Economics 252 – Revised Review Questions Chapter 14
(1) The goldsmith’s ability to create money was based upon 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.
(2) The ABC Commercial Bank has $5,000 in excess reserves and the reserve ratio is 30 percent. The bank must have:
(a) $90,000 in outstanding loans and $35,000 in reserves.
(b) $90,000 in checkable deposit liabilities, and $32,000 in reserves.
(c) $20,000 in checkable deposit liabilities, and $10,000 in reserves.
(d) $90,000 in checkable deposit liabilities and $35,000 in reserves.
(3) Most modern banking systems are based on:
(a) money of intrinsic value.
(b) commodity money.
(c) 100 percent reserves.
(d) fractional reserves.
(4) 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.
(5) Banks create money when they:
(a) add to their reserves in the Federal Reserve Bank.
(b) accept deposits of cash.
(c) Sell government bonds.
(d) exchange checkable deposits for loans to businesses and individuals.
Use Table 1 to answer Questions (6) and (7). Table 1
Reserve Requirement, Checkable Actual Excess
Percent Deposits Reserves 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
(6) In row (1) in Table 1, the number appropriate for space W is:
(a) 4
(b) 6
(c) 10
(d) 12
(7) In row (2) in Table 1, the number appropriate for space X is:
(a) $20,000
(b) $60,000
(c) $200,000
(d) $100,000
(8) 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?
(a) $16,000
(b) $84,000
(c) $24,000
(d) $20,000
(9) 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 customer’s deposits.
(c) difference between actual reserves and loans.
(d) difference between actual reserves and required reserves.
(10) With a reserve requirement of 10 percent, if a bank has $5 million of checkable deposits and actual reserves of $500,000, the bank:
(a) can safely lend out $500,000
(b) can safely lend out $5 million.
(c) can safely lend out $50,000
(d) cannot safely lend out more money.
(11) 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
(12) Suppose that a bank’s actual reserves are $5 million, its checkable deposits are $5 million, and its excess reserves are $3 million. The reserve requirement must be:
(a) 40 percent.
(b) 20 percent.
(c) 10 percent.
(d) 5 percent.
(13) Assume Company X deposits $100,000 in cash in a commercial bank. If no excess reserves exist at the time this deposit is made and the reserve requirement in 20 percent, the money supply in the system can increase by a maximum of:
(a) $50,000
(b) $180,000
(c) $400,000
(d) $500,000
(14) Which of the following is correct?
(a) Both the granting and repaying of bank loans expand the aggregate money supply.
(b) Granting and repaying bank loans do not affect the money supply.
(c) Granting a bank loan destroys the money supply.
(d) Granting a bank loan creates money.
(15) 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 five if the reserve requirement is 20 percent.
(c) is smaller the larger the legal reserve ratio.
(d) All of the above are true.
(16) Other things equal, if the required reserve ratio was lowered:
(a) banks would have to reduce their lending.
(b) the size of the monetary multiplier would increase.
(c) the actual reserves of banks would increase.
(d) the Federal Funds interest rate would rise.
Use Table 2 to answer Questions (17) and (18). The required reserve ratio is 20 percent. Table 2
Assets Liabilities and Net Worth
Reserves $27,000 Checkable Deposits $110,000
Loans $50,000 Capital Stock $200,000
Securities $33,000
Property $200,000
(17) In Table 2, this commercial bank has excess reserves of:
(a) $0
(b) $3,000
(c) $12,000
(d) $5,000
(18) In Table 2, assume that the bank has a check cleared against it for the amount of the excess reserves in Question (17). Its reserves and checkable deposits will now be:
(a) $25,000 and $122,000 respectively.
(b) $22,000 and $110,000 respectively.
(c) $32,000 and $115,000 respectively.
(d) $22,000 and $105,000 respectively.
Utilize Table 3 in answering Questions (19) and (20). Table 3
(1) (2) (3)
Legal Reserve Ratio Checkable Actual
(Percent) Deposits Reserves
10 $40,000 $10,000
20 $40,000 $10,000
25 $40,000 $10,000
30 $40,000 $10,000
(19) In Table 3, when the legal reserve ratio is 25 percent, the excess reserves are:
(a) $0
(b) $1,000
(c) $5,000
(d) $30,000
(20) In Table 3, when the legal reserve ratio is 10 percent, the excess reserves are:
(a) $0
(b) $6,000
(c) $30,000
(d) $60,000