Money Multiplier Practice

Front

How does the FED get reserves?

Back

They make it up out of thin air.

Answer explanation

The FED gets theses reserves by making them up literally out of thin air.

Front

What is a bank’s asset?

Back

Cash, loans, investments, and physical property

Answer explanation

An asset is any physical property or financial claim that is owned.

Front

What is the required reserve ratio?

Back

The required reserve ratio is the portion of depositors' balances that banks must have on hand as cash.

Answer explanation

Because the required reserve ratio is 0.1, Fidelity Bank sets side $1,000 of the new deposit as reserves and lends the remaining $9,000 for a computer purchase by increasing the borrower’s checking account.

Front

What does the potential expansion of checkable deposits in the banking system equal?

Back

Money multiplier multiplied by the initial excess reserves

Answer explanation

The potential expansion of checkable deposits in the banking system equals some multiple of the initial increase in excess reserves.

Front

What cycle repeats after round one?

Back

Borrowing, spending, and depositing.

Front

What is the money multiplier?

Back

The maximum multiple by which the money supply increases as a results of an increase in the banking system’s excess reserves.

Answer explanation

The money multiplier is the maximum multiple by which the money supply increases as a results of an increase in the banking system’s excess reserves.

Front

We can hold money as a form of wealth until we find something we want to buy with it.

Back

Store of Value

Front

Assume the reserve requirement is 20 percent. If a bank initially has no excess reserves and $10,000 cash is deposited in the bank, what is the maximum amount by which this bank may increase its loans?

Back

8,000

Front

Assume that Atlantic National Bank has demand deposits of $100,000 and no excess reserves, and that the reserve requirement is 10 percent. A customer withdraws $5,000 from the bank. To meet the reserve requirement, the bank must increase its reserves by

Back

4,500

Front

If the required reserve ratio is 10 percent, actual reserves are $10 million and currency in circulation is equal to $20 million, M1 will at most be equal to

Back

120 million