Chapter 25
Chapter 15
Practice Quiz
Money Creation
1. If a bank has total deposits of $100,000 with $10,000 set aside to meet reserve requirements of the Fed, its required reserve ratio is
a. $10,000.
b. 10 percent.
c. 0.1 percent.
d. 1 percent.
ANS:
b. Required reserve ratio = required deposits/ total deposits x 100 = $10,000/$100,000 x 100 = 10 percent
2. Assume a simplified banking system in which all banks are subject to a uniform required reserve ratio of 30 percent and checkable deposits are the only form of money. A bank that receives a new deposit of $10,000 is able to extend new loans up to a maximum of
a. $3,000.
b. $7,000.
c. $10,000.
d. $30,000.
ANS:
b. Excess reserves can be loaned. Excess reserves = total reserves - required reserves = $10,000 - (0.30 x $10,000) = $10,000 - $3,000 = $7,000
3. The Best National Bank operates with a 10 percent required reserve ratio. One day a depositor withdraws $400 from his or her checking account at the bank. As a result, the bank’s excess reserves
a. fall by $400.
b. fall by $360.
c. fall by $40.
d. rise by $400.
ANS:
b. Excess reserves = total reserves – required reserves = -$400 - (0.10 x $400) = -$400 + $40 = -$360
4. If an increase of $100 in excess reserves in a simplified banking system can lead to a total expansion in bank deposits of $400, the required reserve ratio must be
a. 40 percent.
b. 400 percent.
c. 25 percent.
d. 4 percent.
e. 2.5 percent.
ANS:
c. money multiplier (MM) = ∆ in bank deposits / initial ∆ in excess reserves (ER) = $400/ $100 = 4. Since MM= 1/required reserve ratio (RRR), 4 = 1/RRR or RRR=1/4 = 0.25.
5. In a simplified banking system in which all banks are subject to a 25 percent required reserve ratio, a $1,000 open sale by the Fed would cause the money supply to
a. increase by $1,000.
b. decrease by $1,000.
c. decrease by $4,000.
d. increase by $4,000.
ANS:
c. Money supply change (∆M1) = initial ∆ in excess reserves (ER) x money multiplier (MM).
MM = 1/ required reserve ratio (RRR) = 1/ 25/100= 4.
∆M1 = $1,000 x 4 = -$4,000.
6. In a simplified banking system in which all banks are subject to a 20 percent required reserve ratio, a $1,000 open market purchase by the Fed would cause the money supply to
a. increase by $100.
b. decrease by $200.
c. decrease by $5,000.
d. increase by $5,000.
ANS:
d. Money supply change (∆M1) = initial change in excess reserves (ER) x money multiplier (MM)
MM = 1/ required reserve ratio (RRR) = 1/ 20/100 = 5
∆M1 = $1,000 x 5 = $5,000.
7. The cost to a member bank of borrowing from the Federal Reserve is measured by the
a. reserve requirement.
b. price of securities in the open market.
c. discount rate.
d. yield on government bonds.
ANS:
c. The Fed provides a discount window at each of the Federal Reserve districts banks to make loans of reserves to banks and change an interest rate called the discount rate.
[pic]
8. The required reserve ratio in Exhibit 5 is
a. 10 percent.
b. 15 percent.
c. 20 percent.
d. 25 percent.
ANS:
c. Required reserves = Checkable deposits - Excess reserves = $100,000 - $80,000 = $20,000. Required reserve ratio (RRR) = required reserves/ Checkable deposits = $20,000/ $100,000 x 100 = 20 percent
9. If the bank in Exhibit 5 received $100,000 in new deposits, its addition to required reserves would be
a. $10,000.
b. $20,000.
c. $30,000.
d. $40,000.
ANS:
b. Required reserves = required reserve ratio x new deposits = 0.20 x $100,000 = $20,000
10. Suppose Brad Jones deposits $1,000 in the bank shown in Exhibit 5. The result would be
a. a $200 increase in excess reserves.
b. a $200 increase in required reserves.
c. a $1,200 increase in required reserves.
d. zero change in required reserves.
ANS:
b. Required reserves = required reserve ratio x new deposits = 0.20 x $1,000 = $200
11. If all banks in the system are identical to Best National Bank in Exhibit 5, the money multiplier would be
a. 5.
b. 10.
c. 15.
d. 20.
ANS:
a. Money multiplier (MM) = 1/ required reserve ratio (RRR) = 1/ 20/100 = 5
12. Assume all banks in the system are identical to Best National Bank in Exhibit 5. A $1,000 open market sale by the Fed would
a. expand the money supply by $1,000.
b. expand the money supply by $15,000.
c. contract the money supply by $1,000.
d. contract the money supply by $5,000.
ANS:
d. Money supply change (∆M1) = initial
change in excess reserves x money multiplier (MM)
MM = 1 ¸ required reserve ratio = 1/ 20/100 = 5
∆ M1 = $1,000 x 5 = -$5,000.
[pic]
13. The required reserve ratio in Exhibit 6 is
a. 10 percent.
b. 15 percent.
c. 20 percent.
d. 25 percent.
ANS:
d. Since $5,000 is in Excess reserves and $70,000 is in Loans, the remaining $25,000 must be in required reserves. Therefore, $25,000 is 25 percent of $100,000 checkable deposits.
14. In Exhibit 6, the bank could
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.
ANS:
a. Tucker National Bank can extend new loans equal to the amount in its Excess reserves.
15. If all banks in the system shown in Exhibit 6 were identical to Tucker National Bank, the money multiplier for the system would be
a. 4.
b. 5.
c. 10.
d. 25.
ANS:
a. The money multiplier equals 1/required reserve ratio. Therefore, 1 ÷ 25/100 = 1 ÷ ¼ = 4.
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