Chapter 32 review
Student: ___________________________________________________________________________
1. The fractional reserve system of banking started when goldsmiths began: 
A) Accepting deposits of gold for safe storage
B) Charging people who deposited their gold
C) Using deposited gold to produce products for sale to others
D) Issuing paper receipts in excess of the amount of gold held
 2. What is one significant characteristic of fractional reserve banking? 
A) Banks hold a fraction of their loans in reserve
B) Banks use deposit insurance for loans to customers
C) Bank loans will be equal to the amount of gold on deposit
D) Banks can create money through lending their reserves
 
3. A bank has $2 million in checkable deposits. In the bank's balance sheet, this would be part of: 
A) Assets
B) Liabilities
C) Capital stock
D) Net worth
 4. A checkable deposit at a commercial bank is a(n): 
A) Liability to the depositor and an asset to the bank
B) Liability to both the depositor and the bank
C) Asset to the depositor and a liability to the bank
D) Asset to both the depositor and the bank
 
5. Cash held by a bank in its vault is a part of the bank's: 
A) Reserves
B) Liabilities
C) Money supply
D) Net worth
6. When cash is deposited in a checkable-deposit account at a bank, there is: 
A) A decrease in the money supply M1
B) An increase in the money supply M1
C) An increase in the bank's net worth
D) An increase in the bank's liabilities
 
7. When cash is withdrawn from a checkable-deposit account at a bank: 
A) The money supply M1 increases
B) The money supply M1 decreases
C) The money supply M1 does not change but its composition changes
D) The composition of money supply M1 does not change
 
8. A bank's required reserves can be calculated by: 
A) Dividing its excess reserves by its required reserves
B) Dividing its required reserves by its excess reserves
C) Multiplying its checkable-deposit liabilities by the reserve ratio
D) Multiplying its checkable-deposit liabilities by its excess reserves
9. A commercial bank has actual reserves of $50,000 and checkable deposits of $200,000, and the required reserve ratio is 20%. The excess reserves of the bank are: 
A) $10,000
B) $20,000
C) $40,000
D) $50,000
10. A commercial bank has required reserves of $6,000 and the reserve ratio is 20 percent. How much are the commercial bank's checkable-deposit liabilities? 
A) $1,200
B) $9,000
C) $30,000
D) $120,000
11. A commercial bank has checkable-deposit liabilities of $50,000 and a reserve ratio of 20 percent. What is the amount of required reserves? 
A) $10,000
B) $50,000
C) $250,000
D) $1 million
12. A commercial bank has actual reserves of $1 million and checkable-deposit liabilities of $9 million, and the required reserve ratio is 10 percent. The excess reserves of the bank are: 
A) $50,000
B) $100,000
C) $900,000
D) $1 million
13. A bank is in the position to make loans when required reserves: 
A) Equal actual reserves
B) Equal excess reserves
C) Are less than actual reserves
D) Are greater than actual reserves
14. An individual deposits $12,000 in a commercial bank. The bank is required to hold 10 percent of all deposits on reserve at the regional Federal Reserve Bank. The deposit increases the loan capacity of the bank by: 
A) $11,000
B) $10,800
C) $9,600
D) $6,000
15. Assume that the required reserve ratio is 5 percent. If a commercial bank has $2 million cash in its vault, $1 million in government securities, $3 million on deposit at the Fed, and $60 million in checkable deposits, then its excess reserves equal: 
A) $0 million
B) $2 million
C) $5 million
D) $6 million
16. Suppose the Northwestern Bank has excess reserves of $12,000 and outstanding checkable deposits of $125,000. If the reserve requirement is 20 percent, what are the bank's actual reserves? 
A) $25,000
B) $37,000
C) $44,000
D) $47,000
17. A bank has excess reserves of $5,000 and demand deposits of $50,000 when the required reserve ratio is 20 percent. If the reserve ratio is raised to 25 percent, then this bank can lend a maximum of: 
A) $1,000
B) $1,500
C) $2,000
D) $2,500
18. A depositor places $10,000 in cash in a commercial bank, and the reserve ratio is 10 percent. The bank sends the $10,000 to its Federal Reserve Bank. As a result, the actual reserves, required reserves, and excess reserves of the bank have been increased by: 
A) $10,000, $9000, and $1000 respectively
B) $10,000, $500, and $4500 respectively
C) $10,000, $1000, and $9000 respectively
D) $1000, $10,000, and $9000 respectively
 The figures in the table below are for a single commercial bank. All figures are in thousands of dollars.

19. Refer to the above data. This bank has total assets of: 
A) $340 million
B) $440 million
C) $520 million
D) $580 million
20. Assume that the required reserve ratio is 20 percent. A business deposits a $50,000 check at Bank A; the check is drawn against Bank B. What happens to the reserves at Bank A and Bank B? 
A) Increase by $10,000 at Bank A, and decrease by $10,000 at Bank B
B) Increase by $10,000 at Bank A, and decrease by $50,000 at Bank B
C) Reserves stay the same in both banks
D) Increase by $50,000 at Bank A, and decrease by $50,000 at Bank B
21. Money is "created" when: 
A) A depositor gets cash from the bank's ATM
B) A bank accepts deposits from its customers
C) People receive loans from their banks
D) People spend the incomes that they receive
22. Other things being equal, an expansion of commercial bank lending: 
A) Changes the composition, but not the size, of the money supply
B) Is desirable during a period of demand-pull inflation
C) Reduces the money supply
D) Increases the money supply
23. The primary reason commercial banks must keep required reserves on deposit at Fed is to: 
A) Add to the liquidity of the commercial bank
B) Allow the Fed to control the amount of bank lending
C) Protect the deposits in the commercial bank against losses
D) Ensure that depositors can withdraw their money if they wish to
24. A single commercial bank must meet a 25 percent reserve requirement. If it initially has no excess reserves and then $2,000 in cash is deposited in the bank, it can increase its loans by a maximum of: 
A) $2,000
B) $1,500
C) $1,250
D) $1,750
25. If the reserve ratio is 25 percent, what level of excess reserves does a bank acquire when a customer deposits a $12,000 check drawn on another bank? 
A) $3,000
B) $6,000
C) $9,000
D) $12,000
26. In the Federal funds market, a bank that needs to meet reserve requirements can borrow reserves, usually for a period: 
A) Overnight
B) Of a week
C) Of a month
D) Of six months
27. The Federal funds rate is the rate that banks pay for loans from: 
A) The Fed
B) The U.S. Treasury
C) Other banks
D) Large Corporations
28. If the Federal Reserve System sells $5 billion of government securities to commercial banks, the banks' reserves would: 
A) Increase by $5 billion
B) Decrease by $5 billion
C) Be added to net worth
D) Remain the same
29. If the required reserve ratio is 20 percent and commercial bankers decide to hold additional excess reserves equal to 5 percent of any newly acquired checkable deposits, then the effective monetary multiplier for the banking system will be: 
A) 3
B) 4
C) 5
D) 6
30. Maximum checkable-deposit expansion in the banking system is equal to: 
A) Actual reserves minus required reserves
B) Assets plus net worth and liabilities
C) Excess reserves times the monetary multiplier
D) Excess reserves divided by the monetary multiplier
31. The multiple by which the commercial banking system can expand the supply of money is equal to: 
A) The ratio of actual reserves to required reserves
B) The reciprocal of the federal funds rate
C) The reciprocal of the reserve ratio
D) The ratio of required reserves to actual reserves
32. The commercial banking system has excess reserves of $200,000. Then new loans of $800,000 are subsequently made, and the system ends up just meeting its reserve requirements. The required reserve ratio must be: 
A) 10 percent
B) 20 percent
C) 25 percent
D) 30 percent
 The balance sheet below is for the First Federal Bank. Assume the required reserve ratio is 20 percent.

33. Refer to the above information. This commercial bank has required reserves of: 
A) $40,000
B) $60,000
C) $100,000
D) $200,000
34. Refer to the above information. This bank can safely expand its loans by a maximum of: 
A) $20,000
B) $40,000
C) $100,000
D) $200,000
35. Refer to the above information. The monetary multiplier is: 
A) 3.00
B) 4.00
C) 5.00
D) 6.67
36. Refer to the above information. If the original bank balance sheet was for the commercial banking system, rather than a single bank, loans and deposits could have been expanded by a maximum of: 
A) $40,000
B) $100,000
C) $200,000
D) $300,000

Chapter 32 review Key
 
1. D
 
2. D
 
3. B
 
4. C
 
5. A
 
6. D
 
7. C
 
8. C
 
9. A
 
10. C
 
11. A
 
12. B
 
13. C
 
14. B
 
15. B
 
16. B
 
17. D
 
18. C
 
19. D
 
20. D
 
21. C
 
22. D
 
23. B
 
24. B
 
25. C
 
26. A
 
27. C
 
28. B
 
29. B
 
30. C
 
31. C
 
32. C
 
33. B
 
34. B
 
35. C
 
36. C