Chapter 33 and 34

The goldsmith’s ability to create money was based on the fact that:

paper money was in the form of gold receipts was rarely redeemed for gold.

Which one of the following is presently a major deterrent to bank panics in the United States?

deposit insurance

In a fractional reserve banking system:

banks can create money through the lending process.

A bank that has liabilities of $150 billion and a net worth of $20 billion must have:

assets of $170 billion.

Which of the following describes the identity embodied in a balance sheet?

Assets equals liabilities plus net worth

A commercial bank’s reserves are:

assets to the commercial bank and liabilities to the Federal Reserve Bank holding them.

The primary purpose of the legal reserve requirement is to:

provide a means by which the monetary authorities can influence the lending ability of commercial banks

Suppose a commercial bank has checkable deposits of $100,000 and the legal reserve ratio is 10 percent. If the bank’s required and excess reserves are equal, then its actual reserves:

are $20,000

When a check is drawn and cleared, the

bank against which the check cleared loses 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?

$24,000

Excess reserves refer to the:

difference between actual reserves and required reserves.

Suppose the reserve requirement is 10 percent. If a bank has $5 million of checkable deposits and actual reserves of $500,000, the bank:

cannot safely lend out more money.

Assume that a bank initially has no excess reserves. If it receives $5,000 in cash from a depositor and the bank finds that it can safely lend out $4,500, the reserve requirement must be:

10 percent.

Assuming a legal reserve ratio of 20 percent, how much excess reserves would this bank have after a check for $10,000 was drawn and cleared against it

$6,000

A commercial bank can expand its excess reserves by:

demanding and receiving payment on an overdue loan.

Assume Klein ISD deposits $100,000 in Bearkat National Bank. If no excess reserves exists at the time of this deposit is made and the reserve ratio is 20 percent. Bearkat national Bank can increase the money supply by a maximum of:

$80,000

Assume that Smith deposits $600 in currency into her checking account in the XYZ Bank. Later that same day Jones negotiates a loan for $1,200 at the same bank. In what direction and by what amount has the supply of money changed?

increased by $1,200

Assume the bank has a check deposit cleared against it for the ammount

$22,000 and $110,000

If the original balance sheet was for the commercial banking system, rather than a single bank, loans and checkable deposits could have been expanded by a maximum of
Assets Liabilities and Net Worth

$25,000

Which of the following is correct?

Granting a bank loan creates money; repaying a bank loan destroys money.

Banks create money when they:

buy government bonds from households.

In prosperous times commercial banks are likely to hold very small amounts of excess reserves because:

the Federal Reserve Banks pay lower rates of interest on bank reserves than could be earned by the commercial banks loaning out the reserves.

The Federal funds market is the market in which:

banks borrow reserves from one another on an overnight basis

If a portion of the loans extended by commercial banks is taken as cash rather than as checkable deposits, the maximum money-creating potential of the commercial banking
system will:

decrease

After the deposit of $10 billion new currency, the maximum amount by which this commercial banking system can expand the supply of money by lending is:

90 billion

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

raise the required reserve ratio.

The greater the leverage in the fin system all

greater stability of financial system

The transactions demand for money is most closely related to money functioning as a:

medium of exchange

The asset demand for money is most closely related to money functioning as a:

storage of value

The asset demand for money:

varies inversely with the rate of interest

The total demand for money curve will shift to the right as a result of:

an increase in nominal GDP.

Which of the following statements is correct? Other things equal:

deflation will shift both the transactions demand curve for money and the total money demand curve to the left.

In which of the following situation is it certain that the quantity of money demanded by the public will decrease?

nominal GDP decreases and the interest rate increases.

Which of the following is correct?

The asset demand for money is downsloping because the opportunity cost of holding money increases as the interest rate rises

If the quantity of money demanded exceeds the quantity supplied:

the interest rate will rise

Refer to the the stock of money is determined by the Federal Reserve System and does not change when the interest rate changes.diagram of the market for money. The vertical money supply curve Sm reflects the fact that:

the stock of money is determined by the Federal Reserve System and does not change

Refer to the diagram; the equilibrium

i2

If the price of this bond falls by $200, the interest rate will:

rise by 2.5 percentage points

If nominal GDP is $300 and the supply of money is $230, the equilibrium interest rate will be

4 percent

Equilibrium interest rate is

8%

Which of the following will increase commercial bank reserves?

the purchase of government bonds in the open market by the Federal Reserve Banks

When a commercial bank borrows from a Federal Reserve Bank:

the commercial bank’s lending ability is increased.

The Federal Reserve Banks buy government securities from commercial banks. As a result, the checkable deposits:

of commercial banks are unchanged, but their reserves increase.

The four main tools of monetary policy are:

the discount rate, the reserve ratio, the term auction facility, and open-market operations.

Assume the reserve ratio is 25 percent and Federal Reserve Banks buy $4 million of U.S. securities from the public, which deposits this amount into checking accounts. As a result of these transactions, the supply of money is:

directly increased by $4 million and the money-creating potential of the commercial banking system is increased by an additional $12 million.

Assume that a single commercial bank has no excess reserves and that the reserve ratio is 20 percent. If this bank sells a bond for $1,000 to a Federal Reserve Bank, it can expand its loans by a maximum of:

$1,000

Refer to the above data. Suppose the Fed sold $10 billion of U.S. securities to the banks. This would:

reduce bank reserves to $50 billion, increase bank-held securities to $150 billion, and decrease the money supply (checkable deposits) by $100 billion

When the required reserve ratio is increased, the excess reserves of member banks are

reduced and the multiple by which the commercial banking system can lend is reduced.

When the required reserve ratio is increased, the excess reserves of member banks are:

reduced and the multiple by which the commercial baking system can lend is reduced

Refer to the above data. If the Fed increased the reserve requirement from 20 percent to 25 percent, a
deficiency of reserves in the commercial banking system of _____ would occur and the monetary multiplier
would fall to ____.

$50 billion; 4