Money and Banking, Money Demand and Money Supply (1-16-2016)

Money and Banking 1. A person deposits $1 000 with the banking system. The required reserve ratio is 0.25. As a result of

the deposit, the maximum amount of deposit created would be _____ and the maximum amount of money supply created would be _____.

A. $4 000; $4 000 B. $4 000; $3 000 C. $3 000; $4 000 D. $3 000 ; $3 000 (90-18) 2. The maximum banking multiplier will increase when there is A. a reduction in the excess reserve ratio in the banking system. B. a reduction in the minimum legal reserve ratio. C. a wider spread of the banking habit among the public. D. technological progress in the electronic payments system. (90-19) 3. The necessary condition for credit creation of the commercial banks is A. the adoption of a fractional reserve system. B. no excess reserves held by the banking sector. C. no cash leakage to the public. D. the availability of sufficient loans to the public. (91-24) 4. Suppose Bank As balance statement is as follows: A

Assets ($000) Liabilities ($000) Reserves 40 Loans 45 Investment 90

Demand Deposits 130 Capital 45

Assuming a legal reserve ratio of 20 percent, how much excess reserves would this bank have after a cheque for $10 000 was drawn and cleared against it? A. $6 000 B. $14 000 C. $16 000 D. $24 000 (92-01) 5. Initially a bank has no excess reserves and the legal reserve ratio is 25%. Now a customer adds to

his demand deposit by depositing $100 in cash from his pocket. The bank grants a loan equal to the resulting excess reserves.

What is the possible maximum amount of loans created by the whole banking system? A. $75 B. $100 C. $300 D. $400 (93-18) 6. If part of loans granted by banks is held as cash by the non-bank public and does not return to the

banking system, the maximum money-creating ability of the banking system will A. increase. B. decrease. C. be unaffected. D. be greater than the reserve ratio times the system excess reserves. (94-19) 7. Suppose Mr. Chan deposits $1,250 cash in Bank A. Later on the same day Bank A grants a loan of

$2,500 to Miss Lee. What will be the immediate effect on the money supply? A. It will increase by $2,500. B. It will increase by $1,250.

C. It will decrease by $2,500. D. It will decrease by $1,250. (94-20) 8. When a commercial bank makes a loan, it (1) acquires an asset. (2) increases the liability of the bank. (3) increases the money supply. A. (1) and (2) only B. (1) and (3) only C. (2) and (3) only D. (1), (2) and (3) (95-09) Study the following balance sheet of a banking system and answer question 9 and 10.

Assets ($) Liabilities ($) Reserves 4,000 Loans 3,000 Investment 1,000

Demand Deposits 8,000

9. Suppose the banking system has $2,000 excess reserves. When the central bank buys $2,000 worth

of government bonds from the non-bank public, the excess reserves of the banking system would increase by

A. $0. B. $1,000. C. $1,500. D. $2,000. (95-16) 10. If the banks engage in credit creation after the purchase of government bonds by the central bank,

which of the following statements will be true? (1) The maximum amount of demand deposits will be $24,000. (2) The loans will increase. (3) The excess reserves will decrease. A. (1) and (2) only B. (1) and (3) only C. (2) and (3) only D. (1), (2) and (3) (95-17) 11. The total amount of currency issued is $100 billion. Half is held by the non-bank public and half is

held by commercial banks as reserve. Suppose the minimum reserve ratio is 20% and banks do not keep excess reserves, the money supply will be

A. $60 billion. B. $100 billion. C. $250 billion. D. $300 billion. (96-19) 12. Which of the following is true if the required reserve ratio is 100%? A. The money supply will not change if banks accept deposits from the public. B. The total amount of bank loans must be equal to the total amount of deposits. C. The banking multiplier can be greater than 1. D. The government cannot affect the money supply. (97-07)

For Questions 13 and 14, consider the following balance sheet of a banking system. Assets ($) Liabilities ($)

Reserves 3 000 Loans 4 000 Investment 5 000

Deposits 12 000

Suppose the banking system has $600 excess reserves, the public does not hold any cash and deposits all cash into the banking system. 13. Suppose the central bank sells $500 worth of government bonds to the commercial banks, the

money supply in the economy will A. decrease by $500. B. decrease by $2 500. C. remain unchanged. D. increased by $500. (99-15) 14. Suppose a customer withdraws $2 000 cash from a commercial bank by cheque. What would be the

maximum possible amount of deposits in the whole banking system? A. $2 000. B. $5 000. C. $7 000. D. $10 000. (99-16) Study the following balance sheet of a banking system and answer questions 15 and 16,

Assets ($) Liabilities ($) Reserves 2 500 Loans 6 000 Investment 1 500

Deposits 10 000

Suppose the banking system has excess reserve of $500 and the public does not cash. 15. Which of the following statements are correct? (1) The required reserve ratio is 0.2. (2) The money supply is $10 000. (3) The maximum amount of loans the whole banking system can make is $12 500. A. (1) and (2) only. B. (1) and (3) only. C. (2) and (3) only. D. (1), (2) and (3) (00-17) 16. Suppose the government buys $1 000 worth of bonds from the commercial banks. If the total

amount of loans of the banking system increases to $10 000, the total amount of excess reserve will be _____ and the money supply will be _____.

A. $700 ... $14 000 B. $1 500 ... $10 000 C. $700 ... $10 000 D. $1 500 ... $14 000 (00-18) 17. Suppose the balance sheet of a banking system is as follows:

Assets ($) Liabilities ($) Reserves 300 Loans 700

Deposits 1 000

Suppose the amount of excess reserves in the banking system is $50. Now, a customer withdraws $50 from his bank account. What would be the amount of deposits in the banking system if the banking system is fully loaned up? A. $750 B. $800 C. $950 D. $1 000 (01-18)

Study the following balance sheet of a banking system and answer questions 18 and 19. Suppose the required reserve ratio is 25%.

Assets ($) Liabilities ($) Reserves 3 000 Loans 5 000

Deposits 8 000

18. The maximum possible amount of deposits in the banking system is A. $4 000 B. $8 000 C. $12 000 D. $15 000 (02-20) 19. Newly printed bank notes worth $400 are issued resulting in a $200 increase in cash held by the

non-bank public and a $1 000 increases in the money supply. The total amount of excess reserves in the banking system will be

A. $800 B. $950 C. $1 000 D. $1 600 (02-21) Study the following balance sheet of a banking system and answer questions 20 and 21. Suppose the banking system is fully loaned up and the public keeps $1 cash for every $10 deposit.

Assets ($) Liabilities ($) Reserves 200 Loans 800

Deposits 1 000

20. What is the money supply of this economy? A. $1 100 B. $1 200 C. $5 000 D. $5 500 (03-15) 21. Suppose $300 of newly printed bank notes are issued. What will be the new amount of deposits in

the banking system after the deposit creation process? A. $1 300 B. $2 000 C. $2 350 D. $2 500 (03-16) Study the following balance sheet of a banking system and answer Questions 22 and 23.

Assets ($) Liabilities ($) Reserves 2 000 Loans 7 000 Investment 1 000

Deposits 10 000

22. Suppose the banking system does not hold any excess reserve. The immediate effect(s) of a

withdrawal of $500 cash from the banking system is/are (1) the reserve shortage is $100. (2) the money supply remains unchanged. (3) the monetary base remains unchanged. A. (2) only B. (1) and (3) only C. (2) and (3) only D. (1), (2) and (3) (05-19) 23. After the credit contraction process is completed, the money supply will decrease by _____ and the

monetary base will _____. A. $1 500 ... decrease by $500 B. $1 500 ... remain unchanged C. $2 000 ... decrease by $500 D. $2 000 ... remain unchanged (05-20)