Money Creation and the Banking System
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1. The amount of money a bank can lend out is _______ than the amount of deposits it holds.
a. greater than
b. less than
c. equal to
d. not related to
2. The percentage of demand deposits a bank must hold in cash is referred to as the
a. velocity of money.
b. velocity of deposits.
c. money multiplier.
d. reserve requirement.
3. If the legal reserve requirement is 20% and a bank has $300 million in deposits, it can make up to _______ in loans.
a. $280 million
b. $ 60 million
c. $240 million
d. $300 million
4. Given the Legal Reserve Requirement (LRR), the potential money multiplier is
a. 1 / (1 - LRR)
b. 1 - LRR
c. LRR / (1 - LRR)
d. 1 / LRR
5. Suppose the LRR is 30%. If Bank One receives an additional $90 in deposits, it can lend out
a. $30.
b. $90.
c. $63.
d. $300.
6. The additional loan made by Bank One is deposited in Bank Two, which then lends out these funds. Bank Two's loan portfolio will increase by a maximum of
a. $44.10.
b. $18.90.
c. $63.00.
d. $90.
7. If the LRR is 0.3, the money multiplier is
a. 0.3
b. 0.7
c. 10 / 3
d. 10 / 7
8. The total increase in the money supply from the increase in deposits of $90 given the LRR of 30% will be a maximum of
a. $30.
b. $135.
c. $300.
d. $54.
9. If the Fed lowers the reserve requirement to 20%, the money multiplier will be
a. 0.2.
b. 0.8.
c. 5.
d. 1.25.
10. If the Federal Reserve lowers the LRR to 20%, the increase in the money supply from the $90 increase in deposits will be a maximum of
a. $18.
b. $72.
c. $720.
d. $450.
11. Why might the increase in the money supply in question 8 be less than the maximum?
a. Banks may hold excess reserves.
b. Banks may lend out more than they are legally allowed.
c. Firms may hold excess deposits.
d. The legal reserve requirement is only an approximation.
12. If the Fed wants to decrease the money supply it can
a. decrease the legal reserve requirement.
b. increase the legal reserve requirement.
c. increase the velocity of money.
d. decrease the velocity of money.
13. A major cause of bank failures in the 1980s and 1990s was
a. increases in agricultural prices.
b. heavy losses in international lending.
c. the decline of the U.S. auto industry.
d. an increase in the rate of default on credit cards.
14. Joe Smith's brother-in-law, Tom Jones, is the president of a local bank. Tom realizes that there are big profits to be made in high-risk loans. By making such loans, the chances of Tom's bank failing
a. increases.
b. decreases.
c. will not change.
d. is zero, since banks are insured by the FDIC.
15. Tom persuades Joe to deposit $150,000 in his bank, but the bank fails. According to the law, Joe will be covered by the government up to
a. 90% of his deposit.
b. $ 1 million.
c. $10,000.
d. $100,000.
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