Economics Sample Questions and answers-10

1. Which of the following statements is not correct?
A) The actual reserves of a commercial bank equal its excess plus its required reserves.
B) A bank’s assets plus its net worth equal its liabilities.
C) When borrowers repay bank loans, the supply of money is reduced.
D) A single commercial bank can safely lend an amount equal to its excess reserves.
Ans: B

2. A bank which has assets of $85 billion and a net worth of $10 billion must have:
A) liabilities of $75 billion.
B) excess reserves of $10 billion.
C) liabilities of $10 billion.
D) excess reserves of $75 billion.
Ans: A

3. The reserves of a commercial bank consist of:
A) the amount of money market funds it holds.
B) deposits at the Federal Reserve Bank and vault cash.
C) government bonds which the bank holds.
D) the bank’s net worth.
Ans: B

4. The ABC Commercial Bank has $5,000 in excess reserves and the reserve ratio is 30 percent. The bank must have:
A) $90,000 in outstanding loans and $35,000 in reserves.
B) $90,000 in demand deposit liabilities and $32,000 in reserves.
C) $20,000 in demand deposit liabilities and $10,000 in reserves.
D) $90,000 in demand deposit liabilities and $35,000 in reserves.
Ans: B

5. Suppose a commercial bank has demand deposits of $100,000 and the legal reserve ratio is 10 percent. If the bank’s required and excess reserves are equal, then its actual reserves:
A) are $30,000.
B) are $10,000.
C) are $20,000.
D) cannot be determined from the given information.
Ans: C

6. A reserve requirement of 20 percent means a bank must have $1000 of reserves if its demand deposits are:
A) $100.
B) $1,000.
C) $5,000.
D) $12,000.
Ans: C

7. Suppose that a bank’s actual reserves are $5 million, its demand deposits are $5 million, and its excess reserves are $3 million. The reserve requirement must be:
A) 40 percent.
B) 20 percent.
C) 10 percent.
D) 5 percent.
Ans: A

8. When a bank loan is repaid the supply of money:
A) is constant, but its composition will have changed.
B) is decreased.
C) is increased.
D) may either increase or decrease.
Ans: B

9. The amount of reserves which a commercial bank is required to hold is equal to:
A) the amount of its demand deposits.
B) the sum of its demand deposits and time deposits.
C) its demand deposits multiplied by the required reserve ratio.
D) none of the above.
Ans: C

10. Which of the following would reduce the money supply?
A) Commercial banks use excess reserves to buy government bonds from the public.
B) Commercial banks loan out excess reserves.
C) Commercial banks sell government bonds to the public.
D) A check clears from Bank A to Bank B.
Ans: C

11. The Federal funds market is the market in which:
A) banks borrow from the Federal Reserve Banks.
B) U.S. securities are bought and sold.
C) banks borrow reserves from one another on an overnight basis.
D) Federal Reserve Banks borrow from one another.
Ans: C

12. If we let m equal the maximum number of new dollars which can be created for a single dollar of excess reserves and R equal the required reserve ratio, then we can say that for the banking system:
A) m = R – 1.
B) R = m/1.
C) R = m – 1.
D) m = 1/R.
Ans: D

13. If the reserve ratio is 15 percent and commercial bankers decide to hold additional excess reserves equal to 5 percent of any newly acquired demand deposits, then the relevant monetary multiplier for the banking system will be:
A) 31/2.
B) 4.
C) 5.
D) 10.
Ans: C

14. If the reserve ratio were 100 percent, the value of the monetary multiplier would be:
A) 0.
B) 1.
C) 10.
D) 100.
Ans: B