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Chapter 19 Practice Quiz Tutorial

Money Creation

©2004 South-Western

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1. If a bank has total deposits of $100,000 set aside to meet reserve requirements of the Fed, its required reserve ratio isa. $10,000.b. 10 percent.c. 0.1 percent.d. 1 percent.

B. Required reserve ratio = required deposits total deposits x 100 = $10,000 $100,000 x 100

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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 received a new deposit of $10,000 would be able to extend new loans up to a maximum of a. $3,000.b. $7,000.c. $10,000.d. $30,000.

B. Excess reserves can be loaned. Excess reserves = total reserves - required reserves = $10,000 - (0.3 x $10,000) = $10,000 - $3,000 = $7,000

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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.

B. Excess reserves = total reserves - required reserves = -$400 - (0.10 x $400) = -$400 + $40 = -$360

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4. If an increase in excess reserves of $100 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.

C. $ multiplier = in bank deposits initial in excess reserves = 400 $100 = 4 = 1 required reserve ratio = 1 money multiplier x 100.

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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.

C. Money supply change ( M1) = initial in excess reserves x money multiplier (MM).

MM = 1 required reserve ratio = 1 25/100 = 4 .

M1 = $1,000 x 4 = -$4,000.

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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 toa. increase by $100.b. decrease by $200.c. decrease by $5,000.d. increase by $5,000.

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.

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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.

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.

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Exhibit 19-5

Balance Sheet of Best National BankAssets Liabilities

Required Reserves$ Checkable

deposits$100,000

Excess Reserves

Total $100,000 Total $100,000

Loans 80,000

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8. The required reserve ratio in Exhibit 19-5 is a. 10 percent.b. 15 percent.c. 20 percent.d. 25 percent.

C. Excess reserves = total reserves - required reserves = $80,000 = $100,000 - required reserves = $20,000

Required reserve ratio = required deposits total deposits = $20,000 $100,000 x 100 = 20%

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9. If the bank in Exhibit 19-5 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.

B. Required reserves = required reserve ratio x new deposits = .20 x $100,000 = $20,000

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10. Suppose Brad Rich deposits $1,000 in the bank shown in Exhibit 19-5. The result would bea. 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.

B. Required reserves = required reserve ratio x new deposits = .20 x $1,000 = $200

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11. If all banks in the system are identical to Best National Bank in Exhibit 19-5, the money multiplier would be a. 5.b. 10.c. 15.d. 20.

A. Money multiplier = 1 required reserve ratio = 1 20/100 = 5

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12. Assume all banks in the system are identical to Best National Bank in Exhibit 19-5. 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.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.

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