Bob the Builder

Topics: Fractional-reserve banking, Monetary policy, Central bank Pages: 11 (1101 words) Published: January 5, 2014
Module 25 Practice Set 1

Multiple Choice
Identify the choice that best completes the statement or answers the question.

Assets
Liabilities
Reserves $20,000
Deposits _________
Loans _______

Table 25-1: Balance Sheet

____1.Use Table 25-1. If the reserve ratio is 25%, loans are: A.
$5,000.
B.
$15,000.
C.
$60,000.
D.
$80,000.
E.
$20,000.

____2.Banks are illiquid because:
A.
their deposits are less liquid than their loans.
B.
their loans are less liquid than their deposits.
C.
their assets are greater than their liabilities.
D.
their liabilities are greater than their assets.
E.
their assets are equal to their liabilities.

Assets
Liabilities
Cash in bank vault
$2 million
Checkable deposits $100 million
Deposits at the Federal Reserve
$13 million

Loans
$75 million

Property
$8 million

Bonds
$2 million

Table 25-2: ABC Bank's Balance Sheet

____3.Use Table 25-2. Using the information in ABC Bank's Balance sheet, the bank is holding excess reserve of: A.
$17 million.
B.
$15 million.
C.
$5 million.
D.
$25 million.
E.
$3 million.

Scenario 25-1 First National Bank First National Bank has $80 million in checkable deposits, $15 million in deposits with the Federal Reserve, $5 million cash in the bank vault and $5 million in government bonds.

____4.Use Scenario 25-1. Consider the information for First National Bank. If the minimum reserve ratio is 20%, how much is the bank required to keep in reserves? A.
$20 million
B.
$16 million
C.
$25 million
D.
$10 million
E.
$40 million

____5.A bank run occurs when:
A.
too many people are trying to borrow more at one time.
B.
the assets of the bank are greater than the liabilities of the bank. C.
interest rates start to increase.
D.
interest rates are higher than inflation rates.
E.
many bank depositors are trying to withdraw their funds from the bank.

____6.Which of the following would be the initial effect of an individual making a $10,000 cash deposit in a bank? A.
The money supply would rise by $10,000.
B.
The money supply would fall by $10,000.
C.
The money supply would not be affected by the deposit.
D.
The money supply would fall, but by less than the $10,000 deposit. E.
The money supply would rise by more than $10,000.

____7.Suppose the reserve ratio is 20%. If Sam deposits $500 into his checking account, his bank can increase loans by: A.
$500.
B.
$2,500.
C.
$100.
D.
$400.
E.
$300.

____8.Suppose a bank already has excess reserves of $800 and the reserve ratio is 20%. If Andy deposits $1,000 of cash into his checking account and the bank lends $600 to Melanie, that bank can lend an additional: A.

$200.
B.
$1,000.
C.
$800.
D.
$2,400.
E.
$400.

____9.Suppose a bank already has excess reserves of $50 and the reserve ratio is 20%. If Andy deposits $5,000 of cash into his checking account and the bank lends $2,500 to Melanie, the money supply: A.

is increased by $7,500.
B.
is increased by $2,500.
C.
remains unchanged.
D.
is decreased by $5,000.
E.
is increased by $6500.

Scenario 25-2: Money Creation
The reserve requirement is 20%, and Leroy deposits his $1,000 check received as a graduation gift in his checking account. The bank does NOT want to hold excess reserves.

____10.Use Scenario 25-2. How much of the deposit is the bank required to keep in reserves? A.
$1,000
B.
$100
C.
$200
D.
$800
E.
$250

____11.The money multiplier and the required reserve ratio are: A.
independent of one another.
B.
are directly related to one another.
C.
are inversely related.
D.
both greater than 1.
E.
both less than 1.

____12.When a bank deposit is withdrawn and kept as currency, bank reserves decrease and the: A.
monetary base decreases.
B.
quantity of loans increases.
C.
monetary base increases.
D.
money supply decreases....
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