Money Multiplier Practice

How does the FED get reserves?

• By borrowing from foreign central banks
• They make it up out of thin air.

• By printing more money
• By selling government bonds to the public

Answer explanation

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

What is an bank’s asset

• Credit card debt
• Cash, loans, investments, and physical property
• Employee salaries
• Customer deposits

Answer explanation

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

What is the required reserve ratio?

• The required reserve ratio is the interest rate at which banks lend to each other
• The required reserve ratio is the portion of depositors' balances that banks must have on hand as cash.

  (0.1)

• The required reserve ratio is the maximum amount of money a bank can lend out
• The required reserve ratio is the percentage of profits that banks must keep as reserves

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.

What does the potential expansion of checkable deposits in the banking system equals

• Money multiplier multiplied by the initial excess reserves
• The number of bank branches in the country
• The Federal Reserve's discount rate
• Total amount of currency in circulation

Answer explanation

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

What cycle repeats after round one?

• life cycle
• water cycle
• cycle of the moon
• Borrowing, spending, and depositing.

What is the money multiplier?

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

• The money multiplier is the percentage of income that is saved rather than spent
• The money multiplier is the total amount of money in circulation
• The money multiplier is the interest rate set by the Federal Reserve

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.

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

• Savings Account

• Measure of Value

• Measure of Value

• Store of Value

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

• 2,000

• 8,000

• 10,000

• 20,000

• 50,000

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

• 500

• 1,000

• 2,000

• 4,000

• 4,500

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

• 20 million

• 30 million

• 90 million

• 120 million

• 150 million