EGC1 - Chapter 32

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Suppose the required reserve ratio is 10% and the banking system initially has no excess reserves. If $20 billion in new currency is deposited into the system, these new deposits will initially create excess reserves of

$18 billion

Suppose a bank has checkable deposits of $1,000,000 and the legal reserve ratio is 5 percent. If the institution has excess reserves of $5,000, then its actual reserves are

$55,000

Assume that SIC, Inc. writes a $50,000 check on its account at Metro National Bank to repay the balance on a loan issued by this bank. The initial result of this transaction is that

the money supply declines by $50,000

A single bank can safely increase its total loans by an amount equal to its

excess reserves

What are A bank's excess reserves?

Reserves above what it is legally required to hold. These funds are available to be invested in loans or other assets

Money is created when

banks make additional loans

Assume the banking system has no excess reserves with a reserve requirement of 20%. The reserve requirement is then dropped to 10%. As a result of this reduction

the money supply will likely increase

A bank temporarily short of required reserves may remedy the situation by borrowing reserves

in the Federal funds market

Hassan deposits $50,000 in a commercial bank that is required to retain 20% in reserve. The deposit increases the lending capacity of the bank by

$40,000

Banks ________ money when they make loans; money ________ when bank loans are repaid.

creates; vanishes

How can the government use bonds to create new money?

buy bonds from the public

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