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35-96
Copyright © 2018 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior
written consent of McGraw-Hill Education.
demonstrate its relevance.
Test Bank: II
Topic: The Monetary Multiplier
226. Suppose a commercial banking system has $240,000 of outstanding checkable deposits and
actual reserves of $85,000. If the reserve ratio is 25 percent, the banking system can expand the
supply of money by a maximum of
227.
Assets
Liabilities + Net Worth
Reserves
$100,000
Checkable Deposits
$300,000
Loans
140,000
Stock Shares
200,000
Securities
60,000
Property
200,000
The accompanying balance sheet is for the First Federal Bank. Assume the required
reserve ratio is 20 percent. This bank can safely expand its loans by a maximum of
35-97
Copyright © 2018 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior
written consent of McGraw-Hill Education.
Topic: The Monetary Multiplier
228.
Assets
Liabilities + Net Worth
Reserves
$100,000
Checkable Deposits
$300,000
Loans
140,000
Stock Shares
200,000
Securities
60,000
Property
200,000
The accompanying balance sheet is for the First Federal Bank. Assume the required reserve ratio
is 20 percent. The monetary multiplier is
229.
Assets
Liabilities + Net Worth
Reserves
$100,000
Checkable Deposits
$300,000
Loans
140,000
Stock Shares
200,000
Securities
60,000
Property
200,000
The accompanying balance sheet is for the First Federal Bank. Assume the required
reserve ratio is 20 percent. If the original bank balance sheet was for the whole
commercial banking system rather than a single bank, loans and deposits could have been
expanded by a maximum of
35-98
Copyright © 2018 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior
written consent of McGraw-Hill Education.
D. $300,000.
230.
Assets
Liabilities + Net Worth
Reserves
$100,000
Checkable Deposits
$300,000
Loans
140,000
Stock Shares
200,000
Securities
60,000
Property
200,000
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
231.
Assets
Liabilities + Net Worth
Reserves
$100,000
Checkable Deposits
$300,000
Loans
140,000
Stock Shares
200,000
Securities
60,000
Property
200,000
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. If
there is a deposit of $10 billion of new currency into checking accounts in the banking
system, excess reserves will increase by
excess reserve. If people collectively cash out $10 billion from their checking accounts, then the
lending ability of the banking system will be
233.
Which of the following factors can contribute to a reduction in the money supply?
35-100
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: Remember
Di ffi cul ty : 01 Easy
Learning Objective: 35-05 Define the monetary multiplier, explain how to calculate it, and
demonstrate its relevance.
Test Bank: II
Topic: The Monetary Multiplier
234.
"Leverage" in finance refers to the
235.
What percentage of the money that a typical modern bank invests comes from borrowing?
236.
Banks' borrowed funds come mostly from
35-101
Copyright © 2018 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior
written consent of McGraw-Hill Education.
B.
buying stocks and selling Treasury bonds.
C.
issuing stocks and buying Treasury bonds.
D. issuing bonds and accepting deposits.
237.
The use of high leveraging by banks leads to the banking system's
238.
One way to enhance the stability of the banking system is to
239.
Requiring banks to use less leveraging is equivalent to
True / False Questions
240.
When you deposit money at a bank, the bank will normally turn around and lend most of it
to a borrower.
241.
If all depositors of a bank were to try withdrawing all their deposits at the same time,
a good solid bank should be able to meet all the withdrawals.
35-103
Copyright © 2018 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior
written consent of McGraw-Hill Education.
reserve" system.
Test Bank: II
Topic: The Fractional Reserve System
242.
When cash is deposited at a bank, the composition of the money supply is changed but
the total supply of money is not.
243.
When a bank's loan defaults, then the bank's reserves will decrease.
244.
The amount of required reserves that a bank must hold is computed as a certain
fraction of the bank's assets.
35-104
245.
When a bank accepts additional deposits, its required reserves and excess reserves
will both increase.
246.
When a bank grants a loan, the money supply M1 will increase, even if the funds from the
loan are not spent.
247.
The primary purpose of the reserve requirements for banks is not really to ensure
liquidity to meet withdrawals, but rather to allow the Fed some control over the money
supply.
248.
The granting of a $10,000 loan and the purchase of a $10,000 government bond from a
securities dealer by a commercial bank would have the same effect on the money supply.
249.
A bank can grant loans up to the amount of its actual reserves.
250.
A bank has reserves of $30,000 and deposits of $120,000. If the reserve ratio is 10 percent,
then this bank can lend out a maximum of $12,000 in new loans.
251.
When a bank buys government securities from the Fed, then the bank's ability to
"create money" will be reduced.
35-106
Copyright © 2018 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior
written consent of McGraw-Hill Education.
D i f f i c u l ty : 02 Medium
Learning Objective: 35-03 Describe how a bank can create money.
Test Bank: II
Topic: Money-Creating Transactions of a Commercial Bank
252.
A check for $10,000 drawn on Bank A and deposited at Bank B will increase the
excess reserves in Bank B by $10,000.
253.
The federal funds rate is the interest rate that the Fed charges banks for its loans to them.
254.
One bank can borrow reserves from another bank, and the interest on the loan is
called the federal funds rate.
255.
When Bank A borrows reserves in the federal funds market, it causes the total reserves in
the banking system to increase.
256.
When a commercial bank buys government (Treasury) bonds from the general public,
money is created.
257.
If a bank has excess reserves of $100,000, then it can lend out only up to $100,000; but if
the banking system has excess reserves of $100,000, then the system can make additional loans
totaling more than $100,000.
258.
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.
35-108
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 ty : 02 Medium
Learning Objective: 35-04 Describe the multiple expansion of loans and money by the entire
banking system.
Test Bank: II
Topic: The Banking System: Multiple-Deposit Expansion
259.
When bank loans are repaid and the banks hold on to the funds as additional reserves, then
the banking system's ability to "create" money decreases.
260.
The monetary multiplier can also be called the spending multiplier.
261.
The maximum deposit creation that can be made in the banking system is equal to the
excess reserves divided by the required reserve ratio.
35-109
Copyright © 2018 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior
written consent of McGraw-Hill Education.
Blooms: Remember
Di ffi cul ty : 01 Easy
Learning Objective: 35-05 Define the monetary multiplier, explain how to calculate it, and
demonstrate its relevance.
Test Bank: II
Topic: The Monetary Multiplier
262.
If the banking system has $20 billion in excess reserves and the reserve ratio is 10
percent, the system can increase its loans by a maximum of $22 billion.
263.
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.
264.
During a recession, when banks tend to increase their excess reserves, the money
supply M1 decreases.
35-110
Copyright © 2018 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior
written consent of McGraw-Hill Education.
Di ffi cul ty : 01 Easy
Learning Objective: 35-05 Define the monetary multiplier, explain how to calculate it, and
demonstrate its relevance.
Test Bank: II
Topic: The Monetary Multiplier
265.
While the withdrawal of cash from banks does not affect money supply immediately, it will
affect the banking system's lending capacity, which will eventually lead to a contraction in
money
supply.
