Question 1

The federal funds rate is the rate that banks pay for loans from

Accepted Answer

A)  the Fed.
B)  the U.S.Treasury.
C)  other banks.
D)  large corporations.E) A) and D)
F) None of the above

Question 2

The claims of creditors of a bank against the bank's assets are called

Accepted Answer

A)  loans.
B)  net worth.
C)  liabilities.
D)  required reserves.E) B) and D)
F) A) and D)

Question 3

The fact that reserves lost by any particular bank will be gained by some other bank explains why the commercial banking system

Accepted Answer

A)  has been able to reduce the vulnerability of banks to "runs" or "panics."
B)  can increase its demand deposits by a multiple of its excess reserves.
C)  cannot increase its demand deposits by a multiple of its excess reserves.
D)  has been based on the fractional reserve system of banking.E) A) and B)
F) A) and D)

Question 4

In essence, which of the following groups "creates" money?

Accepted Answer

A)  banks' loan officers when they grant loans
B)  consumers when they go shopping
C)  depositors when they deposit or withdraw money from their banks
D)  firms when they pay workers their wages and salariesE) All of the above
F) B) and C)

Question 5

If a portion of the loans extended by commercial banks is taken as cash rather than as checkable deposits, the maximum money-creating potential of the commercial banking system will

Accepted Answer

A)  be equal to twice the reciprocal of the reserve ratio.
B)  be unaffected.
C)  increase.
D)  decrease.E) A) and D)
F) None of the above

Question 6

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

Accepted Answer

A)  require higher bank capitalization, or net worth.
B)  increase the federal funds rate.
C)  reduce the required reserve ratio.
D)  require more leveraging by banks.E) B) and C)
F) A) and B)

Question 7

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

Accepted Answer

A)  zero.
B)  10 percent.
C)  20 percent.
D)  25 percent.E) B) and D)
F) C) and D)

Question 8

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

Accepted Answer

A) True 
 B)False

Question 9

If m equals the maximum number of new dollars that can be created for a single dollar of excess reserves and R equals the required reserve ratio, then for the banking system,

Accepted Answer

A)  m = R − 1.
B)  R = m/1.
C)  R = m − 1.
D)  m = 1/R.E) None of the above
F) All of the above

Question 10

A bank's required reserves can be calculated by

Accepted Answer

A)  dividing its excess reserves by its required reserves.
B)  dividing its required reserves by its excess reserves.
C)  multiplying its checkable-deposit liabilities by the reserve ratio.
D)  multiplying its checkable-deposit liabilities by its excess reserves.E) B) and C)
F) A) and B)

Question 11

A commercial bank has checkable-deposit liabilities of $50,000 and a required reserve ratio of 20 percent.What is the amount of required reserves?

Accepted Answer

A)  $10,000
B)  $50,000
C)  $250,000
D)  $1 millionE) All of the above
F) C) and D)

Question 12

Which of the following are all assets to a commercial bank?

Accepted Answer

A)  demand deposits, stock shares, and reserves
B)  vault cash, property, and reserves
C)  vault cash, property, and stock shares
D)  vault cash, stock shares, and demand depositsE) B) and D)
F) A) and D)

Question 13

Bank panics

Accepted Answer

A)  occur frequently in fractional reserve banking systems.
B)  are a risk of fractional reserve banking but are unlikely when banks are highly regulated and lend prudently.
C)  cannot occur in a fractional reserve banking system.
D)  occur more frequently when the monetary system is backed by gold.E) A) and C)
F) All of the above

Question 14

A bank has $2 million in checkable deposits.In the bank's balance sheet, this would be part of

Accepted Answer

A)  assets.
B)  liabilities.
C)  capital stock.
D)  net worth.E) A) and B)
F) None of the above

Question 15

Other things being equal, an expansion of commercial bank lending

Accepted Answer

A)  changes the composition, but not the size, of the money supply.
B)  is desirable during a period of demand-pull inflation.
C)  reduces the money supply.
D)  increases the money supply.E) B) and C)
F) B) and D)

Question 16

A bank is in the position to make loans when required reserves

Accepted Answer

A)  equal actual reserves.
B)  equal excess reserves.
C)  are less than actual reserves.
D)  are greater than actual reserves.E) B) and C)
F) A) and B)

Question 17

If D equals the maximum amount of new demand-deposit money that can be created by the banking system on the basis of any given amount of excess reserves; E equals the amount of excess reserves; and m is the monetary multiplier, then

Accepted Answer

A)  m = E/D.
B)  D = E ×m.
C)  D = E − 1/m.
D)  D = m/E.E) A) and C)
F) C) and D)

Question 18

Maximum checkable-deposit expansion in the banking system is equal to

Accepted Answer

A)  actual reserves minus required reserves.
B)  assets plus net worth and liabilities.
C)  excess reserves times the monetary multiplier.
D)  excess reserves divided by the monetary multiplier.E) A) and C)
F) None of the above

Question 19

The two major income-earning assets of commercial banks are

Accepted Answer

A)  checkable deposits and bank reserves.
B)  loans and securities.
C)  checkable deposits and securities.
D)  reserves and loans.E) A) and B)
F) A) and C)

Question 20

What is one significant consequence of fractional reserve banking?

Accepted Answer

A)  Banks are vulnerable to "panics" or "bank runs."
B)  Banks can only lend an amount equal to their deposits.
C)  Banks hold a portion of their deposits in gold.
D)  Banks can serve the withdrawals of all their depositors.E) All of the above
F) B) and C)

Exam 35: Money Creation

A bank is in the position to make loans when required reserves

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The fact that reserves lost by any particular bank will be gained by some other bank explains why the commercial banking system

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A bank's required reserves can be calculated by

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The claims of creditors of a bank against the bank's assets are called

Correct AnswerverifiedShow Answer

Bank panics

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

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If m equals the maximum number of new dollars that can be created for a single dollar of excess reserves and R equals the required reserve ratio, then for the banking system,

Correct AnswerverifiedShow Answer

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

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Which of the following are all assets to a commercial bank?

Correct AnswerverifiedShow Answer

A commercial bank has checkable-deposit liabilities of $50,000 and a required reserve ratio of 20 percent.What is the amount of required reserves?

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If D equals the maximum amount of new demand-deposit money that can be created by the banking system on the basis of any given amount of excess reserves; E equals the amount of excess reserves; and m is the monetary multiplier, then

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What is one significant consequence of fractional reserve banking?

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The federal funds rate is the rate that banks pay for loans from

Correct AnswerverifiedShow Answer

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

Correct AnswerverifiedShow Answer

In essence, which of the following groups "creates" money?

Correct AnswerverifiedShow Answer

The two major income-earning assets of commercial banks are

Correct AnswerverifiedShow Answer

Maximum checkable-deposit expansion in the banking system is equal to

Correct AnswerverifiedShow Answer

Other things being equal, an expansion of commercial bank lending

Correct AnswerverifiedShow Answer

If a portion of the loans extended by commercial banks is taken as cash rather than as checkable deposits, the maximum money-creating potential of the commercial banking system will

Correct AnswerverifiedShow Answer

A bank has $2 million in checkable deposits.In the bank's balance sheet, this would be part of

Correct AnswerverifiedShow Answer

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