Exploring Money Creation in Fractional Reserve Banking

The video explains how money is created in a fractional reserve banking system, where banks keep only a fraction of deposits as reserves. Excess reserves are loaned out, creating new money. The money multiplier effect amplifies the initial deposit, increasing the money supply. Central bank actions, like bond purchases, also impact the money supply differently than private deposits.

What is required in a fractional reserve banking system?

• Banks must invest all excess reserves in government bonds.

• Banks can lend out all of their deposits.

• Banks are only required to keep a fraction of deposits in reserve.

• Banks must keep all deposits in reserve.

What is the reserve ratio if a bank is required to keep 20% of deposits?

• 0.2

• 0.5

• 0.8

• 1.0

What does a reserve ratio of 0.2 imply about a bank's reserves?

• It must keep 80% of deposits as reserves.

• It can lend out 20% of its deposits.

• It must keep 20% of deposits as reserves.

• It can lend out 80% of its deposits.

What is the purpose of the reserve requirement in fractional reserve banking?

• To ensure banks can pay interest on deposits.

• To control the money supply.

• To prevent banks from lending money.

• To increase the central bank's reserves.

What happens to excess reserves in a fractional reserve banking system?

• They are loaned out to borrowers.

• They are kept in the vault.

• They are returned to the depositors.

• They are transferred to the central bank.

How is new money created in a fractional reserve banking system?

• Through government spending.

• By printing new currency.

• Through lending of excess reserves.

• By increasing taxes.

How does the money multiplier effect work?

• It increases the total money supply.

• It keeps the money supply constant.

• It has no effect on the money supply.

• It decreases the total money supply.

What is the total change in money supply with a multiplier of 5 and an initial deposit of 1000 euros?

• 4000 euros

• 2000 euros

• 1000 euros

• 5000 euros

What effect does a central bank's purchase of bonds have on the money supply?

• It decreases the money supply.

• It does not affect the money supply.

• It increases the money supply by the amount of the purchase.

• It increases the money supply by a multiple of the purchase amount.

Why does the money supply increase more when the central bank buys bonds compared to when private deposits are made?

• Because private deposits are taxed.

• Because money at the central bank is not part of the money supply.

• Because private deposits have a higher money multiplier.

• Because central bank purchases have a higher reserve ratio.