Mr. Beck

SUNY College at Oneonta

Review Questions for Chapter 29

Homepage

Review Questions for Economics 110

Major Topics Covered in Chapter 29

Money (General Questions):  #Q3  #Q5  #Q12

Required Reserves, Demand Deposits, and Bank Loans:  #Q1  #Q7  #Q8  #Q10  #Q11  #Q13

The Money Multiplier:  #Q2  #Q6  #Q9

Excess Reserves and the Bank Creation of Money Process:  #Q4


1. A bank has demand deposits of $150 million and reserves of $50 million. If the required reserve ratio (m) is 8%, then the bank can increase its loans by

Q1 answer
2. Wilber National Bank has reserves of $80 million and demand deposits of $500 million. It determines that it may increase its loans by up to $55 million.
    Given the above information, what is the value of the money multiplier?
Q2 answer
3. Which one of the following, if any, is considered part of the nation's money supply?
  1. U.S. government EE savings bonds held by individuals.
  2. Reserves held by banks.
  3. Individual credit card balances.
  4. Gold held by the public.
  5. None of the above is part of the nation's money supply.

    6. Q3 answer
4. Mr. X deposits $1,000 cash in a checking account. If the required reserve ratio, m, is 20%, then what will be the maximum (potential) resultant increase in the money supply as a result of this deposit?
Q4 answer
5. The economist considers cash in a bank's vaults to be part of the
  1. bank's liabilities
  2. bank's reserves
  3. economy's money supply
  4. bank's checking accounts (demand deposits)
  5. bank's loans

    6. Q5 answer
6. Bank X currently has reserves of $180 million and demand deposits of $600 million. It determines it is permitted to increase its loans by up to $30 million.
    Given the above information, what is the value of the money multiplier?
Q6 answer
7. Key Bank has reserves of $1,000 and demand deposit liabilities of $1,000. The required reserve ratio (m) is 10%. It lends out $500 by opening up a checking account for Mr. Allen. Mr. Allen purchases a $500  item by writing a check to Bentley, Inc.. Bentley also banks at Key Bank and deposits the check there in their checking account. After this deposit, what is Key Bank's level of excess reserves?
Q7 answer
8. A bank has demand deposits of $300 million and reserves of $80 million. If the required reserve ratio (m) is 16%, then the bank can increase its loans by
Q8 answer
9. First Federal Bank has reserves of $120 million and demand deposits of $400 million. It determines that it may increase its loans by up to $20 million.
    Given the above information, what is the value of the required reserve ratio (m)?
Q9 answer
10. Wilber National Bank currently has $2,000 of demand deposits. It then lends out $1,600 and the borrower uses the full amount of the loan to purchase an item from somebody who banks at a different bank. After all steps in the transactions are completed, including check clearing if necessary, Wilber National Bank will have demand deposits of
  1. $2,000 if the loan is made by opening up a checking account for the borrower, but $400 if the loan is made in cash.
  2. $2,000, regardless of how the loan was made.
  3. $2,000 if the loan is made in cash, but $400 if the loan is made by opening up a checking account for the borrower.
  4. $2,000 if the loan is made in cash, but $3,600 if the loan is made by opening up a checking account for the borrower.
  5. $400, regardless of how the loan was made.

    6. Q10 answer
11. Key Bank currently has demand deposits of $800 million, reserves of $200 million, and loans of $600 million. If the required reserve ratio (m) is 12%, then Key Bank is permitted to increase its loans by
Q11 answer
12. Checking accounts (demand deposits) are classified as money because
  1. they are backed by the U.S. government's Federal Deposit Insurance Corporation (F.D.I.C.).
  2. they are backed by the Federal Reserve Bank.
  3. banks hold cash and reserves equal to the value of their deposits.
  4. they are generally acceptable in the purchase of goods and services.
  5. they can be convertible into cash upon demand.

    6. Q12 answer
13. Oneonta National Bank and Trust Company currently has $4,000 in reserves, $6,000 in loans, and $10,000 in demand deposits. Ms. X then deposits $1,000 cash into her demand deposit (checking) account. If the required reserve ratio (m) is 15%, what is the bank's  level of excess reserves after the deposit?
Q13 answer

Formulas


Required Reserve Ratio (m)  =   Required Reserves/Demand Deposits
 

Required Reserves  =  m x  Demand Deposits
 

Excess Reserves  =  Reserves - Required Reserves
 

Money Multiplier  =  1/m
 

Resultant change in the money supply = 1/m  x initial change in excess reserves

(This formula represents the maximum potential change in the money supply banks can create.)
 
 

Answers



 

1. $38 million  Return to Q1
Solution to Q1

 

2. 20  Return to Q2
Solution to Q2

 

3. e  Return to Q3
Solution to Q3

 

4. $4,000  Return to Q4
Solution to Q4

 

5. b  Return to Q5
Solution to Q5

 

6. 4  Return to Q6
Solution to Q6

 

7. 850  Return to Q7
Solution to Q7

 

8. $32 million  Return to Q8
Solution to Q8

 

9. 0.25  Return to Q9
Solution to Q9

 

10. b  Return to Q10
Solution to Q10

 

11. $104 million  Return to Q11
Solution to Q11

 

12. d  Return to Q12
Solution to Q12

 

13. $3,350  Return to Q13
Solution to Q13

Return to top of page