Question 1

The primary purpose of the reserve requirements for banks is not really to ensure liquidity to meet withdrawals, but rather to allow the Fed some control over the money supply.

Accepted Answer

A) True 
 B)False

Question 2

The commercial banking system can lend by a multiple of its excess reserves primarily because

Accepted Answer

A)  its reserves are on deposit with the Federal Reserve Banks.
B)  its reserves are highly liquid assets.
C)  it loses reserves when it extends credit.
D)  its required reserves are fractional.E) B) and C)
F) A) and D)

Question 3

If the reserve requirement is 20 percent, the monetary multiplier will be 4.

Accepted Answer

A) True 
 B)False

Question 4

Banks' borrowed funds come mostly from

Accepted Answer

A)  buying bonds and loans.
B)  buying stocks and selling Treasury bonds.
C)  issuing stocks and buying Treasury bonds.
D)  issuing bonds and accepting deposits.E) A) and D)
F) A) and C)

Question 5

A commercial bank buys a $50,000 government security from a securities dealer.The bank pays the dealer by increasing the dealer's checkable deposit balance by $50,000.The money supply has

Accepted Answer

A)  not been affected.
B)  decreased by $50,000.
C)  increased by $50,000.
D)  increased by $50,000 multiplied by the reserve ratio.E) B) and C)
F) A) and B)

Question 6

A depositor places $5,000 in cash in a commercial bank, and the reserve ratio is 20 percent; the bank sends the $5,000 to the Federal Reserve Bank.As a result, the reserves and excess reserves of the bank have been increased by

Accepted Answer

A)  $5,000 and $1,000, respectively.
B)  $5,000 and $4,000, respectively.
C)  $5,000 and $5,000, respectively.
D)  $4,000 and $4,000, respectively.E) A) and B)
F) A) and C)

Question 7

(Last Word)  The greater the leverage in the financial system, all else equal,

Accepted Answer

A)  the smaller the monetary multiplier.
B)  the smaller the profit and loss margins of financial firms.
C)  the greater the stability of the financial system.
D)  the greater the instability of the financial system.E) All of the above
F) A) and B)

Question 8

The primary reason commercial banks must keep required reserves on deposit at the Fed is to

Accepted Answer

A)  add to the liquidity of the commercial bank.
B)  allow the Fed to control the amount of bank lending.
C)  protect the deposits in the commercial bank against losses.
D)  ensure that depositors can withdraw their money if they wish to.E) A) and B)
F) A) and C)

Question 9

If a bank has excess reserves of $100,000, then it can lend out only up to $100,000; but if the banking system has excess reserves of $100,000, then the system can make additional loans totaling more than $100,000.

Accepted Answer

A) True 
 B)False

Question 10

If the monetary authorities want to reduce the monetary multiplier, they should

Accepted Answer

A)  lower the required reserve ratio.
B)  raise the required reserve ratio.
C)  increase bank reserves.
D)  lower interest rates.E) None of the above
F) B) and C)

Question 11

The amount that a commercial bank can lend is determined by its

Accepted Answer

A)  required reserves.
B)  excess reserves.
C)  outstanding loans.
D)  outstanding checkable deposits.E) C) and D)
F) A) and B)

Question 12

"Leverage" in finance refers to the

Accepted Answer

A)  increase in profits or losses from an investment.
B)  use of one's own money in an investment.
C)  use of borrowing money in order to magnify returns from an investment.
D)  shifting of financial risk onto an insurer.E) B) and D)
F) A) and C)

Question 13

When a check is drawn and cleared, the

Accepted Answer

A)  reserves and deposits of both the bank against which the check is cleared and the bank receiving the check are unchanged by this transaction.
B)  bank against which the check is cleared loses reserves and deposits equal to the amount of the check.
C)  bank receiving the check loses reserves and deposits equal to the amount of the check.
D)  bank against which the check is cleared acquires reserves and deposits equal to the amount of the check.E) A) and B)
F) B) and C)

Question 14

If actual reserves in the banking system are $40,000, excess reserves are $10,000, and checkable deposits are $240,000, then the legal reserve requirement is

Accepted Answer

A)  10 percent.
B)  12.5 percent.
C)  20 percent.
D)  5 percent.E) All of the above
F) B) and C)

Question 15

A commercial bank's reserves are

Accepted Answer

A)  liabilities to both the commercial bank and the Federal Reserve Bank holding them.
B)  liabilities to the commercial bank and assets to the Federal Reserve Bank holding them.
C)  assets to both the commercial bank and the Federal Reserve Bank holding them.
D)  assets to the commercial bank and liabilities to the Federal Reserve Bank holding them.E) All of the above
F) None of the above

Question 16

The greater the required reserve ratio, the

Accepted Answer

A)  higher is the spending multiplier.
B)  lower is the spending multiplier.
C)  lower is the monetary multiplier.
D)  higher is the monetary multiplier.E) A) and D)
F) None of the above

Question 17

Which of the following factors can contribute to a reduction in the money supply?

Accepted Answer

A)  bank purchases of Treasury bonds from the Fed
B)  bank sales of government bonds to meet liquidity demands
C)  banks expanding the approval and granting of loans
D)  a decrease in the required reserve ratioE) A) and D)
F) None of the above

Question 18

The maximum deposit creation that can be made in the banking system is equal to the excess reserves divided by the required reserve ratio.

Accepted Answer

A) True 
 B)False

Question 19

Fractional reserve banking refers to a system where banks

Accepted Answer

A)  grant loans to their borrowing customers.
B)  deposit a fraction of their reserves at the central bank.
C)  hold only a fraction of their deposits in their reserves.
D)  accept a portion of their deposits in checkable accounts.E) B) and D)
F) All of the above

Question 20

Most modern banking systems are based on

Accepted Answer

A)  money of intrinsic value.
B)  commodity money.
C)  100 percent reserves.
D)  fractional reserves.E) A) and B)
F) None of the above

Exam 35: Money Creation

The amount that a commercial bank can lend is determined by its

Correct AnswerverifiedShow Answer

A commercial bank buys a $50,000 government security from a securities dealer.The bank pays the dealer by increasing the dealer's checkable deposit balance by $50,000.The money supply has

Correct AnswerverifiedShow Answer

Fractional reserve banking refers to a system where banks

Correct AnswerverifiedShow Answer

If the monetary authorities want to reduce the monetary multiplier, they should

Correct AnswerverifiedShow Answer

The commercial banking system can lend by a multiple of its excess reserves primarily because

Correct AnswerverifiedShow Answer

The greater the required reserve ratio, the

Correct AnswerverifiedShow Answer

"Leverage" in finance refers to the

Correct AnswerverifiedShow Answer

Banks' borrowed funds come mostly from

Correct AnswerverifiedShow Answer

If actual reserves in the banking system are $40,000, excess reserves are $10,000, and checkable deposits are $240,000, then the legal reserve requirement is

Correct AnswerverifiedShow Answer

Which of the following factors can contribute to a reduction in the money supply?

Correct AnswerverifiedShow Answer

(Last Word) The greater the leverage in the financial system, all else equal,

Correct AnswerverifiedShow Answer

Most modern banking systems are based on

Correct AnswerverifiedShow Answer

If the reserve requirement is 20 percent, the monetary multiplier will be 4.

Correct AnswerverifiedShow Answer

The primary reason commercial banks must keep required reserves on deposit at the Fed is to

Correct AnswerverifiedShow Answer

A commercial bank's reserves are

Correct AnswerverifiedShow Answer

A depositor places $5,000 in cash in a commercial bank, and the reserve ratio is 20 percent; the bank sends the $5,000 to the Federal Reserve Bank.As a result, the reserves and excess reserves of the bank have been increased by

Correct AnswerverifiedShow Answer

The primary purpose of the reserve requirements for banks is not really to ensure liquidity to meet withdrawals, but rather to allow the Fed some control over the money supply.

Correct AnswerverifiedShow Answer

When a check is drawn and cleared, the

Correct AnswerverifiedShow Answer

The maximum deposit creation that can be made in the banking system is equal to the excess reserves divided by the required reserve ratio.

Correct AnswerverifiedShow Answer

If a bank has excess reserves of $100,000, then it can lend out only up to $100,000; but if the banking system has excess reserves of $100,000, then the system can make additional loans totaling more than $100,000.

Correct AnswerverifiedShow Answer

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