Gottheil Quiz: Money Creation and The Banking System

Quiz
Money Creation and The Banking System

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1. Under a fractional reserve system,: a. banks who owe depositors, say, $100 million are not required to hold $100 million of reserves for those deposits.
b. banks who owe depositors, say, $100 million may only be required to hold, say, $10 million of reserves for those deposits.
c. depositors who put, say, $100 million into banks that face a 10% reserve requirement can only use $90 million of their deposits.
d. depositors who put, say, $100 million into banks that face a 10% reserve requirement can only use $10 million of their deposits.
e. both (a) and (b) hold true.

2. If a customer deposits $500 of cash in a bank,: a. the bank's assets rise by $500.
b. the bank's reserves rise by $500.
c. the bank's liabilities rise by $500.
d. the deposit component of the M1 money supply rises by $500.
e. all of the above occur.

3. If a bank has $500 in excess reserves and a 10% legal reserve requirement,: a. it can make new loans of $450 at most.
b. its making of new loans in the form of cash will leave the total of its assets unchanged.
c. its making of new loans in the form of new deposits will leave the composition of its assets unchanged.
d. its making of new loans in the form of cash will increase its liabilities.
e. all of the above hold true.

4. If you deposit $100 of cash in your checking account,: a. and your bank makes no new loans, the M1 money supply is unchanged.
b. and your bank makes no new loans, the M1 money supply rises by $100.
c. and your bank makes no new loans, the M1 money supply falls by $100.
d. and your bank makes all the loans it can, the M1 money supply rises by $500.
e. and your bank makes all the loans it can, the M1 money supply rises by $5,000.

5. If the public withdraws $500 in cash from checking accounts,: a. the M1 money supply rises by $500.
b. the M1 money supply falls by $500.
c. the M1 money supply is initially unchanged.
d. bank reserves contract by a multiple.
e. bank reserves are unaffected.

6. If a bank holds $500 of excess reserves and then makes a $500 loan in cash,: a. bank reserves are down.
b. the M1 money supply is initially unchanged.
c. the M1 money supply is going to decrease later (by a multiple of $500).
d. the bank's assets fall.
e. the bank's liabilities fall.

7. If a depositor writes a $500 check on an account at Bank A and the recipient deposits it in Bank A as well,: a. the bank's reserves decline.
b. the bank's liabilities decline.
c. the bank's liabilities rise.
d. the bank's liabilities only change in their composition.
e. the bank's assets only change in their composition.

8. If a depositor writes a $500 check on an account at Bank A and the recipient deposits it in Bank B,: a. the M1 money supply rises.
b. the M1 money supply falls.
c. the reserves of Bank A decline, while those of Bank B rise.
d. the deposit liabilities of Bank A rise.
e. the deposit liabilities of Bank B fall.

9. A bank has $500 of excess reserves. If it now makes a $500 loan and the recipient cashes $100 of it,: a. the M1 money supply rises by $100.
b. the bank's assets rise by $500.
c. the bank's liabilities rise by $400.
d. the bank's total reserves fall by $500.
e. the bank's excess reserves fall by $500.

10. If a borrower pays off a $800 bank loan at Bank A with a check drawn on Bank B,: a. then the assets of Bank A will rise.
b. then the size of Bank A assets will remain unchanged, although their composition will change.
c. then the liabilities of Bank B will rise.
d. then the size of Bank B liabilities will remain unchanged, although their composition will change.
e. then the assets of Bank B will be unaffected.

11. If a borrower pays off a $800 bank loan at Bank A with a check drawn on Bank B,: a. then the liabilities of Bank A will rise.
b. then the liabilities of Bank A will fall.
c. then the liabilities of Bank A will remain unchanged, although their composition will be affected.
d. then the M1 money supply will fall.
e. then the banking system's reserves will fall.

12. Excess reserves equal: a. required reserves minus total reserves.
b. required reserves plus total reserves.
c. bank assets minus liabilities.
d. bank liabilities minus assets.
e. total reserves minus required reserves.

13. When a customer deposits $100 of Federal Reserve Notes in a U.S. bank that is subject to a 25% reserve requirement,: a. the bank's assets increase by $100.
b. the bank's liabilities increase by $25.
c. only $75 of the deposit are available to the customer.
d. the bank can make new loans of $25.
e. all of the above are true.

14. Assume that nobody cashes checking accounts and that banks are subject to a 25% reserve requirement and hold zero excess reserves. Then, if someone deposits $1,500 of currency in a bank,: a. that bank's assets rise by $375, while its liabilities rise by $1,500.
b. that bank's assets and liabilities both rise by $1,500.
c. the banking system as a whole can create additional checkable deposits of $1,500.
d. the banking system as a whole can create additional checkable deposits of $3,750.
e. the banking system as a whole can create additional checkable deposits of $4,000.

15. If the money multiplier equals 5, we know: a. that the required reserve ratio is 20% or 0.2.
b. that the maximum change in checkable deposits associated with a $500 deposit of cash equals $1,000.
c. that (b) is true if nobody ever cashes a portion of checking accounts.
d. that (b) is true as long as banks hold on to their excess reserves.
e. none of the above.

16. If the legal reserve requirement equals 10%, what is the maximum amount by which the M1 money supply can increase due to an initial cash deposit of $678?: a. $6,780.
b. $6,520.
c. $6,390.
d. $6,102.
e. $67.80.

17. The concept of moral hazard is illustrated by the fact that: a. some banks decide to live with excess reserves.
b. the potential money multiplier exceeds the actual money multiplier.
c. a large portion of bank loans is never repaid.
d. banks with Federal Deposit Insurance sometimes assume an immoderate amount of risk.
e. people who learn of bank failures tend to become nervous about their own deposits, withdraw them, and thereby trigger a wave of failures.

18. The Federal Deposit Insurance Corporation (FDIC) provides depositors in participating U.S. banks: a. 100% coverage of their deposits.
b. 100% coverage of their first $10,000 of deposits.
c. 100% coverage of their first $100,000 of deposits.
d. 90% coverage of their first $10,000 of deposits.
e. 50% coverage of their first $100,000 of deposits.

19. The extraordinary number of S&L failures in the years 1988-1991 can be attributed to: a. banking deregulation.
b. higher risk loans made by the S&Ls.
c. outright banking fraud in this industry.
d. none of the above.
e. a combination of factors (a) through (c).

20. If left to their own devices, financial intermediaries would: a. make business cycle downturns less pronounced.
b. make business cycle downturns more pronounced.
c. make business cycle upturns less extreme.
d. refuse membership in the Resolution Trust Company.
e. do (a) and (c).