Money and Banking Quiz

What is the liquidity ratio?

• The percentage of loans a bank holds as assets.

• The percentage of deposits a bank uses to make loans.

• The percentage of deposits a commercial bank holds as cash or cash assets.

• The interest rate a bank pays on deposits.

How do banks earn profit?

• By holding all customer deposits in reserve.

• Through the difference between the interest rate charged on loans and the interest paid on deposits.

• By charging customers fees for deposits.

• By maintaining a low liquidity ratio.

What is the credit multiplier (also called the money multiplier)?

• The percentage of deposits a bank must keep in reserve.

• A measure of how much an initial deposit can increase the money supply.

• The interest rate charged on loans.

• The amount of money a bank can loan out.

How do you calculate the credit/money multiplier using the liquidity/reserve ratio?

• Multiply the liquidity/reserve ratio by 100.

• Divide 100 by the liquidity/reserve ratio.

• Subtract the liquidity/reserve ratio from 100.

• Add the liquidity/reserve ratio to 100.

If a bank has a liquidity/reserve ratio of 20%, what is the credit/money multiplier?

• 2

• 4

• 5

• 10

An increase in deposits of $10,000 with a credit/money multiplier of 5 will lead to what overall increase in the money supply?

• $10,000

• $20,000

• $40,000

• $50,000

What is the effect of fractional reserve banking on the money supply?

• It decreases the money supply.

• It has no effect on the money supply.

• It increases the money supply.

• It stabilizes the money supply.

What is the minimum reserve ratio that large banks in the United States are required to have?

• 5%

• 10%

• 20%

• 25%

What happens if banks hold more reserves than required?

• The money multiplier increases.

• The money multiplier stays the same.

• The money multiplier decreases.

• The money supply increases.

During a recession, what typically happens to the money multiplier?

• It increases.

• It remains constant.

• It decreases.

• It becomes more stable.