Chapter 19
Practice Quiz Tutorial
Money Creation
©2004 South-Western
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1. If a bank has total deposits of $100,000 set
aside to meet reserve requirements of the
Fed, its required reserve ratio is
a. $10,000.
b. 10 percent.
c. 0.1 percent.
d. 1 percent.
B. Required reserve ratio = required
deposits  total deposits x 100 =
$10,000  $100,000 x 100
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2. Assume a simplified banking system in which
all banks are subject to a uniform required
reserve ratio of 30 percent and checkable
deposits are the only form of money. A bank
that received a new deposit of $10,000 would be
able to extend new loans up to a maximum of
a. $3,000.
b. $7,000.
c. $10,000.
d. $30,000.
B. Excess reserves can be loaned. Excess reserves
= total reserves - required reserves = $10,000 (0.3 x $10,000) = $10,000 - $3,000 = $7,000
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3. The Best National Bank operates with a 10
percent required reserve ratio. One day a
depositor withdraws $400 from his or her
checking account at the bank. As a result, the
bank’s excess reserves
a. fall by $400.
b. fall by $360.
c. fall by $40.
d. rise by $400.
B. Excess reserves = total reserves required reserves = -$400 - (0.10 x $400)
= -$400 + $40 = -$360
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4. If an increase in excess reserves of $100 in
a simplified banking system can lead to a
total expansion in bank deposits of $400,
the required reserve ratio must be
a. 40 percent.
b. 400 percent.
c. 25 percent.
d. 4 percent.
e. 2.5 percent.
C. $ multiplier =  in bank deposits 
initial  in excess reserves = 400  $100 =
4 = 1  required reserve ratio = 1 
money multiplier x 100.
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5. In a simplified banking system in which all
banks are subject to a 25 percent required
reserve ratio, a $1,000 open sale by the Fed
would cause the money supply to
a. increase by $1,000.
b. decrease by $1,000.
c. decrease by $4,000.
d. increase by $4,000.
C. Money supply change ( M1) = initial  in
excess reserves x money multiplier (MM).
MM = 1  required reserve ratio = 1  25/100 = 4 .
 M1 = $1,000 x 4 = -$4,000.
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6. In a simplified banking system in which all banks
are subject to a 20 percent required reserve ratio, a
$1,000 open market purchase by the Fed would
cause the money supply to
a. increase by $100.
b. decrease by $200.
c. decrease by $5,000.
d. increase by $5,000.
D. Money supply change ( M1) = initial
change in excess reserves x money
multiplier (MM)
MM = 1  required reserve ratio = 1  20/100
=5
 M1 = $1,000 x 5 = $5,000.
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7. The cost to a member bank of borrowing
from the Federal Reserve is measured by the
a. reserve requirement.
b. price of securities in the open market.
c. discount rate.
d. yield on government bonds.
C. The Fed provides a discount window at each
of the Federal Reserve districts banks to
make loans of reserves to banks and change
an interest rate called the discount rate.
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Exhibit 19-5
Balance Sheet of Best National Bank
Assets
Liabilities
Required Reserves
$
Checkable
deposits
$100,000
Excess Reserves
Loans
80,000
Total
$100,000
Total
$100,000
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8. The required reserve ratio in Exhibit 19-5 is
a. 10 percent.
b. 15 percent.
c. 20 percent.
d. 25 percent.
C. Excess reserves = total reserves required reserves = $80,000 = $100,000 required reserves = $20,000
Required reserve ratio = required deposits
 total deposits = $20,000  $100,000 x
100 = 20%
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9. If the bank in Exhibit 19-5 received $100,000
in new deposits, its addition to required
reserves would be
a. $10,000.
b. $20,000.
c. $30,000.
d. $40,000.
B. Required reserves = required reserve ratio
x new deposits = .20 x $100,000 = $20,000
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10. Suppose Brad Rich deposits $1,000 in the
bank shown in Exhibit 19-5. The result
would be
a. a $200 increase in excess reserves.
b. a $200 increase in required reserves.
c. a $1,200 increase in required reserves.
d. zero change in required reserves.
B. Required reserves = required reserve
ratio x new deposits = .20 x $1,000 = $200
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11. If all banks in the system are identical to
Best National Bank in Exhibit 19-5, the
money multiplier would be
a. 5.
b. 10.
c. 15.
d. 20.
A. Money multiplier = 1  required
reserve ratio = 1  20/100 = 5
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12. Assume all banks in the system are identical
to Best National Bank in Exhibit 19-5. A $1,000
open market sale by the Fed would
a. expand the money supply by $1,000.
b. expand the money supply by $15,000.
c. contract the money supply by $1,000.
d. contract the money supply by $5,000.
D. Money supply change ( M1) = initial
change in excess reserves x money
multiplier (MM)
MM = 1  required reserve ratio = 1  20/100
=5
 M1 = $1,000 x 5 = -$5,000.
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END
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