Q: If a bank receives a new deposit of $50,000 and the required reserve ratio is 20%, what is the maximum possible increase in the money supply?

$$\frac{1}{0.20} \times 50,000 = 250,000$$

Q: According to the balance sheet identity, which equation is always true for a bank?

$$\text{Assets} = \text{Liabilities} + \text{Net Worth}$$

Question 1

Which of the following best explains why a barter system is considered inefficient compared to a monetary system?

Accepted Answer

Barter systems require a double coincidence of wants, making transactions more difficult.

Question 2

Which of the following is NOT a function of money?

Accepted Answer

Means of production

Question 3

A commodity must possess certain characteristics to serve as money. Which of the following is NOT one of those characteristics?

Accepted Answer

Must be issued by a central bank

Question 4

Which of the following best describes fiat money?

Accepted Answer

Money that is decreed as such by the government and has little value as a commodity.

Question 5

Suppose the required reserve ratio $$m is 0.25. $$What is the deposit multiplier?

Accepted Answer

$$\frac{1}{0.25} = 4$$

Question 6

If a bank receives a new deposit of $50,000 and the required reserve ratio is 20%, what is the maximum possible increase in the money supply?

Accepted Answer

$$\frac{1}{0.20} 	imes 50,000 = 250,000$$

Question 7

Which of the following is included in M1 but NOT in M2?

Accepted Answer

Traveler's checks

Question 8

Why are banks heavily regulated by governments?

Accepted Answer

To control the money supply and protect depositors from bank failures.

Question 9

Which of the following scenarios would most likely lead to a 'run on the bank'?

Accepted Answer

Many depositors withdraw their cash all at once due to concerns about the bank's solvency.

Question 10

What is the main risk associated with deposit insurance, such as that provided by the FDIC?

Accepted Answer

Moral hazard, where insured banks may take on riskier behavior.

Question 11

Which of the following best describes systemic risk in the banking system?

Accepted Answer

The risk that the failure of one large financial institution can threaten the stability of the entire financial system.

Question 12

According to the balance sheet identity, which equation is always true for a bank?

Accepted Answer

$$	ext{Assets} = 	ext{Liabilities} + 	ext{Net Worth}$$

Question 13

If banks decide to hold excess reserves rather than lend them out, what is the likely effect on the money supply?

Accepted Answer

The money supply will increase less than predicted by the deposit multiplier.

Question 14

During a recession, what is the typical response of banks regarding the money supply?

Accepted Answer

Banks tend to reduce the money supply by increasing excess reserves and lending less.

Question 15

Which of the following is considered a 'near money'?

Accepted Answer

Money market mutual funds

Question 16

If the required reserve ratio is $$m = 0.10$$ and a bank receives a $$200,000$$ deposit, what is the maximum increase in deposits possible in the banking system?

Accepted Answer

$$\frac{1}{0.10} 	imes 200,000 = 2,000,000$$

Question 17

Which of the following is NOT a feature of a fractional reserve banking system?

Accepted Answer

Banks keep all deposits as reserves.

Question 18

The Dodd-Frank Act of 2010 was primarily designed to:

Accepted Answer

Increase supervision and regulation of systemically important financial institutions.

Question 19

Which of the following would most likely cause the deposit-creation formula to overestimate the increase in the money supply?

Accepted Answer

Individuals and businesses decide to hold more cash rather than redeposit it.

Question 20

Which of the following best describes the evolution of money?

Accepted Answer

Commodity money → Full-bodied paper money → Partially backed money → Fiat money

Money and the Banking System: Definitions, Functions, and Creation of Money

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