Practice Quiz 5: How Banks Create Money Some students have been having difficulty with this quiz so I will demonstrate how to do the problems.
6.
Use the following balance sheet for the ABC National Bank in answering the next question(s). Assume the required reserve ratio is 20 percent.
Assets Liabilities and net worth Reserves$27,000 Demand deposits$110,000 Loans50,000 Capital stock200,000 Securities33,000 Property200,000
Reserves$27,000
Demand deposits$110,000
Loans50,000
Capital stock200,000
Securities33,000
Property200,000
R-1 REF14033
Refer to the above data. This commercial bank has excess reserves of:
A.
$0.
B.
$3,000.
C.
$12,000.
D.
$5,000.
E.
$7,000.
Excess Reserves (ER) = Total Reserves - Required Reserves
Required Reserves = .20 x $ 110,000 = $ 22,000
ER = $ 27,000 - $ 22,000 = $ 5,000 (Answer D)
7.
Refer to the above data. This bank can safely expand its loans by a maximum of:
$25,000.
$35,000.
Since this bank has $ 5,000 in excess reserves, it can safely expand its loans by a maximum of: $ 5,000 (Answer D)
8.
Use the following balance sheet for the ABC National Bank in answering the next question(s). Assume the required reserve ratio is 20 percent
Refer to the above data. Assuming the bank has a check cleared against it for the amount loaned in the previous question, its reserves and demand deposits will now be:
$25,000 and $122,000 respectively.
$22,000 and $110,000 respectively.
$32,000 and $115,000 respectively.
$22,000 and $105,000 respectively.
Assets Liabilities and net worth Reserves $27,000 Demand deposits $115,000 ($ 5,000 more in demand deposits because the loan is deposited in the borrowers's checking account. NOTE: This $ 5,000 is NEW MONEY) Loans 55,000 ($ 5,000 more in loans) Capital stock 200,000 Securities 33,000 Property 200,000
Reserves $27,000
Demand deposits $115,000 ($ 5,000 more in demand deposits because the loan is deposited in the borrowers's checking account. NOTE: This $ 5,000 is NEW MONEY)
Loans 55,000 ($ 5,000 more in loans)
Capital stock 200,000
Securities 33,000
Property 200,000
When that new $ 5,000 loan is spent and the Demand Deposits go back to $ 110,000. When the check clears this bank has to send $ 5,000 of its Reserves to the bank where the $ 5,000 was deposited, so the reserves are now $ 22,000.
After the loan is made, spent, and the check is cleared, the new balance sheet will look like:
Assets Liabilities and net worth Reserves $22,000 ($ 5,000 less in reserves, because it was sent to another bank to cover the check) Demand deposits $110,000 ($ 5,000 less in demand deposits because the loan was spent) Loans 55,000 Capital stock 200,000 Securities 33,000 Property 200,000
Reserves $22,000 ($ 5,000 less in reserves, because it was sent to another bank to cover the check)
Demand deposits $110,000 ($ 5,000 less in demand deposits because the loan was spent)
Loans 55,000
Answer B
9.
Refer to the above data. After the transaction described in the previous question is completed, the bank will now have excess reserves of:
Reserves $22,000
Demand deposits $110,000
Loans 50,000
Now the Required Reserves are .20 x $ 110,000 = $ 22,000
Total Reserves - Required Reserves = Excess Reserves
$ 22,000 - $ 22,000 = $ 0 (Answer A)
10.
Refer to the above data. If the original bank sheet was for the commercial banking system, rather than a single bank, loans and deposits could have been expanded by a maximum of:
$8,000.
$15,000.
$48,000.
MS = initial ER x money multiplier
Money Multiplier = 1 / Required Reserve Ratio
multiplier = 1 / RR
multiplier = 1/.20 = 5
MS = $ 5,000 x 5 = $ 25,000 (Answer D)