16) Refer to Scenario 14-1. M2 in this simple economy equals
A) $3,000.
B) $8,000.
C) $14,000.
D) $21,000.
17) If households and firms decide to hold less of their money in checking account deposits and more in
currency, then initially, the money supply
A) will not change.
B) will increase.
C) will decrease.
D) may increase or decrease.
18) In the United States, currency includes
A) gold, silver, and paper money.
B) checking and savings account deposits.
C) paper money and coins in circulation.
D) traveler’s checks.
19) The narrowest official definition of the money supply is
A) M1.
B) M2.
C) M3.
D) L.
20) M1 includes
A) currency in circulation, checking account deposits in banks, and holdings of traveler’s checks.
B) currency in circulation, savings account balances, and checking account deposits in banks.
C) currency in circulation, savings account balances, checking account deposits in banks, and holdings
of traveler’s checks.
D) coins, savings account balances, traveler’s checks.
21) Most payments in the United States for goods and services are made using
A) currency.
B) checking account deposits.
C) traveler’s checks.
D) gold.
22) M2 includes M1 plus
A) currency in circulation, checking account deposits in banks, and holdings of traveler’s checks.
B) savings account balances, money market deposit accounts in banks, small-denomination time
deposits, and noninstitutional money market fund shares.
C) checking account deposits, large-denomination time deposits, and noninstitutional money market
fund shares.
D) currency in circulation, savings account balances, and small-denomination time deposits.
23) A person’s wealth
A) is a measure of how much money the person has.
B) equals the value the person’s assets minus his or her liabilities.
C) is measured independent of his or her current and expected future income.
D) All of the above are correct.
24) If households in the economy decide to take money out of checking account deposits and put this
money into savings accounts, this will initially
A) decrease M1 and increase M2.
B) decrease M1 and decrease M2.
C) decrease M1 and not change M2.
D) increase M1 and decrease M2.
25) If households in the economy decide to take money out of checking account deposits and hold it as
currency, this will initially
A) not change M1 and increase M2.
B) decrease M1 and decrease M2.
C) decrease M1 and not change M2.
D) not change M1 and not change M2.
26) If you transfer all of your currency to your checking account, then initially, M1 will ________ and
M2 will ________.
A) increase; not change
B) not change; increase
C) not change; not change
D) decrease; increase
27) If you liquidate $3,000 of your mutual fund and transfer the funds to your checking account, then
initially, M1 will ________ and M2 will ________.
A) not change; decrease
B) increase; decrease
C) increase; not change
D) not change; not change
28) Credit card balances are
A) part of M1.
B) part of M2.
C) part of M3.
D) not part of the money supply.
29) Liquidity increases as we move from the M1 to the M2 definition of the money supply.
30) The amount of national income in an economy equals the money supply in an economy.
31) Innovations, including new products and services, in financial markets and institutions have made
the job of defining the money supply easier.
32) Most U.S. currency held outside the U.S. banking system is held by foreigners.
33) A person’s wealth is the same as his income.
34) Suppose you withdraw $1,000 from your savings account and put it under your mattress. Briefly
explain how this will affect M1 and M2.
35) Suppose you withdraw $1,000 from your savings account and put it in your checking account.
Briefly explain how this will affect M1 and M2.
36) Suppose you transfer $2,000 from your mutual fund account to your checking account. What is the
immediate impact of this transfer on M1 and M2?
27
37) Suppose that you decide that you no longer want to hold currency, and deposit all of your currency
holdings to your checking account. What is the immediate or initial impact of this transaction on M1
and M2?
14.3 How Do Banks Create Money?
1) The major assets on a bank’s balance sheet are its
A) checking and savings account deposits.
B) loans, and checking and savings account deposits.
C) reserves, loans, and holdings of securities.
D) reserves, checking and savings account deposits.
E) reserves, loans, and checking account deposits.
2) The largest liability on the balance sheet of most banks is its
A) loans.
B) holdings of securities.
C) deposits with the Federal Reserve.
D) checking account and savings account deposits of its customers.
E) vault cash.
3) A bank will consider a car loan to a customer ________ and a customer’s checking account to be
________.
A) a liability; an asset
B) an asset; a liability
C) a liability; a liability
D) an asset; an asset
E) an asset; net worth
4) Bank reserves include
A) vault cash and deposits with the Federal Reserve.
B) loans to bank customers and deposits with the Federal Reserve.
C) vault cash and loans to bank customers.
D) customer checking accounts and vault cash.
E) deposits with the Federal Reserve and holdings of securities.
5) The required reserves of a bank equal its ________ the required reserve ratio.
A) deposits divided by
B) deposits multiplied by
C) loans divided by
D) loans multiplied by
6) Banks can make additional loans when required reserves are
A) greater than total reserves.
B) less than total reserves.
C) less than total deposits.
D) less than total loans.
7) Suppose you decide to borrow money from an online peer-to-peer lending site. On the T-account for
the lending site for this transaction, the funds from the investor who chooses to fund the loan would be
classified as ________, and the loan made to you would be classified as ________.
A) an asset; an asset
B) an asset; a liability
C) a liability; an asset
D) a liability, a liability
Scenario 14-2
Imagine that Kristy deposits $10,000 of currency into her checking account deposit at Bank A and that
the required reserve ratio is 20%.
8) Refer to Scenario 14-2. As a result of Kristy’s deposit, Bank A’s reserves immediately increase by
A) $2,000.
B) $8,000.
C) $10,000.
D) $50,000.
9) Refer to Scenario 14-2. As a result of Kristy’s deposit, Bank A’s required reserves increase by
A) $2,000.
B) $8,000.
C) $10,000.
D) $50,000.
10) Refer to Scenario 14-2. As a result of Kristy’s deposit, Bank A’s excess reserves increase by
A) $2,000.
B) $8,000.
C) $10,000.
D) $50,000.
11) Refer to Scenario 14-2. As a result of Kristy’s deposit, Bank A can make a maximum loan of
A) $2,000.
B) $8,000.
C) $10,000.
D) $50,000.
12) Refer to Scenario 14-2. As a result of Kristy’s deposit, checking account deposits in the banking
system as a whole (including the original deposit) could eventually increase up to a maximum of
A) $8,000.
B) $10,000.
C) $50,000.
D) $100,000.
13) If the required reserve ratio is 10 percent, an increase in bank reserves of $1,000 can support an
increase in checking account deposits (including the original deposit) in the banking system as a whole
of up to
A) $100.
B) $1,000.
C) $10,000.
D) $100,000.
14) Suppose you withdraw $500 from your checking account deposit and bury it in a jar in your back
yard. If the required reserve ratio is 10 percent, checking account deposits in the banking system as a
whole could drop up to a maximum of
A) $0.
B) $50.
C) $500.
D) $5,000.
15) If the required reserve ratio (RR) is 20 percent, the simple deposit multiplier is
A) 2.
B) 5.
C) 10.
D) 20.
16) Suppose that you deposit $2,000 in your bank and the required reserve ratio is 10 percent. The
maximum loan your bank can made as a direct result of your deposit is
A) $200.
B) $1,800.
C) $2,000.
D) $20,000.
Table 14-1
Assets
Liabilities
Reserves +$4,000
Deposits +$4,000
17) Refer to Table 14-1. Suppose a transaction changes a bank’s balance sheet as indicated in the T-
account, and the required reserve ratio is 10 percent. As a result of the transaction, the bank has excess
reserves of
A) $0.
B) $400.
C) $3,600.
D) $4,000.
Table 14-2
Assets
Liabilities
Reserves +$8,000
Deposits + $8,000
18) Refer to Table 14-2. Suppose a transaction changes a bank’s balance sheet as indicated in the
following T-account, and the required reserve ratio is 10 percent. As a result of the transaction, the bank
can make a maximum loan of
A) $0.
B) $800.
C) $7,200.
D) $8,000.
Table 14-3
Assets
Liabilities
Reserves +$7,000
Deposits +$50,000
Loans +$46,000
Net Worth +$3,000
19) Refer to Table 14-3. Consider the above simplified balance sheet for a bank. If the required reserve
ratio is 10 percent, the bank can make a maximum loan of
A) $2,000.
B) $5,000.
C) $6,300.
D) $45,000.
20) Banks can continue to make loans until their
A) actual reserves equal their required reserves.
B) excess reserves equal their required reserves.
C) actual reserves equal their excess reserves.
D) actual reserves equal their checking account balances.
21) Suppose Warren Buffet withdraws $1 million from his checking account at Chase Bank. If the
required reserve ratio is 20 percent, what is the maximum change in deposits in the banking system?
A) -$5 million
B) -$4 million
C) -$200,000
D) $1 million
E) $5 million
22) Suppose Bill Gates deposits $20 million into his checking account at Wells Fargo Bank. If the
required reserve ratio is 10 percent, what is the maximum change in money supply?
A) -$200 million
B) -$180 million
C) $2 million
D) $180 million
E) $200 million
23) Suppose the required reserve ratio is 20 percent. If banks are conservative and choose not to loan all
of their excess reserves, the real-world deposit multiplier is
A) less than 5.
B) equal to 5.
C) greater than 5.
D) equal to 20.
24) Which of the following best describes how banks create money?
A) Banks charge higher interest rates on loans than they pay on deposits.
B) Banks charge fees for providing financial advice.
C) Banks create checking account deposits when making loans from excess reserves.
D) Banks make loans from reserves.
25) The more excess reserves banks choose to keep,
A) the larger the deposit multiplier.
B) the smaller the deposit multiplier.
C) the higher the required reserve ratio.
D) the lower the required reserve ratio.
26) Which of the following determines the amount of money the banking system as a whole can create?
A) the quantity of bank reserves
B) the quantity of vault cash held by banks
C) the gold reserves held by the Federal Reserve
D) the limit on profits by banks imposed by the U.S. Congress
27) If households choose to take some fraction of each check they deposit and hold it as currency, then
the simple deposit multiplier ________ the real-world multiplier.
A) is greater than
B) is less than
C) is equal to
D) bears no relationship to
28) In an attempt to bring lenders and borrowers together following the financial crisis of 2008, the
Federal Reserve made a large amount of new funds available to financial markets. Any of these new
funds that are loaned out by banks would be classified as ________ of the banks.
A) required reserves
B) excess reserves
C) deposits
D) liabilities
29) In an attempt to bring lenders and borrowers together following the financial crisis of 2008, the
Federal Reserve made a large amount of new funds available to financial markets. The Fed expected
this to increase the money supply and the total amount of lending because of the multiplier effect, in
which a given amount of new reserves results in a multiple increase in
A) stockholders’ equity.
B) bank deposits.
C) long-term debt.
D) required reserves.
30) A bank’s assets are
A) things owned by or owed to the bank.
B) things the bank owes to someone else.
C) a measure of the bank’s net worth.
D) always greater than the bank’s liabilities.
31) A bank’s liabilities are
A) things owned by or owed to the bank.
B) things the bank owes to someone else.
C) a measure of the bank’s net losses.
D) included as part of the bank’s reserves.
32) Net worth is
A) a measure of a firm’s profits.
B) part of stockholders’ equity.
C) the difference between a firm’s assets and liabilities.
D) listed on the asset side of a firm’s balance sheet.
33) Which of the following is an asset for a bank?
A) deposits of its customers
B) short-term borrowing
C) shareholders’ equity
D) loans
34) Which of the following is counted as a liability for a bank?
A) customer deposits
B) bank reserves
C) securities
D) bank loans
35) A bank’s largest liability is its
A) short-term borrowing.
B) long-term debt.
C) deposits of its customers.
D) shareholder equity.
36) Typically, a bank’s largest asset is its
A) reserves.
B) holdings of securities.
C) deposits of its customers.
D) loans.
37) The portion of ________ that a bank does not loan out or spend on securities is known as ________.
A) loans; reserves
B) deposits; reserves
C) deposits; securities
D) loans; securities
38) A bank holds its reserves as ________ and ________.
A) securities; loans
B) securities; deposits at the Federal Reserve
C) vault cash; deposits at the Federal Reserve
D) vault cash; loans
39) Reserves of a bank equal its
A) vault cash.
B) deposits with the Federal Reserve.
C) vault cash plus deposits with the Federal Reserve.
D) vault cash plus deposits of its customers.
40) A bank is legally required to hold a fraction of its ________ as ________.
A) deposits; required reserves
B) deposits; excess reserves
C) loans; excess reserves
D) loans; required reserves
41) Which of the following is a true statement?
A) excess reserves = actual reserves – required reserves
B) excess reserves = deposits – required reserves
C) excess reserves = deposits – loans
D) excess reserves = loans – required reserves
42) Suppose the reserve ratio is RR. Then,
A) required reserves = RR × actual reserves.
B) required reserves = RR × excess reserves.
C) required reserves = RR × deposits.
D) required reserves = RR × loans.
43) When you open a checking account at Bank of America, Bank of America
A) has more reserves and more excess reserves.
B) has more reserves, but excess reserves remain unchanged.
C) has more deposits and less in excess reserves.
D) has more deposits, but excess reserves remain unchanged.
44) If the bank of Waterloo receives a $10,000 deposit and the reserve requirement is 10 percent, how
much can the bank loan out? (Assume that before the deposit this bank is just meeting its legal reserve
requirement.)
A) $1,000
B) $9,000
C) $10,000
D) $11,000
45) A balance sheet
A) measures flows of income and expenditure over a given period of time.
B) measures assets, liabilities, and net worth at a giving instance in time.
C) equates flows of revenue with flows of expenditure.
D) None of the above are correct.
46) Suppose you deposit $2,000 into Bank of America and that the required reserve ratio is 10 percent.
How does this affect the bank’s balance sheet?
A) Reserves rise by $200.
B) Required reserves rise by $2,000.
C) Deposits rise by $1,000.
D) Excess reserves rise by $1,800.
47) A commercial bank like Comerica creates money by
A) printing paper money.
B) earning profits.
C) selling corporate bonds.
D) making loans.