Important Quiz Notes

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Which of the following is NOT a part of the M1 definition of money? C.) Saving accounts Which of the following is true of M2? C.) It is larger than M1 A Business owner applies for a bank loan to launch a fairly low-risk project. After receiving the loan, sje cancels the low-risk project and instead uses the borrowed funds for a high-risk venture. A.) moral hazard The likelihood that individual who seek to borrow money may use the funds for unworthy, high-risk projects is A.) adverse selection A system in which deposit instructions’ hold reserves that are less than the amount of total deposit is called… C.) fractional reserve banking In the United States, where do depository institutions hold their reserves? B.) Either as vault or on reserve with Federal Reserve district banks A bank with $200 million in transaction deposits keeps $20 million in cash in the bank vault, $10 million in deposits at the Fed, and $5 million in government securities in the bank vault. Its total reserves equal… D.) $30 million A depository institution has $2 million in transaction deposits and $1 million in non-transaction deposits. The required reserve ratio is 10 percent. What is the minimum amount of legal reserves this institution must hold? D.) $200,000 If a bank holds $20,000 in required reserves in order to meet a required reserve ratio of 40 percent, demand deposits must equal… C.) $50,000 A bank with $500 million in deposits holds $35 million in vault cash, has $40 million on deposit with the Fed, and owns $50 million in government securities. If a decrease in the reverse requirement ratio generates excess reserves of $25 million , and prior to the fall the bank had no excess reserves, then the former reserves ratio was _____ and the new reserve ratio is _____. A.) 15 percent, 10 percent
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