ECON 232 Chapter 14 Study Quiz
 
 
 
 
1. Most modern banking systems are based on:
A. money of intrinsic value.
B. commodity money.
C. 100 percent reserves.
D. fractional reserves.

 
2. If m equals the maximum number of new dollars that can be created for a single dollar of excess reserves and R equals the required reserve ratio, then for the banking system:
A. m = R - 1.
B. R = m/1.
C. R = m - 1.
D. m = 1/R.

 
3. 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:
A. are $30,000.
B. are $10,000.
C. are $20,000.
D. cannot be determined from the given information.

 
4. Money is destroyed when:
A. loans are made.
B. checks written on one bank are deposited in another bank.
C. loans are repaid.
D. the net worth of the banking system declines.

 
5. Assume the Continental National Bank's balance statement is as follows:

Assuming a legal reserve ratio of 20 percent, how much excess reserves would this bank have after a check for $10,000 was drawn and cleared against it?
A. $3,000
B. $24,000
C. $6,000
D. $16,000


 
6. The goldsmith's ability to create money was based on the fact that:
A. withdrawals of gold tended to exceed deposits of gold in any given time period.
B. consumers and merchants preferred to use gold for transactions, rather than paper money.
C. the goldsmith was required to keep 100 percent gold reserves.
D. paper money in the form of gold receipts was rarely redeemed for gold.

 
7.
Answer the next question(s) on the basis of the following information about a banking system: new currency deposited in the system = $40 billion; legal reserve ratio = 0.20; excess reserves prior to the currency deposit = $0.
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Refer to the above information. The banking system will be able to expand the money supply through loans by:
A. $160 billion.
B. $200 billion.
C. $40 billion.
D. $128 billion.


 
8.
Answer the next question(s) on the basis of the following information about a banking system: new currency deposited in the system = $40 billion; legal reserve ratio = 0.20; excess reserves prior to the currency deposit = $0.
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Refer to the above information. The $40 billion deposit of new currency will support total checkable deposits of:
A. $160 billion.
B. $200 billion.
C. $40 billion.
D. $128 billion.


 
9. When a bank loan is repaid the supply of money:
A. is constant, but its composition will have changed.
B. is decreased.
C. is increased.
D. may either increase or decrease.

 
10. The amount that a commercial bank can lend is determined by its:
A. required reserves.
B. excess reserves.
C. outstanding loans.
D. outstanding checkable deposits.

 
11. The amount of reserves that a commercial bank is required to hold is equal to:
A. the amount of its checkable deposits.
B. the sum of its checkable deposits and time deposits.
C. its checkable deposits multiplied by the reserve requirement.
D. its checkable deposits divided by its total assets.

 
12. Commercial banks monetize claims when they:
A. collect checks through the Federal Reserve System.
B. make loans to the public.
C. accept repayment of outstanding loans.
D. borrow from the Federal Reserve Banks.

 
13. The basic reason why the commercial banking system can increase its checkable deposits by a multiple of its excess reserves is that:
A. reserves lost by any particular bank will be gained by some other bank.
B. the central banks follow policies that prevent reserves from falling below the level required by law.
C. the MPC of borrowers is greater than zero, but less than 1.
D. the banking system must keep reserves equal to 100 percent of its checkable-deposit liabilities.

 
14. The claims of the owners of a firm against the firm's assets are called:
A. working capital.
B. assets.
C. net worth.
D. liabilities.

 
15.
Answer the next question(s) on the basis of the following table for a commercial bank or thrift:

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Refer to the above table. When the legal reserve ratio is 30 percent, the monetary multiplier is:
A. 5.
B. 4.
C. 3.33.
D. 2.5.


 
16. Commercial banks create money when they:
A. accept cash deposits from the public.
B. purchase government securities from the central banks.
C. create checkable deposits in exchange for IOUs.
D. raise their interest rates.

 
17. Which of the following would reduce the money supply?
A. Commercial banks use excess reserves to buy government bonds from the public.
B. Commercial banks loan out excess reserves.
C. Commercial banks sell government bonds to the public.
D. A check clears from Bank A to Bank B.

 
18. Excess reserves refer to the:
A. difference between a bank's vault cash and its reserves deposited at the Federal Reserve Bank.
B. minimum amount of actual reserves a bank must keep on hand to back up its customers deposits.
C. difference between actual reserves and loans.
D. difference between actual reserves and required reserves.

 
19. If the reserve ratio is 15 percent and commercial bankers decide to hold additional excess reserves equal to 5 percent of any newly acquired checkable deposits, then the relevant monetary multiplier for the banking system will be:
A. 31/2.
B. 4.
C. 5.
D. 10.

 
20. Which of the following are all assets to a commercial bank?
A. demand deposits, capital stock, and reserves
B. vault cash, property, and reserves
C. vault cash, property, and capital stock
D. vault cash, capital stock, and demand deposits

 
21. Banks destroy money when they:
A. buy government bonds.
B. accept deposits of cash into checkable accounts.
C. fail to reissue loans that are paid off.
D. clear checks against another bank.

 
22.
Answer the next question(s) on the basis of the following consolidated balance sheet for the commercial banking system. Assume the required reserve ratio is 30 percent. All figures are in billions.

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Refer to the above data. The maximum amount by which the commercial banking system can expand the supply of money by lending is:
A. $30 billion.
B. $23.1 billion.
C. $27 billion.
D. $15 billion.


 
23. The primary purpose of the legal reserve requirement is to:
A. prevent banks from hoarding too much vault cash.
B. provide a means by which the monetary authorities can influence the lending ability of commercial banks.
C. prevent commercial banks from earning excess profits.
D. provide a dependable source of interest income for commercial banks.

 
24. The multiple by which the commercial banking system can expand the supply of money on the basis of excess reserves:
A. is larger the smaller the legal reserve ratio.
B. is the reciprocal of the bank's actual reserves.
C. is directly or positively related to the size of the required reserve ratio.
D. will be zero when the required reserve ratio is 100 percent.

 
25. When commercial banks use excess reserves to buy government securities from the public:
A. new money is created.
B. commercial bank reserves increase.
C. the money supply falls.
D. checkable deposits decline.

 
26. The greater the legal reserve ratio, the:
A. higher is the income multiplier.
B. lower is the income multiplier.
C. lower is the monetary multiplier.
D. higher is the monetary multiplier.

 
27. 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:
A. zero.
B. 10 percent.
C. 20 percent.
D. 25 percent

 
28.
Answer the next question(s) on the basis of the following information for the Moola Bank.

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Assume that the listed amounts constitute this bank's complete set of accounts. Moola's:
A. assets are $1000.
B. liabilities are $300.
C. net worth is $100.
D. annual profit is $200.


 
29. When a check is drawn and cleared, the
A. reserves and deposits of both the bank against which the check is cleared and the bank receiving the check are unchanged by this transaction.
B. bank against which the check is cleared loses reserves and deposits equal to the amount of the check.
C. bank receiving the check loses reserves and deposits equal to the amount of the check.
D. bank against which the check is cleared acquires reserves and deposits equal to the amount of the check.

 
30. The multiple by which the commercial banking system can increase the supply of money on the basis of each dollar of excess reserves is equal to:
A. the reciprocal of the legal reserve ratio.
B. 1 minus the legal reserve ratio.
C. the reciprocal of the income velocity of money.
D. 1/MPS.

 

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