If it looks like a bank won't meet the Federal Reserve Bank's reserve requirement, normally it will first turn to the:
A) other member banks and borrow at the federal funds rate.
B) Fed and borrow at the discount rate.
C) open market and borrow money there.
D) Congress to borrow funds.
Exhibit: Money Creation
The reserve requirement is 20%, and Leroy deposits his $1,000 check received as a graduation gift in his checking account. The bank does NOT want to hold excess reserves.
Reference: Ref 13-2
(Exhibit: Money Creation) What is the maximum expansion in the money supply possible?
A) $1,000
B) $1,800
C) $4,000
D) $5,000
21. Exhibit: Money Creation
The reserve requirement is 20%, and Leroy deposits his $1,000 check received as a graduation gift in his checking account. The bank does NOT want to hold excess reserves.
Reference: Ref 13-2
(Exhibit: Money Creation) By how much did the monetary base change?
A) $0
B) $800
C) $1,000
D) $4,000
The money multiplier is equal to:
A) the ratio of the money supply to the monetary base.
B) the ratio of the monetary base to the money supply.
C) the money supply divided by the reserve ratio.
D) none of the above.
24. If a bank has deposits of $100,000, cash on hand of $10,000 and $15,000 on deposit at the Federal Reserve, and the required reserve ratio is .20, then the bank:
A) has no excess reserves.
B) has excess reserves of $5,000.
C) has insufficient reserves to meet requirements.
D) has an insufficient deposit to loan ratio.
25. Suppose the banking system does NOT hold excess reserves and the reserve ratio is 20%. If Sam deposits $500 of cash into his checking account, the banking system can increase the money supply by:
A) $5,000.
B) $2,000.
C) $2,500.
D) $400.
Which of the following actions would allow banks to lend out more money?
A) an increase in the required reserve ratio
B) a decrease in the discount rate
C) an increase in the federal funds rate
D) an increase in the required reserve ratio coupled with an increase in the federal funds rate
28. Federal funds are:
A) government tax receipts.
B) loans between banks.
C) government expenditures.
D) bank deposits at the Federal Reserve.
29. The discount rate is the interest rate the Fed charges on loans to:
A) consumers.
B) the federal government.
C) state governments.
D) banks.
30. The Fed controls:
A) the discount rate.
B) the monetary base.
C) the reserve ratio
D) all of the above.
31. If the Fed conducts a $10 million open-market sale and the reserve requirement is 20%, the monetary base will:
A) increase by $10 million.
B) increase by $8 million.
C) decrease by $10 million.
D) decrease by $50 million.
If a bank has assets equal to $100 million dollars, according to practice, its liabilities should NOT exceed:
A) $7,000.
B) $70,000.
C) $93,000.
D) $107,000.
16. Suppose a bank has excess reserves of $800 and the reserve ratio is 20%. If Andy deposits $1,000 of cash into his checking account and the bank lends $600 to Molly, that bank can lend an additional:
A) $200.
B) $1,000.
C) $800.
D) $2,400.
Expansionary fiscal policies:
A) make the budget surplus smaller.
B) make the budget deficit smaller.
C) affect only taxes.
D) affect only government spending.
a
a
c
d
lfdc
To answer these questions, we need to understand some key concepts related to banking and monetary policy:
1. Reserve Requirement: This refers to the percentage of deposits that banks are required to hold in reserve. If a bank does not have enough reserves to meet the requirement, it will need to take certain actions.
2. Federal Funds Rate: This is the interest rate at which banks borrow from each other in the short term to meet their reserve requirements.
3. Discount Rate: This is the interest rate at which banks borrow from the Federal Reserve when they cannot meet their reserve requirements.
4. Open Market Operations: This refers to the buying and selling of government securities by the Federal Reserve to control the money supply.
5. Monetary Base: This includes currency in circulation and reserves held by banks.
6. Money Multiplier: This is a measure of the maximum amount the money supply can expand based on changes in the monetary base.
Now let's go through the questions:
1. If a bank won't meet the Federal Reserve Bank's reserve requirement, normally it will first turn to the:
Answer: B) Fed and borrow at the discount rate.
2. What is the maximum expansion in the money supply possible?
Answer: C) $4,000.
Explanation: To calculate the maximum expansion in the money supply, we can use the money multiplier. In this case, the reserve requirement is 20%, so the money multiplier is 1/0.20 = 5. Leroy's $1,000 deposit can be multiplied by the money multiplier, resulting in a maximum expansion of $1,000 * 5 = $5,000. However, since the bank does not want to hold excess reserves, the expansion will be $5,000 - $1,000 = $4,000.
3. By how much did the monetary base change?
Answer: C) $1,000.
Explanation: When Leroy deposits $1,000, the monetary base increases by the amount of the deposit, which is $1,000.
4. The money multiplier is equal to:
Answer: A) the ratio of the money supply to the monetary base.
5. If a bank has deposits of $100,000, cash on hand of $10,000, and $15,000 on deposit at the Federal Reserve, and the required reserve ratio is .20, then the bank:
Answer: B) has excess reserves of $5,000.
Explanation: The required reserves can be calculated by multiplying the deposits by the reserve ratio: $100,000 * 0.20 = $20,000. Since the bank has $25,000 in reserves ($10,000 cash on hand + $15,000 at the Federal Reserve), the excess reserves are $25,000 - $20,000 = $5,000.
6. If Sam deposits $500 of cash into his checking account, the banking system can increase the money supply by:
Answer: B) $2,000.
Explanation: Since the reserve ratio is 20%, the banks are required to hold $100 (20% of $500) in reserves and can lend out the remaining $400. This $400 can then be deposited by the borrower into another account, and the process can repeat, resulting in a maximum expansion of $500 * 1/0.20 = $2,500. However, since the question specifies that the banking system does NOT hold excess reserves, the actual money supply increase will be less, which is $2,500 - $500 (initial deposit) = $2,000.
7. Which of the following actions would allow banks to lend out more money?
Answer: B) a decrease in the discount rate.
Explanation: A decrease in the discount rate would lower the cost of borrowing from the Federal Reserve for banks, encouraging them to borrow more and increasing their capacity to lend.
8. Federal funds are:
Answer: B) loans between banks.
9. The discount rate is the interest rate the Fed charges on loans to:
Answer: D) banks.
10. The Fed controls:
Answer: D) all of the above.
Explanation: The Federal Reserve controls the discount rate, the monetary base, and the reserve ratio.
11. If the Fed conducts a $10 million open-market sale and the reserve requirement is 20%, the monetary base will:
Answer: C) decrease by $10 million.
Explanation: When the Fed conducts an open-market sale, it sells government securities, reducing the reserves held by banks. Since the reserve requirement is 20%, a $10 million reduction in reserves will result in a decrease in the monetary base by $10 million.
12. If a bank has assets equal to $100 million dollars, according to practice, its liabilities should NOT exceed:
Answer: D) $107,000.
Explanation: The bank's liabilities should represent the funds it owes to depositors. According to practice, the liabilities should not exceed the bank's capital (assets minus liabilities). Since the assets are $100 million, the liabilities should not exceed this amount. The given answer options have incorrect values.
13. Suppose a bank has excess reserves of $800 and the reserve ratio is 20%. If Andy deposits $1,000 of cash into his checking account and the bank lends $600 to Molly, that bank can lend an additional:
Answer: A) $200.
Explanation: When Andy deposits $1,000, the bank is required to hold $200 (20% of $1,000) as reserves. Since there are already $800 in excess reserves, the bank can still lend out $200 more.
14. Expansionary fiscal policies:
Answer: D) affect only government spending.
Explanation: Expansionary fiscal policies involve increasing government spending and/or decreasing taxes to stimulate economic growth. It is not limited to affecting only government spending or only taxes.
I hope this helps! Let me know if you have any further questions.