chapter 15 – Flashcards

In a fractional reserve banking system: A. bank panics cannot occur. B. the monetary system must be backed by gold. C. banks can create money through the lending process. D. the Federal Reserve has no control over the amount of money in circulation.

The primary purpose of the legal reserve requirement is to: A. prevent banks from hoarding too much vault cash. B. provide a means by which the monetary authorities can influence the lending ability of commercial banks. C. prevent commercial banks from earning excess profits. D. provide a dependable source of interest income for commercial banks.

When a check is drawn and cleared, the 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.

Suppose the ABC bank has excess reserves of $4,000 and outstanding checkable deposits of $80,000. If the reserve requirement is 25 percent, what is the size of the bank's actual reserves? A. $16,000. B. $84,000. C. $24,000. D. $20,000.

Excess reserves refer to the: A. difference between a bank's vault cash and its reserves deposited at the Federal Reserve Bank. B. minimum amount of actual reserves a bank must keep on hand to back up its customers deposits. C. difference between actual reserves and loans. D. difference between actual reserves and required reserves.

A reserve requirement of 20 percent means a bank must have $1,000 of reserves if its checkable deposits are: A. $100. B. $1,000. C. $5,000. D. $12,000.

The amount that a commercial bank can lend is determined by its: A. required reserves. B. excess reserves. C. outstanding loans. D. outstanding checkable deposits.

Commercial banks create money when they: A. accept cash deposits from the public. B. purchase government securities from the central banks. C. create checkable deposits in exchange for IOUs. D. raise their interest rates.

When a commercial bank has excess reserves: A. it is in a position to make additional loans. B. its actual reserves are less than its required reserves. C. it is charging too high an interest rate on its loans. D. its reserves exceed its assets.

If we both have checking accounts in the same commercial bank and I write a check in your favor for $200, the bank's: A. balance sheet will be unchanged. B. reserves and checkable deposits will both decline by $200. C. liabilities will decline by $200, but its net worth will increase by $200. D. assets and liabilities will both decline by $200.

If the reserve requirement is 10 percent, what amount of excess reserves does a bank acquire when a business deposits a $500 check drawn on another bank? A. $450. B. $400. C. $5,000. D. $550.

Banks create money when they: A. allow loans to mature. B. accept deposits of cash. C. buy government bonds from households. D. sell government bonds to households.

Overnight loans from one bank to another for reserve purposes entail an interest rate called the: A. prime rate. B. discount rate. C. federal funds rate. D. treasury bill rate.

The multiple by which the commercial banking system can expand the supply of money on the basis of excess reserves: A. is larger the smaller the required reserve ratio. B. is the reciprocal of the bank's actual reserves. C. is directly or positively related to the size of the required reserve ratio. D. will be zero when the required reserve ratio is 100 percent.

If m equals the maximum number of new dollars that can be created for a single dollar of excess reserves and R equals the required reserve ratio, then for the banking system: A. m = R - 1. B. R = m/1. C. R = m - 1. D. m = 1/R.

Other things equal, if the required reserve ratio was lowered: A. banks would have to reduce their lending. B. the size of the monetary multiplier would increase. C. the actual reserves of banks would increase. D. the federal funds interest rate would rise.

If the monetary authorities want to reduce the monetary multiplier, they should: A. lower the required reserve ratio. B. raise the required reserve ratio. C. increase bank reserves. D. lower interest rates.

The greater the required reserve ratio, the: A. higher is the spending multiplier. B. lower is the spending multiplier. C. lower is the monetary multiplier. D. higher is the monetary multiplier.

Money is destroyed when: A. loans are made. B. checks written on one bank are deposited in another bank. C. loans are repaid. D. the net worth of the banking system declines.

When cash is withdrawn from a checkable-deposit account at a bank: A. The money supply M1 increases B. The money supply M1 decreases C. The money supply M1 does not change but its composition changes D. The composition of money supply M1 does not change

A commercial bank has required reserves of $60 million and the reserve ratio is 20 percent. How much are the commercial bank's checkable-deposit liabilities? A. $120 million B. $900 million C. $300 million D. $1,200 million

Henry deposits $2,000 in currency in the First Street Bank. Later that same day Jane Harris negotiates a loan for $5,400 at the same bank. After these transactions, the supply of money has: A. Increased by $2,100 B. Increased by $3,300 C. Increased by $5,400 D. Decreased by $3,300

When a check is cleared against a bank, the bank will lose: A. Cash and securities B. Checkable deposits and reserves C. Reserves and capital stock D. Loans and demand deposits