Test Your Knowledge
Fractional Reserve Banking
Click on the letter choices to test your
understanding
A
B
C
Question 1
• Fractional reserve banking is a concept
A
• that is predominantly
used only in the U.S.
B
• that was created by the
Federal Reserve during
the Great Depression.
C
• that dates back to the
17th century and is still
used worldwide.
Question 2
Banks earn profits by
A
• charging a higher interest
rate on money loaned than
the interest rate paid on
deposits held.
B
• increasing their holdings of
reserves and decreasing
their lending.
C
• lending to the Federal
Reserve at the discount rate.
Question 3
• The money supply includes
A
• all currency in circulation.
B
• a fraction of currency in
circulation
C
• all currency in circulation plus
the total deposits in
depository institutions.
Question 4
• Required reserves are the fraction of deposits
A
• that commercial banks
hold to meet customer
demands for liquidity.
B
• that commercial banks
lend out to earn profits.
C
• that commercial banks
hold as required by the
FDIC.
Question 5
• The required reserve ratio
A
• is set by the Federal
Reserve’s Board of
Governors.
B
• varies by state.
C
• is a regularly used tool of
monetary policy.
Question 6
• Excess reserves are
A
• reserves that exceed the
capacity of a bank’s vaults.
B
• the total amount of money
in circulation outside the
United States.
C
• the amount of money left
for lending after the
reserve requirement is met.
Question 7
• Which of the following is correct?
A
• a decrease in the reserve requirement
means there is more money available to
lend, so the money supply expands.
B
• a decrease in the reserve requirement
means there is less money available to
lend, so the money supply contracts.
C
• an increase in the reserve requirement
means there is more money available to
lend so the money supply expands.
Question 8
• The simple money multiplier is calculated as
A
• 10 times the initial deposit
amount.
B
• 1 divided by the required
reserve ratio.
C
• the required reserve ratio
divided by the initial
deposit amount.
Question 9
• The “Money Creation” formula is stated as
A
• 1 divided by the required reserve
ratio.
B
• Excess reserves divided by the
simple money multiplier
C
• The simple money multiplier
times excess reserves.
Question 10
• Calculate the maximum money creation
potential of a $1000 deposit when there is a
20% required reserve ratio.
A
• $1,000 is expanded by
$4,000 to become $5,000 of
potential money creation.
B
• $1,000 is expanded by
$9,000 to become $10,000
of potential money creation.
C
• $1,000 is expanded by
$2,000 to become $3,000 of
potential money creation.
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“Test Your Knowledge”