Understanding Reserve Banking and Elastic Money Supply

The video tutorial reviews reserve banking, focusing on the concept of an elastic money supply. It explains the creation of national banks, fractional reserve banking, and reserve requirements. The role of a central reserve bank is discussed, along with the issuance of Federal Reserve notes and their government-backed obligations. The tutorial also covers government debt, risk-free IOUs, and how these concepts relate to the Federal Reserve's ability to influence the money supply.

What is the primary role of commercial banks in the context of reserve banking?

• To print currency notes

• To regulate the economy

• To store gold for the government

• To provide loans and create demand deposit accounts

In fractional reserve banking, what does the reserve requirement dictate?

• The number of loans a bank can issue

• The amount of gold a bank must hold

• The ratio of reserves to demand deposits

• The interest rate on loans

What happens if a bank's reserves fall below the required reserve ratio?

• The bank can borrow from another bank or a central depository

• The bank must increase its interest rates

• The bank can issue more loans to cover the deficit

• The bank must close immediately

What is the function of a central reserve bank?

• To set interest rates for commercial banks

• To manage foreign exchange reserves

• To act as a lender of last resort

• To issue loans to the public

How are Federal Reserve notes backed according to the government?

• By the government's obligation to provide value

• By the gold reserves of the central bank

• By the assets of commercial banks

• By international monetary funds

What is the significance of Federal Reserve notes being an obligation of the government?

• It allows the government to print unlimited notes

• It guarantees the notes' value even if the reserve bank fails

• It ties the notes' value to international currencies

• It ensures the notes are backed by gold

What is a key characteristic of government treasury bonds and bills?

• They are high-risk investments

• They are backed by gold reserves

• They are considered risk-free

• They are issued by commercial banks

Why are government IOUs considered risk-free?

• They are insured by private banks

• The government can always tax to repay them

• They are issued in a foreign currency

• They are backed by gold reserves

What is the role of the central reserve bank in managing the money supply?

• To set the national interest rate

• To print more currency

• To buy and sell government securities

• To regulate international trade

How does the government use treasury bills and bonds?

• To borrow money for public spending

• To control inflation

• To regulate commercial banks

• To increase gold reserves