1. Chapter 15
Money Creation

2. Taylor Economics – Chapter 15
1. Bank panics:
occur frequently in fractional reserve banking systems.
are a risk of fractional reserve banking, but are unlikely when banks are highly regulated and lend prudently.
cannot occur in a fractional reserve banking system.
occur more frequently when the monetary system is backed by gold.
Source: Ch 1, Micro Test Bank, #2
Copyright © Houghton Mifflin Company. All rights reserved.

3. Taylor Economics – Chapter 15
1. Bank panics:
occur frequently in fractional reserve banking systems.
are a risk of fractional reserve banking, but are unlikely when banks are highly regulated and lend prudently.
cannot occur in a fractional reserve banking system.
occur more frequently when the monetary system is backed by gold.
Source: Ch 1, Micro Test Bank, #2
Copyright © Houghton Mifflin Company. All rights reserved.

4. Taylor Economics – Chapter 15
2. Other things equal, if the required reserve ratio was lowered:
banks would have to reduce their lending.
the size of the monetary multiplier would increase.
the actual reserves of banks would increase.
the Federal funds interest rate would rise.
Source: Ch 1, Micro Test Bank, #2
Copyright © Houghton Mifflin Company. All rights reserved.

5. Taylor Economics – Chapter 15
2. Other things equal, if the required reserve ratio was lowered:
banks would have to reduce their lending.
the size of the monetary multiplier would increase.
the actual reserves of banks would increase.
the Federal funds interest rate would rise.
Source: Ch 1, Micro Test Bank, #2
Copyright © Houghton Mifflin Company. All rights reserved.

6. Taylor Economics – Chapter 15
3. A bank owns a 10-story office building. In the bank's balance sheet, this would be an example of:
An asset
A liability
Capital stock
A checkable deposit
Source: Ch 1, Micro Test Bank, #2
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7. Taylor Economics – Chapter 15
3. A bank owns a 10-story office building. In the bank's balance sheet, this would be an example of:
An asset
A liability
Capital stock
A checkable deposit
Source: Ch 1, Micro Test Bank, #2
Copyright © Houghton Mifflin Company. All rights reserved.

8. Taylor Economics – Chapter 15
4. What is one significant characteristic of fractional reserve banking?
Banks are not subject to "panics" or "runs."
Banks use deposit insurance for loans to customers
Bank loans will be equal to the amount of gold on deposit
Banks can create money through lending their reserves
Source: Ch 1, Micro Test Bank, #2
Copyright © Houghton Mifflin Company. All rights reserved.

9. Taylor Economics – Chapter 15
4. What is one significant characteristic of fractional reserve banking?
Banks are not subject to "panics" or "runs."
Banks use deposit insurance for loans to customers
Bank loans will be equal to the amount of gold on deposit
Banks can create money through lending their reserves
Source: Ch 1, Micro Test Bank, #2
Copyright © Houghton Mifflin Company. All rights reserved.

10. Taylor Economics – Chapter 15
5. A commercial bank has actual reserves of $50,000 and checkable deposits of $200,000, and the required reserve ratio is 20%. The excess reserves of the bank are:
$10,000
$20,000
$40,000
$50,000
Source: Ch 1, Micro Test Bank, #2
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11. Taylor Economics – Chapter 15
5. A commercial bank has actual reserves of $50,000 and checkable deposits of $200,000, and the required reserve ratio is 20%. The excess reserves of the bank are:
$10,000
$20,000
$40,000
$50,000
Source: Ch 1, Micro Test Bank, #2
Copyright © Houghton Mifflin Company. All rights reserved.

12. Taylor Economics – Chapter 15
6. When a check is cleared against a bank, it will lose:
Cash and securities
Checkable deposits and reserves
Reserves and capital stock
Loans and demand deposits
Source: Ch 1, Micro Test Bank, #2
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13. Taylor Economics – Chapter 15
6. When a check is cleared against a bank, it will lose:
Cash and securities
Checkable deposits and reserves
Reserves and capital stock
Loans and demand deposits
Source: Ch 1, Micro Test Bank, #2
Copyright © Houghton Mifflin Company. All rights reserved.

14. Taylor Economics – Chapter 15
7. Assume that Johnson deposits $350 of currency in his account in the XYZ bank. Later the same day Swanson negotiates a loan for $2,000 at the same bank. In what direction and by what amounts has the supply of money changed?
Increased by $2,350
Increased by $2,000
Decreased by $350
Decreased by $1,650
Source: Ch 1, Micro Test Bank, #2
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15. Taylor Economics – Chapter 15
7. Assume that Johnson deposits $350 of currency in his account in the XYZ bank. Later the same day Swanson negotiates a loan for $2,000 at the same bank. In what direction and by what amounts has the supply of money changed?
Increased by $2,350
Increased by $2,000
Decreased by $350
Decreased by $1,650
Source: Ch 1, Micro Test Bank, #2
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16. Taylor Economics – Chapter 15
8. Maximum checkable-deposit expansion is equal to:
Actual reserves minus excess reserves
Assets plus net worth and liabilities
Excess reserves times the monetary multiplier
Excess reserves divided by the monetary multiplier
Source: Ch 1, Micro Test Bank, #2
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17. Taylor Economics – Chapter 15
8. Maximum checkable-deposit expansion is equal to:
Actual reserves minus excess reserves
Assets plus net worth and liabilities
Excess reserves times the monetary multiplier
Excess reserves divided by the monetary multiplier
Source: Ch 1, Micro Test Bank, #2
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18. Taylor Economics – Chapter 15
9. Assume that the legally required reserve is 15 percent and commercial banks choose to hold additional excess reserves equal to 5 percent of any newly acquired deposits. Under these circumstances the monetary multiplier for the commercial banking system is:
6.67 5 4 3
Source: Ch 1, Micro Test Bank, #2
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19. Taylor Economics – Chapter 15
9. Assume that the legally required reserve is 15 percent and commercial banks choose to hold additional excess reserves equal to 5 percent of any newly acquired deposits. Under these circumstances the monetary multiplier for the commercial banking system is:
6.67 5 4 3
Source: Ch 1, Micro Test Bank, #2
Copyright © Houghton Mifflin Company. All rights reserved.

20. Taylor Economics – Chapter 15
10. A commercial bank has checkable deposit liabilities of $400,000, reserves of $150,000, and a required reserve ratio of 25%. The amount by which a single commercial bank and the amount by which the banking system can increase loans are, respectively:
$50,000 and $100,000
$50,000 and $150,000
$50,000 and $200,000
$150,000 and $200,000
Source: Ch 1, Micro Test Bank, #2
Copyright © Houghton Mifflin Company. All rights reserved.

21. Taylor Economics – Chapter 15
10. A commercial bank has checkable deposit liabilities of $400,000, reserves of $150,000, and a required reserve ratio of 25%. The amount by which a single commercial bank and the amount by which the banking system can increase loans are, respectively:
$50,000 and $100,000
$50,000 and $150,000
$50,000 and $200,000
$150,000 and $200,000
Source: Ch 1, Micro Test Bank, #2
Copyright © Houghton Mifflin Company. All rights reserved.