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Exam 15: Money Creation

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Question 121

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

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) None of the above
F) B) and C)

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Question 122

Multiple Choice

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When bankers hold excess reserves,

A) the size of the monetary multiplier increases.
B) the money-creating potential of the banking system increases.
C) the money-creating potential of the banking system decreases.
D) there is no change in the money-creating potential of the banking system.

E) B) and D)
F) C) and D)

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Question 123

Multiple Choice

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When required reserves exceed actual reserves, commercial banks will be forced to have borrowers

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

In an uncontrolled or unregulated system, commercial bank lending will tend to intensify the business cycle.

The basic reason why the commercial banking system can increase its checkable deposits by a multiple of itscess reserves is that A) reserves lost by any particular bank will be gained by some other bank. B) the central banks follow policies that prevent reserves from falling below the level required by law. C) the MPC of borrowers is greater than zero but less than 1. D) the banking system must keep reserves equal to 100 percent of its checkable-deposit liabilities.

How are bank customers protected against bank failures? Explain.

$\begin{array} { | c | c | c | c | c | } \hline & \text { Reserve Requirement (\%) } & \text { Checkable Deposits } & \text { Actual Reserves } & \text { Excess Reserves } \\\hline ( 1 ) & \underline { W } & \$ 100,000 & \$ 10,000 & \$ 0 \\\hline ( 2 ) & 8 & \underline { X } & 20,000 & 12,000 \\\hline ( 3 ) & 12 & 200,000 & \underline { Y } & 8,000 \\\hline ( 4 ) & 20 & 300,000 & 70,000 & \underline { Z } \\\hline\end{array}$ The accompanying table gives data for a commercial bank or thrift. In row 3, the number appropriate for space Y is

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

The accompanying table is the consolidated balance sheet for the commercial banking system. All figures are in billions. Assume that the required reserve ratio is 10 percent. The maximum amount by which this commercial Banking system can expand the supply of money by lending is

"Leverage" in finance refers to the

Given a 25 percent reserve ratio, assume the commercial banking system is loaned up. Now assume the reserve ratio is reduced to 20 percent. As a result of this reduction,

A commercial bank's reserves are

One bank can borrow reserves from another bank, and the interest on the loan is called the federal funds rate.

If a commercial banking system has $200,000 in checkable deposits, actual reserves of $70,000, and a reserve ratio of 20 percent, then the banking system can expand the supply of money by a maximum of $180,000.

A bank has excess reserves of $5,000 and demand deposits of $50,000; the required reserve ratio is 20 percent. If the reserve ratio is raised to 25 percent, then this bank can lend a maximum of

The required reserve ratio is equal to

A commercial bank has required reserves of $60 million and the reserve ratio is 20 percent. How much are the commercial bank's checkable-deposit liabilities?

If actual reserves in the banking system are $8,000, checkable deposits are $70,000, and the legal reserve ratio is 10 percent, then excess reserves are

Assume that the required reserve ratio is 5 percent. If a commercial bank has $2 million cash in its vault, $1 million in government securities, $3 million on deposit at the Fed, and $60 million in checkable deposits, then its excess Reserves equal