Question 1

Imagine that Odyssey National is a brand new bank, and that its required reserve ratio is 10 percent. If it accepts a $1,000 deposit, then its loan balance can increase by a maximum of:

Accepted Answer

A)   $0.
B)   $90.
C)   $100.
D)   $900.
E)   $910.F) A) and D)
G) B) and D)

Question 2

Assume that Paris First National Bank is a thriving bank with deposits of $20 million. If the required reserve ratio is 20 percent and the bank is fully loaned out, the bank will keep what amount of required reserves?

Accepted Answer

A)   $2 million.
B)   $4 million.
C)   $10 million.
D)   $16 million.
E)   $20 million.F) A) and E)
G) D) and E)

Question 3

If total deposits at Last Bank and Trust are $100 million, total loans are $70 million, and excess reserves are $20 million, then which of the following is the required reserve ratio?

Accepted Answer

A)   70 percent.
B)   30 percent.
C)   20 percent.
D)   10 percent.E) B) and D)
F) A) and B)

Question 4

Which of the following would cause the money supply in the United States to expand?

Accepted Answer

A)   A decrease in reserve requirements.
B)   An increase in the discount rate.
C)   The sale of U.S. government bonds by a Federal Reserve bank.
D)   An increase in the world supply of gold.E) B) and D)
F) B) and C)

Question 5

Exhibit 19-5  Balance sheet of Tucker National Bank  In Exhibit 19-5, the bank could:

Accepted Answer

A)   extend new loans by $5,000.
B)   extend new loans by $20,000.
C)   call in $5,000 existing loans.
D)   call in $20,000 existing loans.E) All of the above
F) A) and B)

Question 6

When the Federal Reserve sells government bonds to the public, it:

Accepted Answer

A)   increases the M1 money supply and increases the reserves of the commercial banking system.
B)   increases the M1 money supply, while reducing the reserves of the commercial banking system.
C)   reduces the M1 money supply, while increasing the reserves of the commercial banking system.
D)   reduces the M1 money supply and decreases the reserves of the commercial banking system.E) All of the above
F) B) and C)

Question 7

Exhibit 19-3  Balance sheet of Tucker National Bank  The required reserve ratio in Exhibit 19-3 is:

Accepted Answer

A)   10 percent.
B)   20 percent.
C)   80 percent.
D)   100 percent.E) B) and C)
F) A) and D)

Question 8

If the Fed decides to use an open market operation to reduce the money supply by $1 million, and if the money multiplier is 10, then what total amount of Treasury securities must the Fed initially sell?

Accepted Answer

A)   $10,000,000.
B)   $1,000,000.
C)   $100,000.
D)   $10,000.E) A) and C)
F) B) and D)

Question 9

If the fractional reserve system did not exist,

Accepted Answer

A)   the banking system could not create money.
B)   there would be no effect on the ability of the banking system to create money.
C)   banks would loan out its required reserves.
D)   banks would be highly susceptible to bank runs.
E)   the banking system would realize the money multiplier.F) A) and B)
G) C) and D)

Question 10

A bank creates money when it:

Accepted Answer

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.
E)   gets more excess reserves because of a decrease in the required reserve ratio.F) All of the above
G) D) and E)

Question 11

Which of the following correctly is the money multiplier?

Accepted Answer

A)   The required reserve ratio.
B)   1/(1 − the required reserve ratio) .
C)   1/(required reserve ratio) .
D)   1/(1 − MP
C)  .E) A) and B)
F) B) and D)

Question 12

The federal funds market is the market in which:

Accepted Answer

A)   banks borrow from the Fed.
B)   bank customers borrow from their banks
C)   banks borrow from each other.
D)   the federal government borrows from the Fed.
E)   the federal government borrows from members of the general public.F) A) and B)
G) C) and D)

Question 13

The market in which banks make loans of reserves for terms of over one year is called the federal funds market.

Accepted Answer

A) True 
 B)False

Question 14

If your bank receives a checkable deposit of $20,000, and the banking system makes loans totaling $180,000, the maximum possible, then the required reserve ratio must be:

Accepted Answer

A)   0.10.
B)   0.20.
C)   0.25.
D)   0.40.
E)   0.50.F) A) and D)
G) C) and D)

Question 15

Suppose Brenda accepts a loan of $10,000 and deposits the money in her checking account. If the required reserve ratio is 10 percent, and if banks loan out all of their reserves, then what is the maximum increase in the money supply after the multiplier effect has fully operated?

Accepted Answer

A)   $1,000.
B)   $10,000.
C)   $90,000.
D)   $1,000,000.E) A) and B)
F) A) and C)

Question 16

If a bank has $100,000 in checkable deposits, reserves of $20,000, and no excess reserves, then the required reserve ratio is:

Accepted Answer

A)   10 percent.
B)   20 percent.
C)   25 percent.
D)   30 percent.
E)   50 percent.F) C) and D)
G) A) and E)

Question 17

Banks normally hold few excess reserves because this practice is:

Accepted Answer

A)   subject to an excess reserves tax.
B)   not profitable.
C)   against Fed policy.
D)   illegal.E) B) and C)
F) A) and B)

Question 18

Exhibit 19-1  Balance sheet of First Iliad State Bank  In Exhibit 19-1, if the required reserve ratio is raised to 18 percent, then First Iliad State will:

Accepted Answer

A)   have to convert loans worth $800,000 to required reserves.
B)   have to convert loans worth $200,000 to required reserves.
C)   be able to make additional loans worth $800,000.
D)   be able to make additional loans worth $200,000.E) B) and C)
F) A) and B)

Question 19

Reserves of member banks appear on the Fed's balance sheet as liabilities.

Accepted Answer

A) True 
 B)False

Question 20

Exhibit 19-2  Balance Sheet of Springfield National Bank  In Exhibit 19-2, if Springfield National has excess reserves equal to $300, and then its customers write checks for $200, its excess reserves will fall to:

Accepted Answer

A)   $0.
B)   $100.
C)   $140.
D)   $160.
E)   $200.F) C) and E)
G) D) and E)

Exam 19: Money Creation

When the Federal Reserve sells government bonds to the public, it:

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Assume that Paris First National Bank is a thriving bank with deposits of $20 million. If the required reserve ratio is 20 percent and the bank is fully loaned out, the bank will keep what amount of required reserves?

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If your bank receives a checkable deposit of $20,000, and the banking system makes loans totaling $180,000, the maximum possible, then the required reserve ratio must be:

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The federal funds market is the market in which:

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Banks normally hold few excess reserves because this practice is:

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Which of the following correctly is the money multiplier?

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If total deposits at Last Bank and Trust are $100 million, total loans are $70 million, and excess reserves are $20 million, then which of the following is the required reserve ratio?

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Reserves of member banks appear on the Fed's balance sheet as liabilities.

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The market in which banks make loans of reserves for terms of over one year is called the federal funds market.

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Imagine that Odyssey National is a brand new bank, and that its required reserve ratio is 10 percent. If it accepts a $1,000 deposit, then its loan balance can increase by a maximum of:

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Exhibit 19-1 Balance sheet of First Iliad State Bank In Exhibit 19-1, if the required reserve ratio is raised to 18 percent, then First Iliad State will:

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Exhibit 19-2 Balance Sheet of Springfield National Bank In Exhibit 19-2, if Springfield National has excess reserves equal to $300, and then its customers write checks for $200, its excess reserves will fall to:

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A bank creates money when it:

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If the Fed decides to use an open market operation to reduce the money supply by $1 million, and if the money multiplier is 10, then what total amount of Treasury securities must the Fed initially sell?

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Suppose Brenda accepts a loan of $10,000 and deposits the money in her checking account. If the required reserve ratio is 10 percent, and if banks loan out all of their reserves, then what is the maximum increase in the money supply after the multiplier effect has fully operated?

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If the fractional reserve system did not exist,

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Which of the following would cause the money supply in the United States to expand?

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Exhibit 19-5 Balance sheet of Tucker National Bank In Exhibit 19-5, the bank could:

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If a bank has $100,000 in checkable deposits, reserves of $20,000, and no excess reserves, then the required reserve ratio is:

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Exhibit 19-3 Balance sheet of Tucker National Bank The required reserve ratio in Exhibit 19-3 is:

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