Chapter 35 Money Creation Answer Key
Multiple Choice Questions
1. The goldsmith‘s ability to create money was based on the fact that
2.
When the receipts given by goldsmiths to depositors were used to make purchases,
3. Which one of the following is presently a major deterrent to bank panics in the United
States?
35-2
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written consent of McGraw-Hill Education.
A c c e s s i b i l i t y : Keyboard Navigation
Blooms: Understand
D i f f i c u l t y : 02 Medium
Learning Objective: 35–01 Discuss why the U.S. banking system is called a ” fractional
reserve” system.
Test Bank: I
Top i c: The Fractional Reserve System
4.
Most modern banking systems are based on
5.
A fractional reserve banking system
6. In a fractional reserve banking system,
35-3
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written consent of McGraw-Hill Education.
C.
banks can create money through the lending process.
D. the Federal Reserve has no control over the amount of money in circulation.
AACSB: Knowledge Application
A c c e s s i b i l i t y : Keyboard Navigation
Blooms: Understand
D i f f i c u l t y : 02 Medium
Learning Objective: 35–01 Discuss why the U.S. banking system is called a ” fractional
reserve” system.
Test Bank: I
Top i c: The Fractional Reserve System
7. Bank panics
8.
Which of the following statements is correct?
35-4
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written consent of McGraw-Hill Education.
Top i c: A Single Commercial Bank
9. A bank that has assets of $85 billion and a net worth of $10 billion must have
10.
A bank that has liabilities of $150 billion and a net worth of $20 billion must have
11.
Which of the following describes the identity embodied in a balance sheet?
35-5
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written consent of McGraw-Hill Education.
D i f f i c u l t y : 02 Medium
Learning Objective: 35–02 Explain the basics of a banks balance sheet and the distinction
between a banks actual reserves and its required reserves.
Test Bank: I
Top i c: A Single Commercial Bank
12. The claims of the owners of a firm against the firm’s assets are called
13. Which of the following are all assets to a commercial bank?
14.
The reserves of a commercial bank consist of
35-6
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written consent of McGraw-Hill Education.
AACSB: Knowledge Application
A c c e s s i b i l i t y : Keyboard Navigation
Blooms: Understand
D i f f i c u l t y : 02 Medium
Learning Objective: 35–02 Explain the basics of a banks balance sheet and the distinction
between a banks actual reserves and its required reserves.
Test Bank: I
Top i c: A Single Commercial Bank
15. A commercial bank’s reserves are
16.
The primary purpose of the legal reserve requirement is to
35-7
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written consent of McGraw-Hill Education.
Topic: Money-Creating Transactions of a Commercial Bank
17.
The ABC Commercial Bank has $5,000 in excess reserves, and the reserve ratio is 30
percent. This information is consistent with the bank having
18.
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
19.
Reserve Requirement (%)
Checkable Deposits
Actual Reserves
Excess Reserves
(1)
W
$100,000
$10,000
$0
(2)
8
X
20,000
12,000
(3)
12
200,000
Y
8,000
(4)
20
300,000
70,000
Z
The accompanying table gives data for a commercial bank or thrift. In row 1, the number
appropriate for space W is
20.
Reserve Requirement (%)
Checkable Deposits
Actual Reserves
Excess Reserves
(1)
W
$100,000
$10,000
$0
(2)
8
X
20,000
12,000
(3)
12
200,000
Y
8,000
(4)
20
300,000
70,000
Z
The accompanying table gives data for a commercial bank or thrift. In row 2, the number
appropriate for space X is
21.
Reserve Requirement (%)
Checkable Deposits
Actual Reserves
Excess Reserves
(1)
W
$100,000
$10,000
$0
(2)
8
X
20,000
12,000
(3)
12
200,000
Y
8,000
(4)
20
300,000
70,000
Z
The accompanying table gives data for a commercial bank or thrift. In row 3, the number
appropriate for space Y is
22.
Reserve Requirement (%)
Checkable Deposits
Actual Reserves
Excess Reserves
(1)
W
$100,000
$10,000
$0
(2)
8
X
20,000
12,000
(3)
12
200,000
Y
8,000
(4)
20
300,000
70,000
Z
The accompanying table gives data for a commercial bank or thrift. In row 4, the number
appropriate for space Z is
35–10
Copyright © 2018 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior
written consent of McGraw-Hill Education.
Blooms: Understand
D i f f i c u l t y : 02 Medium
Learning Objective: 35–02 Explain the basics of a banks balance sheet and the distinction
between a banks actual reserves and its required reserves.
Test Bank: I
Top i c: A Single Commercial Bank
Type: Table
23. When a check is drawn and cleared, the
24.
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?
25. Excess reserves refer to the
26.
Suppose the reserve requirement is 10 percent. If a bank has $5 million of checkable deposits
and actual reserves of $500,000, the bank
27.
A reserve requirement of 20 percent means a bank must have at least $1,000 of reserves if its
checkable deposits are
35–12
Copyright © 2018 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior
written consent of McGraw-Hill Education.
A c c e s s i b i l i t y : Keyboard Navigation
Blooms: Understand
D i f f i c u l t y : 02 Medium
Learning Objective: 35–02 Explain the basics of a banks balance sheet and the distinction
between a banks actual reserves and its required reserves.
Test Bank: I
Top i c: A Single Commercial Bank
28. 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
29. Suppose the reserve requirement is 20 percent. If a bank has checkable deposits of $4
million and actual reserves of $1 million, it can safely lend out
30.
Suppose that a bank’s actual reserves are $5 million, its checkable deposits are $5 million,
35–13
and its excess reserves are $3 million. The reserve requirement must be
31.
Assets
Liabilities and Net Worth
Reserves
$40,000
Checkable Deposits
$130,000
Loans
25,000
Stock Shares
45,000
Securities
110,000
Assume the Continental National Bank‘s balance statement is as shown in the accompanying
table. Assuming a legal reserve ratio of 20 percent, how much in excess reserves would this
bank
have after a check for $10,000 was drawn and cleared against it?
32. The reserve ratio refers to the ratio of a bank’s
A. reserves to its liabilities and net worth.
35–14
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written consent of McGraw-Hill Education.
B. capital stock to its total assets.
C.
checkable deposits to its total liabilities.
D. required reserves to its checkable-deposit liabilities.
AACSB: Knowledge Application
A c c e s s i b i l i t y : Keyboard Navigation
Blooms: Understand
D i f f i c u l t y : 02 Medium
Learning Objective: 35–02 Explain the basics of a banks balance sheet and the distinction
between a banks actual reserves and its required reserves.
Test Bank: I
Top i c: A Single Commercial Bank
33.
The amount that a commercial bank can lend is determined by its
34. A commercial bank can expand its excess reserves by
35–15
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written consent of McGraw-Hill Education.
Test Bank: I
Top i c: A Single Commercial Bank
35.
Commercial banks monetize claims when they
36. Commercial banks create money when they
37.
Assume Company X deposits $100,000 in cash in commercial Bank A. If no excess reserves
exist at the time this deposit is made and the reserve ratio is 20 percent, Bank A can increase the
money supply by a maximum of
35–16
Copyright © 2018 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior
written consent of McGraw-Hill Education.
Blooms: Understand
D i f f i c u l t y : 02 Medium
Learning Objective: 35-03 Describe how a bank can create money.
Test Bank: I
Top i c: Money-Creating Transactions of a Commercial Bank
38. 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?
39. Assume the Standard Internet Company negotiates a loan for $5,000 from the Metro
National Bank and receives a checkable deposit for that amount in exchange for its
promissory note (IOU). As a result of this transaction,
40.
Assets
Liabilities and Net Worth
Reserves
$27,000
Checkable Deposits
$110,000
Loans
50,000
Stock Shares
200,000
Securities
33,000
Property
200,000
Refer to the accompanying balance sheet for the ABC National Bank. Assume the required
reserve ratio is 20 percent. This commercial bank has excess reserves of
41.
Assets
Liabilities and Net Worth
Reserves
$27,000
Checkable Deposits
$110,000
Loans
50,000
Stock Shares
200,000
Securities
33,000
Property
200,000
Refer to the accompanying balance sheet for the ABC National Bank. Assume the required
reserve ratio is 20 percent. This bank can safely expand its loans by a maximum of
35–18
Copyright © 2018 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior
written consent of McGraw-Hill Education.
Learning Objective: 35-03 Describe how a bank can create money.
Test Bank: I
Top i c: A Single Commercial Bank
Topic: Money-Creating Transactions of a Commercial Bank
Type: Table
42.
Assets
Liabilities and Net Worth
Reserves
$27,000
Checkable Deposits
$110,000
Loans
50,000
Stock Shares
200,000
Securities
33,000
Property
200,000
Refer to the accompanying balance sheet for the ABC National Bank. Assume the required
reserve ratio is 20 percent. Assuming the bank loans out all of its remaining excess
reserves as a checkable deposit and has a check cleared against it for that amount, its
reserves and checkable deposits will now be
43.
Assets
Liabilities and Net Worth
Reserves
$27,000
Checkable Deposits
$110,000
Loans
50,000
Stock Shares
200,000
Securities
33,000
Property
200,000
Refer to the accompanying balance sheet for the ABC National Bank. Assume the required
reserve ratio is 20 percent. 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
44. A single commercial bank must meet a 25 percent reserve requirement. If the bank has
no excess reserves initially and $5,000 of cash is deposited in the bank, it can increase its
loans by a
maximum of
45. If you deposit a $50 bill in a commercial bank that has a 10 percent legal reserve
requirement, the bank will
35–20
Copyright © 2018 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior
written consent of McGraw-Hill Education.
AACSB: Knowledge Application
A c c e s s i b i l i t y : Keyboard Navigation
Blooms: Understand
D i f f i c u l t y : 02 Medium
Learning Objective: 35–02 Explain the basics of a banks balance sheet and the distinction
between a banks actual reserves and its required reserves.
Test Bank: I
Top i c: A Single Commercial Bank
46.
When a commercial bank has excess reserves,
47. If we both have checking accounts in the same commercial bank and I write a check in
your favor for $200, the bank’s