Money Creation
Explain the process by which the bulk of the U.S. money supply comes into existence.
What single feature of the U.S. banking system enables depository institutions to create money? Explain!
What assets of banks serve
as legal reserves?
What are the major asset categories of a bank? The major liabilities?
What variable determines the size of the (maximum) money multiplier? Mathematically, what is the relationship between the autonomous spending multiplier (from Keynesian macro model) and the money multiplier?
What are the factors that decrease the size of the money multiplier, i.e., what are the factors that cause the actual money multiplier to be smaller than the text formula size?
If the Federal Reserve increases reserve requirements, what is the resulting impact on the size of the money multiplier? On the money supply?
Which of the following
assets serve as legal reserves for a bank?
a) Treasure bills, bonds and
notes
b) Vault cash and deposits at
the Fed
c) Currency (coins and Fed.
Res. Notes) only
d) All financial assets of the
bank
e) None of the above
Which of the following is
true of the money multiplier?
a) It indicates the multiple
(of its excess reserves) by which an
individual bank can make loans and create
money
b) It is the reciprocal of the
reserve (requirement) ratio
c) Given a reserve requirement
ratio of 10%, it (the money
multiplier) would have a
value of 5.
d) The more currency that the
public holds, the larger the
money multiplier
Banks create money when they
(Note: may be more than one answer)
a) make loans
b) buy government bonds
c) receive cash deposits
d) retire loans
e) sell Treasury bills
If you deposit a $50 bill in
a bank that has a 10% legal reserve requirement, that bank will:
a) have $50 of excess reserves
b) be capable of lending out an
additional $50
c) increase the money supply by
$50
d) have $45 of additional
excess reserves
e) be capable of lending an
additional $500