Question 1

A bank owns a 10-story office building.In the bank's balance sheet, this would be listed as part of

Accepted Answer

A)  assets.
B)  liabilities.
C)  capital stock.
D)  net worth.E) B) and C)
F) B) and D)

Question 2

When you deposit money at a bank, the bank will normally turn around and lend most of it to a borrower.

Accepted Answer

A) True 
 B)False

Question 3

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

Accepted Answer

A)  increased by $2,100.
B)  increased by $3,300.
C)  increased by $5,400.
D)  decreased by $3,300.E) B) and C)
F) All of the above

Question 4

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

Accepted Answer

A)  can safely lend out $500,000.
B)  can safely lend out $5 million.
C)  can safely lend out $50,000.
D)  cannot safely lend out more money.E) B) and C)
F) A) and D)

Question 5

A commercial bank has excess reserves of $10,000 and a required reserve ratio of 20 percent.It grants a loan of $8,000 to a customer, who then writes out a check for $8,000 that is deposited in another bank.The first bank will find its reserves decrease by

Accepted Answer

A)  $2,000.
B)  $3,000.
C)  $1,600.
D)  $8,000.E) A) and B)
F) A) and D)

Question 6

When Bank A borrows reserves in the federal funds market, it causes the total reserves in the banking system to increase.

Accepted Answer

A) True 
 B)False

Question 7

Which of the following is correct?

Accepted Answer

A)  Required reserves minus actual reserves equal excess reserves.
B)  Required reserves equal excess reserves minus actual reserves.
C)  Required reserves equal actual reserves plus excess reserves.
D)  Actual reserves minus required reserves equal excess reserves.E) A) and B)
F) C) and D)

Question 8

A commercial bank has no excess reserves until a depositor places $5,000 in cash at the bank.The commercial bank then lends $4,000 to a borrower.As a consequence of these transactions, the size of the money supply has

Accepted Answer

A)  not been affected.
B)  increased by $4,000.
C)  increased by $5,000.
D)  decreased by $5,000.E) All of the above
F) A) and D)

Question 9

Which of the following statements is correct?

Accepted Answer

A)  The actual reserves of a commercial bank equal its excess reserves minus its required reserves.
B)  A bank's liabilities plus its net worth equal its assets.
C)  When borrowers repay bank loans, the supply of money increases.
D)  A single commercial bank can safely lend a multiple amount of its excess reserves.E) C) and D)
F) None of the above

Question 10

A banker must strike a balance in the pursuit of two conflicting goals: profits and liquidity.In terms of asset management, this translates into achieving a balance between holding

Accepted Answer

A)  loans and securities on one hand and reserves on the other.
B)  loans on one hand and securities on the other.
C)  checkable deposits on one hand and securities on the other.
D)  checkable deposits on one hand and reserves on the other.E) B) and C)
F) A) and B)

Question 11

Suppose a credit union has checkable deposits of $500,000 and the legal reserve ratio is 10 percent.If the institution has excess reserves of $4,000, then its actual reserves are

Accepted Answer

A)  $46,000.
B)  $50,000.
C)  $54,000.
D)  $4,000.E) B) and C)
F) A) and D)

Question 12

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

Accepted Answer

A)  withdrawals of gold tended to exceed deposits of gold in any given time period.
B)  consumers and merchants preferred to use gold for transactions, rather than paper money.
C)  the goldsmith was required to keep 100 percent gold reserves.
D)  paper money in the form of gold receipts was rarely redeemed for gold.E) C) and D)
F) B) and D)

Question 13

The use of high leveraging by banks leads to the banking system's

Accepted Answer

A)  competitiveness.
B)  instability.
C)  vital role in the economy.
D)  monopoly power.E) B) and D)
F) B) and C)

Question 14

When cash is withdrawn from a checkable-deposit account at a bank,

Accepted Answer

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.E) A) and D)
F) B) and C)

Question 15

A commercial bank has excess reserves of $5,000 and a required reserve ratio of 20 percent.It makes a loan of $6,000 to a borrower.The borrower writes a check for $6,000 that is deposited in another commercial bank.After the check clears, the first bank will be short of reserves in the amount of

Accepted Answer

A)  $1,000.
B)  $1,200.
C)  $5,000.
D)  $6,000.E) None of the above
F) B) and C)

Question 16

If banks borrow from the Fed, the banking system's reserves will increase, but if banks borrow from one another, the banking system's reserves will not change.

Accepted Answer

A) True 
 B)False

Question 17

Sharon sells a government security worth $4,600,000 to the Federal Reserve Bank of Kansas City.She then deposits the funds in her checking account at First Commerce Bank.Her checking accounthad a $150,000 balance before this deposit.The reserves of First Commerce Bank would

Accepted Answer

A)  increase by $4,750,000.
B)  increase by $4,600,000.
C)  decrease by $4,600,000.
D)  decrease by $4,450,000.E) A) and B)
F) A) and C)

Question 18

Banks can lend their excess reserves to other banks in the

Accepted Answer

A)  mutual funds market.
B)  Treasury funds market.
C)  federal funds market.
D)  bank funds market.E) B) and D)
F) B) and C)

Question 19

Balance sheets always balance because reserves must always equal liabilities plus net worth.

Accepted Answer

A) True 
 B)False

Question 20

If the required reserve ratio is 20 percent and commercial bankers decide to hold additional excess reserves equal to 5 percent of any newly acquired checkable deposits, then the effective monetarymultiplier for the bankingsystemwill be

Accepted Answer

A)  3.
B)  4.
C)  5.
D)  6.E) A) and D)
F) A) and C)

Exam 35: Money Creation

If banks borrow from the Fed, the banking system's reserves will increase, but if banks borrow from one another, the banking system's reserves will not change.

Correct AnswerverifiedShow Answer

When cash is withdrawn from a checkable-deposit account at a bank,

Correct AnswerverifiedShow Answer

Sharon sells a government security worth $4,600,000 to the Federal Reserve Bank of Kansas City.She then deposits the funds in her checking account at First Commerce Bank.Her checking accounthad a $150,000 balance before this deposit.The reserves of First Commerce Bank would

Correct AnswerverifiedShow Answer

A bank owns a 10-story office building.In the bank's balance sheet, this would be listed as part of

Correct AnswerverifiedShow Answer

Balance sheets always balance because reserves must always equal liabilities plus net worth.

Correct AnswerverifiedShow Answer

Which of the following statements is correct?

Correct AnswerverifiedShow Answer

When Bank A borrows reserves in the federal funds market, it causes the total reserves in the banking system to increase.

Correct AnswerverifiedShow Answer

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

Correct AnswerverifiedShow Answer

A banker must strike a balance in the pursuit of two conflicting goals: profits and liquidity.In terms of asset management, this translates into achieving a balance between holding

Correct AnswerverifiedShow Answer

Which of the following is correct?

Correct AnswerverifiedShow Answer

If the required reserve ratio is 20 percent and commercial bankers decide to hold additional excess reserves equal to 5 percent of any newly acquired checkable deposits, then the effective monetarymultiplier for the bankingsystemwill be

Correct AnswerverifiedShow Answer

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

Correct AnswerverifiedShow Answer

A commercial bank has excess reserves of $10,000 and a required reserve ratio of 20 percent.It grants a loan of $8,000 to a customer, who then writes out a check for $8,000 that is deposited in another bank.The first bank will find its reserves decrease by

Correct AnswerverifiedShow Answer

Banks can lend their excess reserves to other banks in the

Correct AnswerverifiedShow Answer

When you deposit money at a bank, the bank will normally turn around and lend most of it to a borrower.

Correct AnswerverifiedShow Answer

A commercial bank has excess reserves of $5,000 and a required reserve ratio of 20 percent.It makes a loan of $6,000 to a borrower.The borrower writes a check for $6,000 that is deposited in another commercial bank.After the check clears, the first bank will be short of reserves in the amount of

Correct AnswerverifiedShow Answer

The use of high leveraging by banks leads to the banking system's

Correct AnswerverifiedShow Answer

A commercial bank has no excess reserves until a depositor places $5,000 in cash at the bank.The commercial bank then lends $4,000 to a borrower.As a consequence of these transactions, the size of the money supply has

Correct AnswerverifiedShow Answer

Suppose a credit union has checkable deposits of $500,000 and the legal reserve ratio is 10 percent.If the institution has excess reserves of $4,000, then its actual reserves are

Correct AnswerverifiedShow Answer

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

Correct AnswerverifiedShow Answer

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