61) The minimum percent of deposits that banks must hold and cannot loan is determined
by the
A) interest rate.
B) discount rate.
C) required reserve ratio.
D) federal funds rate.
E) ratio of M2 to M1.
Skill: Level 2: Using deinitions
Section: Checkpoint 11.3
Status: Old
AACSB: Relective thinking
62) The discount rate is the interest rate that
A) commercial banks charge their customers.
B) commercial banks charge each other for the loan of reserves.
C) the Fed charges the government for loans.
D) the Fed charges commercial banks when it loans reserves to the banks.
E) the Fed pays commercial banks on their reserves held at the Fed.
Skill: Level 1: Deinition
Section: Checkpoint 11.3
Status: Old
AACSB: Relective thinking
63) The monetary base is the
A) minimum reserve banks must hold to cover any losses from unpaid loans.
B) sum of coins, Federal Reserve notes, and banks’ reserves at the Fed.
C) sum of gold and foreign exchange held by the Fed.
D) sum of government securities and loans to banks held by the Fed.
E) sum of coins, required reserves, and banks’ loans.
Skill: Level 1: Deinition
Section: Checkpoint 11.3
Status: Old
AACSB: Relective thinking
61
64) If Federal Reserve notes and coins are $765 billion, and banks’ reserves at the Fed are
$8 billion, the gold stock is $11 billion, and the Fed owns $725 billion of government
securities, what does the monetary base equal?
A) $765 billion
B) $773 billion
C) $776 billion
D) $744 billion
E) $1,509 billion
Skill: Level 2: Using deinitions
Section: Checkpoint 11.3
Status: Old
AACSB: Relective thinking
65) If the Federal Reserve ________ the required reserve ratio, the interest rate ________.
A) lowers; rises
B) lowers; falls
C) raises; does not change
D) raises; falls
E) Not enough information is given because the efect depends also on the size of the
monetary base.
Skill: Level 2: Using deinitions
Section: Checkpoint 11.3
Status: Old
AACSB: Relective thinking
66) If the Federal Reserve lowers the required reserve ratio, people will end up taking out
________ because the interest rates ________.
A) fewer loans; will rise
B) more loans; will fall
C) the same number of loans; will not change
D) more loans; will rise
E) fewer loans; are controlled by the economic conditions alone
Skill: Level 3: Using models
Section: Checkpoint 11.3
Status: New
AACSB: Relective thinking
62
11.4 Regulating the Quantity of Money
1) New money is created in the U.S. economy by
A) increased federal government expenditures.
B) banks that create checkable deposits.
C) the U.S. Treasury.
D) U.S. Department of Mint.
E) the U.S. Congress.
Skill: Level 1: Deinition
Section: Checkpoint 11.4
Status: Old
AACSB: Relective thinking
2) Banks create money by
A) printing dollar bills without limit.
B) creating deposits without limit.
C) printing money up to their required reserve limit.
D) making loans and creating deposits, a process that is limited by the size of banks’ excess
reserves.
E) buying U.S. government securities with cash.
Skill: Level 2: Using deinitions
Section: Checkpoint 11.4
Status: Old
AACSB: Relective thinking
3) Banks create money by
A) printing paper money.
B) minting coins.
C) making loans.
D) buying government securities.
E) None of the above because banks cannot create money; only the Federal Reserve can
create money.
Skill: Level 1: Deinition
Section: Checkpoint 11.4
Status: Old
AACSB: Relective thinking
63
4) When a bank receives deposits,
A) it must hold the entire amount as reserves in case of withdrawal.
B) the Fed requires it to hold only a small percentage as reserves.
C) it and it alone decides how much it will hold as reserves.
D) its liabilities increase in amount but its assets do not change.
E) its assets increase in amount but its liabilities do not change.
Skill: Level 2: Using deinitions
Section: Checkpoint 11.4
Status: Old
AACSB: Relective thinking
5) Banks create money by
A) printing currency.
B) asking the Fed to print more currency.
C) lending to the Fed.
D) making loans.
E) buying government securities.
Skill: Level 1: Deinition
Section: Checkpoint 11.4
Status: Old
AACSB: Relective thinking
6) The amount of loans that a bank can create is limited by
A) a law enacted by Congress.
B) the bank’s excess reserves.
C) a directive from the Federal Reserve System, which takes into account the bank’s
inancial stability.
D) the real interest rate.
E) the bank’s government securities.
Skill: Level 1: Deinition
Section: Checkpoint 11.4
Status: Old
AACSB: Relective thinking
64
7) The process of money creation by the banking system is limited, in part, by the
A) number of banks.
B) desired reserve ratio.
C) number of depositors.
D) Comptroller of the Currency.
E) laws passed each year by the U.S. Congress.
Skill: Level 1: Deinition
Section: Checkpoint 11.4
Status: Old
AACSB: Relective thinking
8) Assume the First Bank of Townsville makes a loan of $2,500. This loan will
A) increase the quantity of money initially by $2,500.
B) decrease the quantity of money initially by $2,500.
C) have no change on the quantity of money, just its composition.
D) increase the First Bank of Townville’s liabilities at the Fed.
E) increase the First Bank of Townville’s reserves.
Skill: Level 2: Using deinitions
Section: Checkpoint 11.4
Status: Old
AACSB: Relective thinking
9) When the First Bank of Townsville makes a loan, it
A) prints money.
B) borrows the money from the Fed.
C) creates a checkable deposit.
D) decreases the quantity of money.
E) increases its reserves.
Skill: Level 2: Using deinitions
Section: Checkpoint 11.4
Status: Old
AACSB: Relective thinking
65
10) If the desired reserve ratio is 15 percent, then for every dollar that is deposited in the
bank, the bank will
A) keep 15 cents as reserves.
B) keep 85 cents as reserves.
C) keep 85 cents as reserves and loan 85 cents.
D) loan 15 cents.
E) keep 15 cents as reserves and loan 15 cents.
Skill: Level 2: Using deinitions
Section: Checkpoint 11.4
Status: Old
AACSB: Analytical thinking
11) Riley deposits $4,000 cash in her checkable deposit at Fershur Bank. If the desired
reserve ratio is 5 percent, Fershur Bank’s
A) desired reserves increase by $4,000.
B) assets and its liabilities change in opposite directions.
C) desired reserves increase by $200 and its excess reserves increase by $3,800.
D) excess reserves increase by $4,000.
E) liabilities do not change but its assets increase.
Skill: Level 3: Using models
Section: Checkpoint 11.4
Status: Old
AACSB: Analytical thinking
12) Suppose the desired reserve ratio is 10 percent. If Urban Bank has total deposits of
$1000 and total assets of $10,000, the amount of desired reserves is
A) $100.
B) $900.
C) $1,000.
D) $9,000.
E) $1,100.
Skill: Level 2: Using deinitions
Section: Checkpoint 11.4
Status: Old
AACSB: Analytical thinking
66
13) A bank has $200 of reserves and $4,000 of deposits. It is just meeting its desired
reserves and has no excess reserves. Thus the desired reserve ratio is
A) 10 percent.
B) 20 percent.
C) 25 percent.
D) 5 percent.
E) $200.
Skill: Level 2: Using deinitions
Section: Checkpoint 11.4
Status: Old
AACSB: Analytical thinking
14) If the desired reserve ratio is 7 percent and a bank has $10,000 of deposits, then its
desired reserves are
A) $7.
B) $700.
C) $9,300.
D) $930.
E) $7,000.
Skill: Level 2: Using deinitions
Section: Checkpoint 11.4
Status: Old
AACSB: Analytical thinking
15) When Zane deposits $20,000 cash in his checkable deposit at the Citicorp and the
Citicorp’s desired reserves increase by $5,000, the desired reserve ratio is
A) 5 percent.
B) 75 percent.
C) 25 percent.
D) 20 percent.
E) $5,000.
Skill: Level 3: Using models
Section: Checkpoint 11.4
Status: Old
AACSB: Analytical thinking
67
16) A bank reports reserves of $500,000, physical capital of $200,000, loans of $1,000,000,
deposits of $1,000,000, and owners’ equity of $500,000. If the desired reserve ratio is 5
percent, the bank’s desired reserves are
A) $10,000.
B) $25,000.
C) $50,000.
D) $1,000,000.
E) $500,000.
Skill: Level 3: Using models
Section: Checkpoint 11.4
Status: Old
AACSB: Analytical thinking
17) The Banks of the Mississippi has excess reserves of $20,000, desired reserves of
$80,000 and the desired reserve ratio is 5 percent. What is the total amount of deposits in
this bank?
A) $5,000
B) $1,000,000
C) $1,600,000
D) $100,000
E) $180,000
Skill: Level 3: Using models
Section: Checkpoint 11.4
Status: Old
AACSB: Analytical thinking
18) The part of a commercial bank’s reserves that are larger than desired are called
A) additional reserves.
B) required reserves.
C) excess reserves.
D) nonrequired reserves.
E) unnecessary reserves.
Skill: Level 2: Using deinitions
Section: Checkpoint 11.4
Status: Old
AACSB: Relective thinking
68
19) Banks can make loans as long as they have
A) deposits.
B) reserves.
C) required reserves.
D) excess reserves.
E) excess government securities.
Skill: Level 1: Deinition
Section: Checkpoint 11.4
Status: Old
AACSB: Relective thinking
20) Actual reserves are equal to
A) minimum balances plus desired reserves.
B) required reserves plus fractional deposits.
C) excess reserves plus liabilities.
D) desired reserves plus excess reserves.
E) government securities plus cash in the bank’s vault.
Skill: Level 1: Deinition
Section: Checkpoint 11.4
Status: Old
AACSB: Relective thinking
21) When Grayce deposits $4,000 cash in her checkable deposit at the Beach Bank and the
Beach Bank’s excess reserves increase by $3,600, the desired reserve ratio is
A) 5 percent.
B) 10 percent.
C) 15 percent.
D) 90 percent.
E) $400.
Skill: Level 3: Using models
Section: Checkpoint 11.4
Status: Old
AACSB: Analytical thinking
69
22) If Bulge Bank has a desired reserve ratio of 10 percent, loans of $25,000, deposits of
$100,000, vault cash of $10,000, and reserves at the Fed of $65,000, then the bank
A) has no remaining capacity to make loans.
B) does not have enough reserves to meet its requirement.
C) has excess reserves of $65,000.
D) has excess reserves of $55,000.
E) has excess reserves of $75,000.
Skill: Level 3: Using models
Section: Checkpoint 11.4
Status: Old
AACSB: Analytical thinking
23) The Commerce Bank of Beverly Hills has total deposits of $1,000,000 and total reserves
of $220,000. The desired reserve ratio is 10 percent. The bank’s excess reserves are
A) $22,000.
B) $120,000.
C) $100,000.
D) $80,000.
E) $1,000,000.
Skill: Level 3: Using models
Section: Checkpoint 11.4
Status: Old
AACSB: Analytical thinking
24) A bank has deposits of $400, reserves of $50, and the desired reserve ratio is 7 percent.
The bank’s excess reserves are
A) $0.
B) $22.
C) $28.
D) $3.50
E) $50.
Skill: Level 2: Using deinitions
Section: Checkpoint 11.4
Status: Old
AACSB: Analytical thinking
70