Chapter 15 – Money Creation
92. 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:
The balance sheet below is for the First Federal Bank. Assume the required reserve ratio is 20
percent.
93. Refer to the above information. This commercial bank has required reserves of:
Chapter 15 – Money Creation
94. Refer to the above information. This bank can safely expand its loans by a maximum of:
95. Refer to the above information. The monetary multiplier is:
96. Refer to the above information. Using the original bank balance sheet, assume that the
bank makes a loan of $20,000 and has a check cleared against it for the amount of the loan.
The bank’s reserves and checkable deposits will now be:
Chapter 15 – Money Creation
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97. Refer to the above information. Using the original bank balance sheet, assume that the
bank makes a loan of $30,000 and has a check cleared against it for the amount of the loan.
The bank will then have excess reserves of:
98. Refer to the above information. If the original bank balance sheet was for the commercial
banking system, rather than a single bank, loans and deposits could have been expanded by a
maximum of:
The following 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
Chapter 15 – Money Creation
99. Refer to the above information. The maximum amount by which this commercial banking
system can expand the supply of money by lending is:
100. Refer to the above information. If there is a deposit of $10 billion of new currency into
checking accounts in the banking system, excess reserves will increase by:
101. The establishment of a Federal deposit insurance program resulted from the:
Chapter 15 – Money Creation
102. During the Financial Crisis of 2007-2008, the FDIC increased deposit insurance
coverage from:
103. Assume that the reserve ratio is 20 percent and banks in the system are loaning out all
their excess reserve. If people collectively cash out $10 billion from their checking accounts,
then the lending ability of the banking system will be:
104. During the bank panics of 1930-1933 the money supply decreased by about:
Chapter 15 – Money Creation
105. Which of the following factors contributed to a further reduction in the money supply in
addition to the withdrawal of currency from banks during the 1930-1933 bank panic?
106. The difference between Fed behaviors during the Bank Panics of 1930-1933 and the
Financial Crisis of 2007-2008 is that the Fed:
107. When you deposit money at a bank, the bank will normally turn around and lend most of
it to a borrower.
108. If all depositors of a bank were to try withdrawing all their deposits at the same time, a
good bank should be able to meet all the withdrawals.
109. When cash is deposited at a bank, the composition of the money supply is changed but
the total supply of money is not.
110. When a bank’s loan defaults, then the bank’s reserves will decrease.
111. The amount of required reserves that a bank must hold is computed as a certain fraction
of the bank’s assets.
112. When a bank accepts additional deposits, its required reserves and excess reserves will
both increase.
113. When a bank grants a loan, the money supply M1 will increase, even if the funds from
the loan are not spent.
114. The primary purpose of the reserve requirements for banks is not really to ensure
liquidity to meet withdrawals, but rather to allow the Fed control over money supply.
115. 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.
Chapter 15 – Money Creation
116. A bank can grant loans up to the amount of its actual reserves.
117. A bank has reserves of $30,000 and deposits of $120,000. If the reserve ratio is 10%,
then this bank can lend out a maximum of $12,000 in new loans.
118. When a bank buys government securities from the Fed, then the bank’s reserves and its
excess reserves will both decrease.
119. 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.
Chapter 15 – Money Creation
120. 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.
121. The federal funds rate is the interest rate that the Fed charges banks for its loans to them.
122. If one bank borrows reserves overnight from another bank, the interest on the loan is
called the federal funds rate.
123. If banks borrow from the Fed, the banking system’s reserves will increase, but if banks
borrow from one another, the system’s reserves will not change.
Chapter 15 – Money Creation
124. When bank loans are repaid and the banks hold on to the funds as additional reserves,
then money supply decreases.
125. The monetary multiplier can also be called the spending multiplier.
126. The maximum deposit creation that can be made in the banking system is equal to the
excess reserves divided by the required reserve ratio.
127. If the banking system has $20 billion in excess reserves and if the reserve ratio is 10
percent, the system can increase its loans by $22 billion.
Chapter 15 – Money Creation
128. If a commercial banking system has $200,000 of outstanding checkable deposits and
actual reserves of $70,000, then with a reserve ratio of 20 percent the banking system can
expand the supply of money by a maximum of $180,000.
129. During a recession when banks tend to increase their excess reserves, the money supply
M1 decreases.
130. While the withdrawal of deposits from banks does not affect money supply immediately,
it will affect the banks’ lending capacity which will eventually lead to a contraction in money
supply.