice A is not correct because the bank is simply transferring cash to a checkable deposit, not creating new money. Choice B is also incorrect because paying off a loan does not create new money, it just reduces the bank's assets. Choice D is incorrect because holding back excess reserves does not create new money, it just reduces the amount of money that can be lent out.

Question 6

Suppose the required reserve ratio is 3 percent, and currency and reserves total $10 million. The maximum change in the money supply that can be supported is:
A) $13 million.
B) $30 million.
C) $97 million.
D) $333.3 million.

Accepted Answer

The maximum change in the money supply is determined by the money multiplier formula, which is 1/required reserve ratio. With a 3 percent reserve ratio, the multiplier is 1/0.03 = 33.33. Therefore, the maximum change in the money supply is $10 million * 33.33 = $333.3 million.

Question 7

Exhibit 19-4 Balance sheet of Tucker National Bank $$\begin{array} { | l r | l l | } 
\hline  { \text { Assets } } &&{ \text { Liabilities } } \
\hline \text { Required reserves } & \$ 4,000 & \text { Checkable deposits } & \$ 20,000 \
\text { Excess reserves } & 16,000 & & \
 \text { Loans } &{ 0 } & \
\text { Total } & \$ 20,000 & \text { Total } & \$ 20,000 \
\hline
\end{array}$$ The required reserve ratio in Exhibit 19-4 is:
A) 5 percent.
B) 10 percent.
C) 15 percent.
D) 20 percent.

Accepted Answer

The required reserve ratio is calculated by dividing the required reserves by the total checkable deposits. In this case, $4,000 (required reserves) / $20,000 (checkable deposits) = 0.20 or 20%.

Question 8

Imagine that Odyssey National is a brand new bank, and that its required reserve ratio is 10 percent. If it accepts a $1,000 cash deposit, then, excluding the $1,000 initial deposit, the banking system can increase the money supply by:
A) $900.
B) $910.
C) $1,000.
D) $9,000.

Accepted Answer

The banking system can increase the money supply by up to $9,000 through the process of fractional-reserve banking. With a 10 percent reserve requirement, Odyssey National can lend out $900 of the initial $1,000 deposit. The recipients of these loans will deposit the funds in their own banks, which can then lend out 90% of those deposits, and so on. This process continues until the initial deposit has created up to $9,000 in new money in the economy, in addition to the original $1,000 deposit.

Question 9

If banks have no excess reserves, and the required reserve ratio is raised, the amount that banks can lend is:
A) reduced and the money supply contracts.
B) reduced and the money supply expands.
C) reduced and there is no change in the money supply.
D) increased and the money supply expands.

Accepted Answer

If banks have no excess reserves and the required reserve ratio is raised, they will be required to hold a larger portion of their deposits as reserves. This means they will have less money available to lend, reducing the amount of loans and ultimately causing the money supply to contract.

Question 10

If your bank receives a checkable deposit that results in $20,000 in excess reserves, and the banking system makes loans totaling $60,000, the maximum possible, then the money multiplier must be:
A) 2.
B) 3.
C) 3.5.
D) 4.

Accepted Answer

The answer of If your bank receives a checkable deposit...

Question 11

If Matt Taylor gets his $800 loan from the Paris First National Bank in cash rather than in the form of a new checkable deposit, the:
A) Paris First National Bank will get $800 in new reserves.
B) Paris First National Bank will not get $800 in new reserves.
C) assets of the Paris First National Bank will increase by $800.
D) assets of the Paris First National Bank will decease by $88.

Accepted Answer

When Matt Taylor gets the loan in cash, it means that the bank is giving him existing reserves in exchange for a promise to repay the loan. Therefore, there is no creation of new reserves, and the bank will not get $800 in new reserves.

Question 12

Best National Bank operates with a 20 percent required reserve ratio, but has substantial excess reserves. One day a depositor withdraws $500 from his or her checking account at this bank. As a result, the bank's excess reserves:
A) fall by $500.
B) fall by $400.
C) rise by $100.
D) rise by $500.

Accepted Answer

When a depositor withdraws $500, the bank's total reserves decrease by $500. Since the bank had excess reserves before the withdrawal, this reduction directly decreases its excess reserves by the same amount, $500.

Question 13

A bank currently has checkable deposits of $100,000, total reserves of $30,000, and loans of $70,000. If the required reserve ratio is lowered from 20 percent to 15 percent, this bank can increase its loans by:
A) $10,000.
B) $15,000.
C) $75,000.
D) $5,000.

Accepted Answer

Currently, the required reserve ratio is 20 percent. This means that the bank must hold 20 percent of their checkable deposits as reserves. So, the required reserves for this bank is:

Required reserves = Checkable deposits x required reserve ratio
Required reserves = $100,000 x 0.2
Required reserves = $20,000

Currently, the bank has $30,000 in total reserves, which is $10,000 more than the required reserves. This means that the bank has excess reserves of $10,000.

If the required reserve ratio is lowered to 15 percent, the new required reserves for this bank would be:

New required reserves = Checkable deposits x new required reserve ratio
New required reserves = $100,000 x 0.15
New required reserves = $15,000

The bank still has $30,000 in total reserves, which means that they now have excess reserves of $15,000. This means that the bank can increase its loans by the amount of excess reserves, which is $15,000.

Therefore, the bank can increase its loans by $15,000. So, the answer is B.

Question 14

If a bank has actual reserves of $40,000 and a 20 percent reserve requirement, then the maximum amount of checkable deposits the bank can have if excess reserves are zero is:
A) $200,000.
B) $80,000.
C) $300,000.
D) $20,000.

Accepted Answer

The maximum amount of checkable deposits a bank can have is determined by dividing its actual reserves by the reserve requirement ratio. With actual reserves of $40,000 and a 20 percent reserve requirement, the calculation is $40,000 / 0.20 = $200,000.

Question 15

Jeff Kaufman decides to bank with Paris First National Bank (PFN). He opens a checking account by depositing $1,000. According to the PFN balance sheet, after this initial $1,000 checkable deposit, there are $1,000 in:
A) reserves and $1,000 in checkable deposits.
B) liabilities and $2,000 in checkable deposits.
C) checkable deposits and $0 in assets.
D) assets and $0 in liabilities.

Accepted Answer

When Jeff deposits $1,000 into his checking account, the bank records this as $1,000 in reserves (assets) and $1,000 in checkable deposits (liabilities). This is because the bank now holds $1,000 of Jeff's money (an asset for the bank) and owes Jeff $1,000 (a liability for the bank).

Question 16

Suppose a bank has checkable deposits of $100,000 and the required reserve ratio is 20 percent. If the bank currently has $100,000 in reserves, it could lend out as much as:
A) $100,000.
B) $400,000.
C) $80,000.
D) $20,000.

Accepted Answer

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

Question 17

A bank that has $10,000 in excess reserves can extend new loans up to a maximum of:
A) $1,000.
B) $9,000.
C) $10,000.
D) $100,000.

Accepted Answer

Excess reserves are the reserves that banks hold over the required amount. Therefore, the bank can use all of its excess reserves of $10,000 to extend new loans.

Question 18

Which of the following is the money multiplier?
A) The required reserve ratio.
B) 1/(1 - the required reserve ratio).
C) 1/(required reserve ratio).
D) 1/(1 - MPC).

Accepted Answer

The money multiplier is calculated as 1/(required reserve ratio), which indicates how much the money supply can increase based on the initial deposit and the reserve ratio.

Question 19

Exhibit 19-4 Balance sheet of Tucker National Bank $$\begin{array} { | l r | l l | } 
\hline  { \text { Assets } } &&{ \text { Liabilities } } \
\hline \text { Required reserves } & \$ 4,000 & \text { Checkable deposits } & \$ 20,000 \
\text { Excess reserves } & 16,000 & & \
 \text { Loans } &{ 0 } & \
\text { Total } & \$ 20,000 & \text { Total } & \$ 20,000 \
\hline
\end{array}$$ In Exhibit 19-4, the bank could make:
A) $1,000 in new loans.
B) $4,000 in new loans.
C) $16,000 in new loans.
D) $20,000 in new loans.

Accepted Answer

The bank could make $16,000 in new loans because it has $16,000 in excess reserves, which are funds over the required reserves that can be used for lending.

Question 20

Exhibit 19-4 Balance sheet of Tucker National Bank $$\begin{array} { | l r | l l | } 
\hline  { \text { Assets } } &&{ \text { Liabilities } } \
\hline \text { Required reserves } & \$ 4,000 & \text { Checkable deposits } & \$ 20,000 \
\text { Excess reserves } & 16,000 & & \
 \text { Loans } &{ 0 } & \
\text { Total } & \$ 20,000 & \text { Total } & \$ 20,000 \
\hline
\end{array}$$ Suppose Connie Rich deposits $500 in the bank in Exhibit 19-4. The result would be that the bank must increase its required reserves to:
A) $4,100.
B) $4,500.
C) $5,100.
D) $5,500.

Accepted Answer

The required reserve ratio can be calculated from the initial data: $4,000 is the required reserve on $20,000 of checkable deposits, which is a 20% reserve ratio. When Connie Rich deposits $500, the new total of checkable deposits becomes $20,500. 20% of $20,500 is $4,100, which means the required reserves must increase to $4,100.

Quiz 19: Money Creation

Assume a simplified banking system in which all banks are subject to a uniform reserve requirement of 20 percent and checkable deposits are the only from of money. A bank that received a new checkable deposit of $10,000 would be able to extend new loans up to a maximum of:

If your bank faces a 20 percent required reserve ratio and receives a cash deposit of $4,000 into a checkable deposit account, the maximum total amount of money possible after the banking system makes all loans is:

A bank creates money when it:

Suppose the required reserve ratio is 3 percent, and currency and reserves total $10 million. The maximum change in the money supply that can be supported is:

Imagine that Odyssey National is a brand new bank, and that its required reserve ratio is 10 percent. If it accepts a $1,000 cash deposit, then, excluding the $1,000 initial deposit, the banking system can increase the money supply by:

If banks have no excess reserves, and the required reserve ratio is raised, the amount that banks can lend is:

If your bank receives a checkable deposit that results in $20,000 in excess reserves, and the banking system makes loans totaling $60,000, the maximum possible, then the money multiplier must be:

If Matt Taylor gets his $800 loan from the Paris First National Bank in cash rather than in the form of a new checkable deposit, the:

Best National Bank operates with a 20 percent required reserve ratio, but has substantial excess reserves. One day a depositor withdraws $500 from his or her checking account at this bank. As a result, the bank's excess reserves:

A bank currently has checkable deposits of $100,000, total reserves of $30,000, and loans of $70,000. If the required reserve ratio is lowered from 20 percent to 15 percent, this bank can increase its loans by:

If a bank has actual reserves of $40,000 and a 20 percent reserve requirement, then the maximum amount of checkable deposits the bank can have if excess reserves are zero is:

Jeff Kaufman decides to bank with Paris First National Bank (PFN) . He opens a checking account by depositing $1,000. According to the PFN balance sheet, after this initial $1,000 checkable deposit, there are $1,000 in:

Suppose a bank has checkable deposits of $100,000 and the required reserve ratio is 20 percent. If the bank currently has $100,000 in reserves, it could lend out as much as:

A bank that has $10,000 in excess reserves can extend new loans up to a maximum of:

Which of the following is the money multiplier?