Chapter 18

Bank Reserves and the Money Supply

D1Factual
1. The largest component of the money supply (M1) is A) time deposits. B) large CDs. C) demand deposits. D) coin and currency. Answer: C

D1Factual
. The !ederal "eser#e$s a%ility to control the amount of demand deposits in the system depends on its a%ility to A) clear chec&s. B) charter national %an&s. C) print currency. D) regulate %an& reser#es. Answer: D

D1Factual
'. (hich of the following is classified as a lia%ility for a commercial %an&) A) "eser#es B) Commercial loans C) Demand deposits D) Deposits with the !ederal "eser#e Answer: C

D1Factual
*. (hich of the following is classified as an asset for a commercial %an& customer) A) A car loan B) A commercial loan C) Demand deposits D) Deposits with the !ederal "eser#e Answer: C

212

213"itter+,il%er+-dell Money, Banking, and Financial Markets . /le#enth /dition

D1Factual
0. Deposits with the !ederal "eser#e Ban& are part of a commercial %an&1s A) capital. B) reser#es. C) loans. D) lia%ilities. Answer: B

D2Factual
2. (hen a %an& recei#es a chec& drawn on an account from another commercial %an&. the %an& gains A) capital e3ual to the amount of the chec&. B) capital e3ual to the re3uired reser#e ratio times the amount of the chec&. C) reser#es e3ual to the amount of the chec&. D) reser#es e3ual to the re3uired reser#e ratio times the amount of the chec&. Answer: C

D2Factual
4. (hen a %an& pays a chec& drawn on a customer$s account to another %an&. the %an& loses A) capital e3ual to the amount of the chec&. B) capital e3ual to the re3uired reser#e ratio times the amount of the chec&. C) reser#es e3ual to the amount of the chec&. D) reser#es e3ual to the re3uired reser#e ratio times the amount of the chec&. Answer: C

D1Factual
5. 6ault cash is part of a commercial %an&$s A) demand deposits. B) capital. C) reser#es. D) lia%ilities. Answer: C

D2Factual
7. A commercial %an&$s reser#es consist of A) capital and -.,. Treasury securities. B) #ault cash and -.,. Treasury securities. C) #ault cash and deposits with the !ederal "eser#e. D) deposits with the !ederal "eser#e and -.,. Treasury securities. Answer: C

D2Applied
18. A %an&$s e9cess reser#es can %e calculated as A) total reser#es times the reser#e ratio. B) demand deposits times the reser#e ratio. C) total reser#es minus re3uired reser#es. D) demand deposits minus total reser#es. Answer: C

Chapter 15Ban& "eser#es and the Money ,upply214

D1Factual
11. A %an& can safely lend an amount e3ual to its A) e9cess reser#es. B) re3uired reser#es. C) #ault cash. D) total reser#es. Answer: A

D1Factual
1 . A %an& creates money A) ne#er since it only lends out money it owns. B) when it ma&es loans. C) when it prints %an& notes. D) when it pays out reser#es. Answer: B

D2Applied
1'. :f the re3uired reser#e ratio is . 0. demand deposits are ;*88 million. and total reser#es are ;108 million. then e9cess reser#es are A) ; 0 million. B) ;08 million. C) ;40 million. D) ;1 0 million. Answer: B

D2Applied
1*. :f the re3uired reser#e ratio is .18. demand deposits are ; 88 million. and total reser#es are ;*8 million. then e9cess reser#es are A) ; 8 million. B) ;*8 million. C) ;*88 million. D) ; .888 million. Answer: A

D2Applied
10. Assume that the re3uired reser#e ratio is 18 percent. A %an& has deposits of ;1.888.888 and cash of ;088.888 in the !ed. The %an& has demand deposits e3ual to ;1.088.888. <i#en this information. the %an& has e9cess reser#es of A) ;508.888. B) ;'08.888. C) ;1.'08.888. D) =one of the a%o#e Answer: C

215"itter+,il%er+-dell Money, Banking, and Financial Markets . /le#enth /dition

D3Applied
12. Assume that e9cess reser#es are ;18 million. demand deposits are ;088 million. and total reser#es are ;1'0 million. The re3uired reser#e ratio is A) .80. B) .1. C) . . D) . 0. Answer: D

D3Applied
14. Assume that e9cess reser#es are ;18 million. the re3uired reser#e ratio is 18 percent. and total reser#es are ;1*0 million. Demand deposits are A) ;1'0 million. B) ;1.'0 %illion. C) ;1.'0 million. D) ;1.*0 %illion. Answer: B

D3Applied
15. Assume that e9cess reser#es are ;'0 million. demand deposits are ;088 million. and total reser#es are ;1'0 million. The re3uired reser#e ratio is A) .84. B) . . C) . 0. D) . 4. Answer: D

D1Factual
17. (hich of the following assets yields a 8 percent return) A) -.,. Treasury Bills B) /9cess reser#es C) Deposits with correspondent %an&s D) Municipal %onds Answer: B

D1Interpretive
8. Ban&s prefer >>>>>>>>>>>>>>>>>> hold e9cess reser#es %ecause >>>>>>>>>>>>>>>>>>. A) not to? e9cess reser#es earn no interest B) not to? %an&s are not re3uired to hold them C) to? e9cess reser#es earn interest D) to? %an&s need them to pre#ent runs Answer: A

Chapter 15Ban& "eser#es and the Money ,upply216

D1Factual
1. A commercial %an&$s a%ility to lend is determined %y its A) re3uired reser#es. B) e9cess reser#es. C) total reser#es. D) capital. Answer: B

D2Interpretive
. A %an& can safely lend only an amount e3ual to its e9cess reser#es %ecause A) all of its reser#es are now re3uired reser#es. B) %orrowers will spend the proceeds of their loans. and the %an& will lose all of its e9cess reser#es. C) the e9cess reser#es will fall to @ero when the %an& ma&es the loans. D) this is not true since a %an& can safely lend an amount e3ual to its total reser#es. Answer: B

D2Interpretive
'. (hen %an&s ma&e new loans. the effect on reser#es is the same as A) holding e9cess reser#es. B) e9panding capital. C) purchasing securities. D) ac3uiring deposits. Answer: C

D2Factual
*. The demand deposit multiplier is e3ual to the A) reciprocal of the reser#e re3uirement ratio. B) reciprocal of the discount rate. C) in#erse of the reser#e re3uirement ratio. D) in#erse of the discount rate. Answer: A

D2Interpretive
0. The demand deposit multiplier >>>>>>>>>>>>>>>>>> as the re3uired reser#e ratio >>>>>>>>>>>>>>>>>>. A) increases? increases B) increases? decreases C) does not change? increases D) does not change? decreases Answer: B

217"itter+,il%er+-dell Money, Banking, and Financial Markets . /le#enth /dition

D2Applied
2. :f the re3uired reser#e ratio was 1. the demand deposit e9pansion multiplier would %e A) 8. B) 1. C) 1. . D) 0. Answer: B

D3Applied
4. :f the ratio of net worth to #ault cash is . . the prime rate is .80. and the re3uired reser#e ratio is . 0. the demand deposit e9pansion multiplier is A) . B) *. C) 0. D) . 0. Answer: B

D2Applied
5. :f original e9cess reser#es are ;18 million. and if the potential change in demand deposits is ;10' million. then the demand deposit e9pansion multiplier is A) 1.0'. B) 8.20. C) 18.8. D) 8.84. Answer: B

D2Applied
7. :f the re3uired reser#e ratio is .18. the demand deposit e9pansion multiplier is A) .1. B) *. C) 0. D) 18. Answer: D

D1Applied
'8. Assume an economy with a single %an&. no e9cess reser#es. no sa#ings accounts. and no currency held %y the pu%lic. (ith a re3uired reser#e ratio of .*. the demand deposit e9pansion multiplier is A) 8. B) 18. C) *. D) .0. Answer: D

Chapter 15Ban& "eser#es and the Money ,upply218

D2Applied
'1. Assume that there are no e9cess reser#es. no sa#ings accounts. and no currency held %y the pu%lic. :f the demand deposit e9pansion multiplier is *. the re3uired reser#e ratio must %e A) also *. B) . . C) . 0. D) .0. Answer: C

D3Applied
' . :f the re3uired reser#e ratio is increased from .1 to . . the demand deposit e9pansion multiplier A) increases from 18 to 0. B) increases from * to *.0. C) decreases from 0 to .0. D) decreases from 18 to 0. Answer: D

D3Applied
''. :f the re3uired reser#e ratio is decreased from . to .1 the demand deposit e9pansion multiplier A) increases from 0 to 18. B) increases from * to *.0. C) decreases from 0 to .0. D) decreases from to 1. Answer: D

D2Applied
'*. Assume a re3uired reser#e ratio of .*. An increase in e9cess reser#es of ;28 can potentially lead to a demand deposit e9pansion of A) ;08. B) ;188. C) ;1 0. D) ;108. Answer: D

D2Applied
'0. Assume a re3uired reser#e ratio of . 0 and a discount rate of .80. :f e9cess reser#es rise %y ; 8. demand deposits can e9pand %y a ma9imum of A) ; 8. B) ; 0. C) ;58. D) ;188. Answer: C

219"itter+,il%er+-dell Money, Banking, and Financial Markets . /le#enth /dition

D2Applied
'2. :f the re3uired reser#e ratio is . and reser#es initially decline %y ; 0. demand deposits can decline %y A) ;1 0. B) ;08. C) ; 0. D) ;0. Answer: A

D2Applied
'4. :f the re3uired reser#e ratio is .0. the deposit contraction multiplier is A) .0. B) . C) .0. D) 0. Answer: B

D3Applied
'5. The re3uired reser#e ratio is 18 percent. and the potential change in demand deposits is ;188 million. (hat are original e9cess reser#es) A) ;18 million B) ;188 million C) ;1 million D) ;1 %illion Answer: A

D2Applied
'7. An initial deficiency in reser#es of ; 8 and a re3uired reser#e ratio of .0 lead to a ma9imum demand deposit contraction of A) ;5. B) ;*8. C) ;08. D) ;58. Answer: B

D2Interpretive
*8. :f a %an& %uys securities. its A) net worth increases. B) net worth decreases. C) reser#es increase. D) reser#es decrease. Answer: D

Chapter 15Ban& "eser#es and the Money ,upply220

D2Interpretive
*1. A %an& with e9cess reser#es A) cannot ma&e new loans. B) must ma&e new loans. C) may choose to ma&e new loans e3ual to the amount of e9cess reser#es. D) can lend an amount e3ual to the amount of e9cess reser#es multiplied %y the in#erse of the re3uired reser#e ratio. Answer: C

D2Interpretive
* . (hich of the following must decline if there is a reser#e deficiency in the %an&ing system) A) Demand deposits B) "eser#es C) =et worth D) The demand deposit multiplier Answer: A

D3Applied
*'. :f the reser#e re3uirement on chec&a%le deposits is . 0. the ratio of currency held %y the pu%lic to demand deposits is .10. the ratio of time deposits to demand deposits is '. the reser#e re3uirement on time deposits is 8. and the ratio of e9cess reser#es to demand deposits is 8. then the demand deposit multiplier is A) 0. B) *. C) '.''. D) .0. Answer: D

D2Interpretive
**. :f there is a(n) >>>>>>>>>>>>>>>>>> in reser#es. the potential change in demand deposits is >>>>>>>>>>>>>>>>>>. A) deficiency? 8 B) deficiency? positi#e C) deficiency? negati#e D) e9cess? negati#e Answer: C

D3Applied
*0. Assume that the ratio of e9cess reser#es to demand deposits is 8. and the ratio of currency to demand deposits is . . :f the reser#e re3uirement on demand deposits is .' and there is no reser#e re3uirement on sa#ings accounts. the M1 multiplier is A) 0.0. B) *. C) .0. D) .*. Answer: D

221"itter+,il%er+-dell Money, Banking, and Financial Markets . /le#enth /dition

D3Applied
*2. Assume that the M1 multiplier is '.8 and the monetary %ase is ; 88 %illion. :f M1 is currently e3ual to ;288 %illion and the !ederal "eser#e wishes to raise the le#el to ;278 %illion. the monetary %ase should %e e9panded %y A) ;28 %illion. B) ;'8 %illion. C) ; 8 %illion. D) ;18 %illion. Answer: B

D3Applied
*4. The change in demand deposits #aries directly with A) the currency ratio. B) the reser#e ratio on demand deposits. C) the monetary %ase. D) the reser#e ratio on time deposits. Answer: C