Question 1

A commercial bank like Comerica creates money by

Accepted Answer

Commercial banks like Comerica create money by making loans. When they lend money, they create a deposit in the borrower's account, which is new money in the system. This process is known as credit creation or fractional reserve banking. Banks only need to keep a fraction of the deposit as reserves and can lend out the rest, thus creating new money in the economy. Printing paper money is the job of the central bank, while earning profits and selling corporate bonds are ways for banks to make money but not create new money.

Question 2

A balance sheet

Accepted Answer

A balance sheet is a financial statement that reports an organization's assets, liabilities, and equity at a specific point in time. It is used to give an overview of the financial health of an organization at a given moment, as opposed to measuring income and expenses over a period of time (as would be done with an income statement).

Question 3

Suppose a transaction changes a bank's balance sheet as indicated in the following T-account,and the required reserve ratio is 10 percent.  As a result of the transaction,the bank can make a maximum loan of

Accepted Answer

The maximum loan that the bank can make is the excess reserves, which is calculated as total reserves minus required reserves. 
Total reserves = $2,000 
Required reserves = 10% of $20,000 (total deposits) = $2,000 
Excess reserves = Total reserves - Required reserves = $2,000 - $2,000 = $0 
Therefore, the bank cannot make any loans initially. However, if the customer deposits more funds, the bank can make loans up to the amount of the excess reserves. In this case, if the customer deposits an additional $2,000, the bank would have excess reserves of $2,000 and could potentially make a loan of $2,000.

Question 4

Which of the following is counted as a liability for a bank?

Accepted Answer

Customer deposits are considered a liability for a bank because the bank owes those funds to its customers and must be available to be withdrawn or transferred by the customer. Bank reserves are the funds that a bank keeps on hand to meet its obligations, therefore they are not considered a liability. Securities can be either assets or liabilities depending on their classification on the balance sheet. Bank loans are assets for a bank as they represent funds lent out by the bank.

Question 5

Suppose the reserve ratio is RR.Then

Accepted Answer

The required reserves are the amount of reserves that banks need to hold against their deposits. The reserve ratio (RR) is the percentage of deposits that banks are required to hold as reserves. Therefore, the required reserves can be calculated as RR multiplied by deposits (Choice C). Choices A, B, and D do not accurately reflect the relationship between the reserve ratio and required reserves.

Question 6

The portion of ________ that a bank does not loan out or spend on securities is known as ________.

Accepted Answer

The portion of deposits that a bank does not loan out or spend on securities is known as reserves.

Question 7

A bank holds its reserves as ________ and ________.

Accepted Answer

The two primary ways a bank holds its reserves are through vault cash (cash held physically in the bank's vault) and deposits at the Federal Reserve. Option A is incorrect because loans are not a part of a bank's reserves. Option B is incorrect because while securities may be held by banks, they do not count as reserves. Option D is incorrect because loans are not a component of reserves.

Question 8

Consider the following T-account for National City Bank:  If the required reserve ratio is lowered to 8 percent,how much can National City loan out?

Accepted Answer

The answer of Consider the following T-account for National City...

Question 9

A bank is legally required to hold a fraction of its ________ as ________.

Accepted Answer

Banks are required to hold a fraction of their deposits as required reserves by the Federal Reserve. This ensures that the bank has enough cash on hand to meet withdrawal demands from its customers. Excess reserves are any reserves held by the bank above the required amount, and are held voluntarily by the bank.

Question 10

Suppose a transaction changes the balance sheet of Wells Fargo bank as indicated in the following T-account.  At this point,what percentage of the new deposits does Wells Fargo hold in reserves?

Accepted Answer

The answer of Suppose a transaction changes the balance sheet...

Question 11

Net worth is

Accepted Answer

Net worth is the difference between a firm's assets and liabilities. It represents the amount of ownership or equity that the company's shareholders have in the business. It is also known as shareholder equity or book value. It is listed on the liability side of the balance sheet because it represents the claims of the company's owners on the assets of the firm. It is an important measure of the company's financial health and profitability.

Question 12

Typically,a bank's largest asset is its

Accepted Answer

The largest asset of a typical bank is its loans. Banks earn revenue by making loans to individuals and businesses, and as a result, their loan portfolios tend to be their largest asset. The other options (reserves, holdings of securities, and deposits of customers) are also important assets for banks, but they are typically not as large as the bank's loan portfolio.

Question 13

Which of the following is a true statement?

Accepted Answer

Excess reserves are the reserves held by banks over and above the required reserves. Thus, excess reserves can be calculated by subtracting the required reserves from the actual reserves held by banks. Option A correctly expresses this relationship. Option B is incorrect because deposits do not have a direct relationship with excess reserves. Option C is not correct because excess reserves have no direct relation with the amount of loans issued by the bank. Option D is incorrect because the relationship between loans and excess reserves is inverse.

Question 14

Reserves of a bank equal its

Accepted Answer

Reserves of a bank consist of the bank's vault cash plus its deposits with the Federal Reserve. These are assets that the bank holds to meet regulatory requirements and to manage its liquidity.

Question 15

Which of the following is an asset for a bank?

Accepted Answer

Loans are considered assets for a bank because they generate interest income. When a bank lends money, it expects to get the money back with interest, making loans an asset on the bank's balance sheet.

Question 16

Suppose you deposit $2,000 into Bank of America and that the required reserve ratio is 10 percent.How does this affect the bank's balance sheet?

Accepted Answer

When you deposit $2,000, the bank must hold 10% as required reserves, which is $200. The remaining $1,800 becomes excess reserves.

Question 17

If the required reserve ratio is 5 percent,then the simple deposit multiplier is

Accepted Answer

The answer of If the required reserve ratio is 5...

Question 18

When you open a checking account at Bank of America,Bank of America

Accepted Answer

When a checking account is opened at Bank of America, the bank's reserves increase by the amount of the deposit. This is because the bank is now required to hold a certain percentage of its deposits in reserve. The bank's excess reserves also increase by the amount of the deposit, since the bank now has more reserves than it is required to hold.

Question 19

If the bank of Waterloo receives a $10,000 deposit and the reserve requirement is 10 percent,how much can the bank loan out? (Assume that before the deposit this bank is just meeting its legal reserve requirement.)

Accepted Answer

The bank can loan out 90% of the deposit, which is $9,000. The reserve requirement of 10% means that the bank must keep $1,000 as reserves, leaving $9,000 available to loan out.

Question 20

A bank's largest liability is its

Accepted Answer

A bank's largest liability is typically the deposits made by its customers, which it holds and uses for lending and investing purposes. Short-term borrowing and long-term debt are significant liabilities but are typically not as large as the deposits held by a bank. Shareholder equity is not a liability; it represents the residual value of a company's assets after subtracting its liabilities.

Quiz 14: Money,Banks,and the Federal Reserve System