Question 1

Suppose the banking system has no excess reserves and required reserves equal to 20 percent of checkable deposits. If the Fed sells $10,000 in securities to Joe Bankustomer, what is the most that checkable deposits in the banking system fall? (Hint: Compare what the banking system might have done if it had loaned at every opportunity; also include the initial transaction with the Fed.)

Accepted Answer

A)  $2,000
B)  $10,000
C)  $20,000
D)  $50,000
E)  $500,000F) A) and D)
G) A) and C)

Question 2

Which of the following is not a liability to a bank?

Accepted Answer

A)  checkable deposits
B)  NOW accounts
C)  net worth
D)  borrowings from the Fed
E)  deposits with the FedF) A) and E)
G) B) and E)

Question 3

From a bank's point of view, its deposits are liabilities, not assets.

Accepted Answer

A) True 
 B)False

Question 4

M1 is the narrowest measure of the money supply.

Accepted Answer

A) True 
 B)False

Question 5

If the required reserve ratio is 20 percent and a bank has $100,000 in checkable deposits, then its

Accepted Answer

A)  required reserves are $500,000
B)  required reserves are $20,000
C)  assets are $500,000
D)  liabilities are $500,000
E)  liabilities plus its net worth are $500,000F) A) and C)
G) A) and E)

Question 6

When a customer deposits $100 into a checking account, the effect is to

Accepted Answer

A)  increase the bank's liabilities
B)  decrease the bank's liabilities
C)  increase the bank's assets
D)  decrease the bank's assets
E)  increase both the bank's liabilities and its assetsF) None of the above
G) B) and C)

Question 7

Suppose that a bank has $100 million in checkable deposits and the required reserve ratio is 0.1. The bank has $5 million in actual reserves, so excess reserves are

Accepted Answer

A)  $-10 million
B)  $-5 million
C)  0
D)  $5 million
E)  $10 millionF) None of the above
G) B) and D)

Question 8

To maximize its profit, a bank will

Accepted Answer

A)  minimize actual reserves
B)  maximize actual reserves
C)  minimize excess reserves
D)  maximize excess reserves
E)  minimize required reservesF) A) and B)
G) A) and E)

Question 9

If banks choose not to lend out their excess reserves then the money supply will not eapand.

Accepted Answer

A) True 
 B)False

Question 10

Narrowly defined, the M1 money supply consists primarily of

Accepted Answer

A)  coins
B)  currency
C)  cash held by banks
D)  checkable deposits
E)  money market mutual fund accountsF) A) and C)
G) B) and C)

Question 11

The primary tool the Fed uses to control the money supply today is

Accepted Answer

A)  the discount rate
B)  the required reserve ratio
C)  the discount window
D)  chartering
E)  open market operationsF) A) and D)
G) A) and C)

Question 12

Banks want to minimize their holdings of excess reserves because

Accepted Answer

A)  they will be penalized by the Federal Reserve System if excess reserves are too high
B)  required reserves will also be minimized
C)  the money multiplier will be larger leading to a greater money supply
D)  they want to borrow more on the federal funds market
E)  excess reserves earn no interestF) A) and B)
G) A) and C)

Question 13

If the required reserve ratio is 10 percent and the Fed buys a $5,000 security from a depository institution, what happens to the money supply, using the simple multiplier?

Accepted Answer

A)  Nothing.
B)  It increases by $5,000.
C)  It decreases by $5,000.
D)  It increases by $50,000.
E)  It decreases by $50,000.F) D) and E)
G) A) and E)

Question 14

Suppose the required reserve ratio is 0.2 and the Fed buys $100,000 in government securities from Big Bank. How much money can the commercial banking system create?

Accepted Answer

A)  $1,000,000
B)  $500,000
C)  $100,000
D)  $80,000
E)  noneF) B) and E)
G) D) and E)

Question 15

A bank finds itself short of required reserves and therefore borrows from another commercial bank. The interest rate on this loan is

Accepted Answer

A)  zero
B)  the prime rate
C)  the discount rate
D)  the federal funds rate
E)  the required reserve ratioF) A) and E)
G) A) and D)

Question 16

The business of banking is essentially a trade-off between liquidity and profitability.

Accepted Answer

A) True 
 B)False

Question 17

Under which of the following circumstances will the simple money multiplier most overstate the change in checkable deposits arising from a change in excess reserves?

Accepted Answer

A)  The public withdraws no cash and banks hold no excess reserves.
B)  The public withdraws no cash and banks hold excess reserves.
C)  The public withdraws cash and banks hold no excess reserves.
D)  The public withdraws cash and banks hold excess reserves.
E)  The required reserve ratio equals 1.F) A) and E)
G) C) and D)

Question 18

Exhibit 15-3
 
-Refer to Exhibit 15-3. Leftbank's total reserves

Accepted Answer

A)  rose by $9,000
B)  were not affected by this transaction
C)  fell by $9,000
D)  fell by $10,000
E)  rose by $10,000F) A) and E)
G) None of the above

Question 19

The majority of M1 is currency.

Accepted Answer

A) True 
 B)False

Question 20

Demand deposits are

Accepted Answer

A)  long-term, high-interest savings accounts
B)  accounts into which banks can require depositors make regular deposits
C)  checkable deposits held by commercial banks that earn no interest
D)  negotiable order of withdrawal accounts
E)  loans from the FedF) B) and D)
G) A) and D)

Exam 16: Banking and the Money Supply

Suppose that a bank has $100 million in checkable deposits and the required reserve ratio is 0.1. The bank has $5 million in actual reserves, so excess reserves are

Correct Answer
verified

Banks want to minimize their holdings of excess reserves because

Correct Answer
verified

Which of the following is not a liability to a bank?

Correct Answer
verified

If the required reserve ratio is 10 percent and the Fed buys a $5,000 security from a depository institution, what happens to the money supply, using the simple multiplier?

Correct Answer
verified

From a bank's point of view, its deposits are liabilities, not assets.

Correct Answer
verified

When a customer deposits $100 into a checking account, the effect is to

Correct Answer
verified

A bank finds itself short of required reserves and therefore borrows from another commercial bank. The interest rate on this loan is

Correct Answer
verified

Suppose the required reserve ratio is 0.2 and the Fed buys $100,000 in government securities from Big Bank. How much money can the commercial banking system create?

Correct Answer
verified

If the required reserve ratio is 20 percent and a bank has $100,000 in checkable deposits, then its

Correct Answer
verified

M1 is the narrowest measure of the money supply.

Correct Answer
verified

If banks choose not to lend out their excess reserves then the money supply will not eapand.

Correct Answer
verified

Under which of the following circumstances will the simple money multiplier most overstate the change in checkable deposits arising from a change in excess reserves?

Correct Answer
verified

Correct Answer
verified

The primary tool the Fed uses to control the money supply today is

Correct Answer
verified

The majority of M1 is currency.

Correct Answer
verified

Demand deposits are

Correct Answer
verified

To maximize its profit, a bank will

Correct Answer
verified

The business of banking is essentially a trade-off between liquidity and profitability.

Correct Answer
verified

Exhibit 15-3 -Refer to Exhibit 15-3. Leftbank's total reserves

Correct Answer
verified

Narrowly defined, the M1 money supply consists primarily of

Correct Answer
verified

Exam 16: Banking and the Money Supply

Suppose that a bank has $100 million in checkable deposits and the required reserve ratio is 0.1. The bank has $5 million in actual reserves, so excess reserves are

Correct AnswerverifiedShow Answer

Banks want to minimize their holdings of excess reserves because

Correct AnswerverifiedShow Answer

Which of the following is not a liability to a bank?

Correct AnswerverifiedShow Answer

If the required reserve ratio is 10 percent and the Fed buys a $5,000 security from a depository institution, what happens to the money supply, using the simple multiplier?

Correct AnswerverifiedShow Answer

From a bank's point of view, its deposits are liabilities, not assets.

Correct AnswerverifiedShow Answer

When a customer deposits $100 into a checking account, the effect is to

Correct AnswerverifiedShow Answer

A bank finds itself short of required reserves and therefore borrows from another commercial bank. The interest rate on this loan is

Correct AnswerverifiedShow Answer

Suppose the required reserve ratio is 0.2 and the Fed buys $100,000 in government securities from Big Bank. How much money can the commercial banking system create?

Correct AnswerverifiedShow Answer

If the required reserve ratio is 20 percent and a bank has $100,000 in checkable deposits, then its

Correct AnswerverifiedShow Answer

M1 is the narrowest measure of the money supply.

Correct AnswerverifiedShow Answer

If banks choose not to lend out their excess reserves then the money supply will not eapand.

Correct AnswerverifiedShow Answer

Under which of the following circumstances will the simple money multiplier most overstate the change in checkable deposits arising from a change in excess reserves?

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

The primary tool the Fed uses to control the money supply today is

Correct AnswerverifiedShow Answer

The majority of M1 is currency.

Correct AnswerverifiedShow Answer

Demand deposits are

Correct AnswerverifiedShow Answer

To maximize its profit, a bank will

Correct AnswerverifiedShow Answer

The business of banking is essentially a trade-off between liquidity and profitability.

Correct AnswerverifiedShow Answer

Exhibit 15-3 -Refer to Exhibit 15-3. Leftbank's total reserves

Correct AnswerverifiedShow Answer

Narrowly defined, the M1 money supply consists primarily of

Correct AnswerverifiedShow Answer

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