04/05/2011 Quiz

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Chapter 15
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1 CORRECT Suppose the required reserve ratio is 10% and the banking system initially has no excess reserves.
If $20 billion in new currency is deposited into the system, these new deposits will initially create
excess reserves of:
A) $2 billion

B) $18 billion

C) $20 billion

D) $200 billion
Feedback: With a required reserve ratio of 10%, $2 billion will be required to remain in reserve.
The remaining $18 billion is excess reserves and can be loaned out or used to acquire other
assets.
2 Sam draws a $100 check on his account at Bank A which is then deposited in Bank B. When this
INCORRECT check is cleared:
A) neither Bank A's nor Bank B's deposits or reserves are affected

B) Bank A gains reserves equal to $100 and Bank B gains deposits equal to $100

C) Bank A loses reserves and deposits equal to $100

D) Bank B loses reserves and deposits equal to $100

Feedback: Sam's account diminishes by $100 and his bank loses an equal amount of reserves.
These reserves are credited to Bank B to balance their new deposit.
3 CORRECT Suppose a bank has checkable deposits of $1,000,000 and the legal reserve ratio is 5 percent. If
the institution has excess reserves of $5,000, then its actual reserves are:
A) $45,000

B) $50,000

C) $55,000

D) $5,000
Feedback: The bank's required reserves are 5% of $1,000,000, or $50,000. Its actual reserves
are its required reserves plus its excess reserves, for a total of $55,000.
4 Assume that SIC, Inc. writes a $50,000 check on its account at Metro National Bank to repay the
INCORRECT balance on a loan issued by this bank. As a result of this transaction:
A) the money supply declines by $50,000

B) the money supply increases by $50,000

C) the bank's excess reserves will decrease by $50,000

D) the bank's required reserves will increase by $50,000

Feedback: Total checkable deposits are reduced by $50,000 when the loan is retired. This
amount is no longer counted as part of the money supply.
5 A single bank can safely increase its total loans by an amount equal to its:
INCORRECT
A) required reserves

B) total reserves

C) excess reserves

D) total deposits

Feedback: A bank's excess reserves are those reserves above what it is legally required to hold.
These funds are available to be invested in loans or other assets.
6 Money is created when:
INCORRECT
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04/05/2011 Quiz
INCORRECT
A) loans are repaid

B) the net worth of the banking system is increased

C) banks exchange some of the state and local bonds in their portfolio for federal government
bonds
D) banks make additional loans
Feedback: Banks make loans by exchanging deposits for IOUs of businesses and individuals.
These deposits are counted as part of the money supply.
7 Assume the banking system has no excess reserves with a reserve requirement of 20%. The
INCORRECT reserve requirement is then dropped to 10%. As a result of this reduction:
A) the money multiplier will decrease

B) bank profitability will likely decrease

C) banks will be forced to accumulate reserves by reducing their lending activity

D) the money supply will likely increase

Feedback: The decrease in the required reserve ratio will provide banks with excess reserves
that they can use to increase loans or acquire other financial assets. This will increase the
money supply.
8 A bank temporarily short of required reserves may remedy the situation by borrowing reserves:
INCORRECT
A) in the bond market

B) in the Federal deposit market

C) from its own depositors

D) in the Federal funds market

Feedback: Banks borrow readily available reserve balances in the Federal funds market and pay
an interest rate known as the Federal funds rate.
9 The monetary multiplier is equal to:
INCORRECT
A) one

B) the inverse of actual reserves minus required reserves

C) the inverse of one minus the required reserve ratio

D) the inverse of the required reserve ratio

Feedback: Every dollar of required reserves can support total deposits such of 1/R, where R is
the required reserve ratio. For example, if R = 10%, every dollar of required reserves can
support total deposits of ten times (1/.10) this amount.
10 Hassan deposits $50,000 in a commercial bank that is required to retain 20% in reserve. The
CORRECT deposit increases the lending capacity of the bank by:
A) $5,000

B) $10,000

C) $40,000

D) $50,000
Feedback: The bank must retain $10,000 (20% of the deposit) in reserves. The remaining
$40,000 is available for lending.

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