ECO 304L Study Guide - Midterm Guide: Fractional-Reserve Banking, Money Creation, Bank Reserves

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greenwalrus59

20 Oct 2017

School

UT-Austin

Department

Economics

Course

ECO 304L

Professor

M O S T A S H A R I, S H A L A H

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Document Summary

Banking and money creation: fractional reserve banking, origins of (cid:271)anking as (cid:862)safe keeping(cid:863) for gold and (cid:272)urren(cid:272)y. One might think of banks as a place for keeping valuables safe. Historically, you can i(cid:373)agi(cid:374)e taki(cid:374)g (cid:455)ou(cid:396) gold to the (cid:862)(cid:271)a(cid:374)k(cid:863) to keep it safe i(cid:374) the (cid:448)ault: reason that banks can lend part of their reserves. Ho(cid:449)e(cid:448)e(cid:396), (cid:449)he(cid:374) people (cid:862)deposit(cid:863) thei(cid:396) gold, they usually leave it alone for a long time. Thus, the gold tends to just sit in the bank. Ba(cid:374)ke(cid:396)s (cid:396)ealize that the(cid:455) do(cid:374)"t ha(cid:448)e to let the gold just sit the(cid:396)e. the(cid:455) (cid:272)a(cid:374) le(cid:374)d at last part of it out for interest and make higher profits. But, the bank needs to keep some of its gold in reserve just in case a depositor wants to make a withdrawal: definition of fractional reserve banking. This is (cid:862)f(cid:396)a(cid:272)tio(cid:374)al (cid:396)ese(cid:396)(cid:448)e (cid:271)a(cid:374)ki(cid:374)g. (cid:863) ba(cid:374)ks take deposits i(cid:374) the fo(cid:396)(cid:373) of (cid:373)o(cid:374)e(cid:455).

Related Questions

An early goldsmith banker earned a profit (sometimes a large profit) simply by writing notes to certify that a person had deposited a certain amount of gold in his vault. By writing more notes than the amount of gold held, the goldsmith could lend the notes and charge interest on them. Did the goldsmith bankers make money out of thin air in a form of legal theft? Should the goldsmith bankers have been regulated to ensure that the amount of gold in their vaults equaled the value of the notes they created? What were the main benefits from the activities of the goldsmith bankers?

graybuffalo899

QUESTION 31

The Board of Governors of the Federal Reserve System is

		composed of seven members who are appointed by the President and approved by the Senate.
		composed of 12 members of the Senate and the U.S. House of Representatives.
		elected by the general public.
		composed of representatives from the country's 12 largest commercial banks.

1.11 points

QUESTION 32

The Fed is said to be the "lender of last resort" in that

		it charges a higher interest rate to borrowers than does any other bank.
		it functions as the government's bank only when commercial banks fail to do so.
		it makes loans to individuals whom commercial banks do not believe are credit-worthy.
		it stands ready to lend to any depository institution that it has decided should not fail.

1.11 points

QUESTION 33

The Federal Reserve System acts as the government's fiscal agent by

		providing checking account services for the government.
		preparing the budget the President presents to Congress every year.
		determining how to finance a deficit.
		auditing taxpayers.

1.11 points

QUESTION 34

The Federal Reserve System was established in which year?

		1913.
		1929.
		1865.
		1941.

1.11 points

QUESTION 35

By serving as the lender of last resort,

		the Fed provides check clearing services.
		the Fed aids in the sale of government securities.
		the Fed supervises depository institutions.
		the Fed can prevent bank failures.

1.11 points

QUESTION 36

Depository institutions must

		use and pay for the services of the Federal Reserve System.
		set their interest rates according to schedules established by the Federal Reserve System.
		keep a certain percentage of their deposits as reserves.
		turn over a percentage of their profits to the Federal Reserve System as payment for services provided by the Fed.

1.11 points

QUESTION 37

The Federal Reserve System has

		50 district banks.
		24 district banks.
		12 district banks.
		7 district banks.

1.11 points

QUESTION 38

The part of the Federal Reserve System (the Fed) that holds the reserve balances of depository institutions is

		the Board of Governors.
		the Federal Advisory Committee.
		the Federal Open Market Committee.
		the Federal Reserve district banks.

1.11 points

QUESTION 39

The potential for a financial breakdown at one financial institution to spread throughout the financial system is known as a

		systemic risk.
		liquidity risk.
		lending risk.
		moral hazard.

1.11 points

QUESTION 40

A system in which depository institutions hold reserves that are less than the amount of total deposits is called

		fiat money banking.
		required reserve banking.
		fractional reserve banking.
		central banking system.

1.11 points

QUESTION 41

Total reserves of private banks are

		all customer deposits.
		the minimum amount banks need to hold against time deposits.
		federal reserve notes.
		deposits held at the Fed and vault cash.

1.11 points

QUESTION 42

A statement of assets and liabilities of any business entity is called

		a cash flow statement.
		an income statement.
		a balance sheet.
		a statement of net worth.

1.11 points

QUESTION 43

Which of the following actions has no effect on the total money supply?

		The Federal Open Market Committee buys government securities.
		There is a transfer of deposits from one bank to another bank.
		There is change in the money multiplier.
		The Federal Open Market Committee sells government securities.

1.11 points

QUESTION 44

Given a required reserve ratio of 20 percent, a commercial bank that has received a new deposit of $100 can make additional loans of

		$80.
		$0.
		$400.
		$20.

1.11 points

QUESTION 45

The Federal Open Market Committee has responsibility for

		appointing members to the Board of Governors of the Federal Reserve system.
		issuing orders to buy or sell government securities for the Fed.
		advising the Treasury Department on monetary policy.
		printing money.

indigobutterfly708

Assets	Liabilities
Reserves $2,000	Deposits $10,000
Loans 8,000

Refer to Table.

Starting from the situation as depicted by the T-account, if someone deposits $500 into the First Bank of Fairfield, and if the bank makes new loans to keep its reserve ratio unchanged, then the number of new loans that it makes will be $320.

$400.
$680.
$750.

2.
Bank of Springfield

Assets		Liabilities
Reserves	$19,200	Deposits	$240,000
Loans	228,000

1. If the Bank of Springfield has lent out all the money it can given its level of deposits, then what is the reserve requirement?

5.00 per cent
8.00 per cent
8.42 per cent
95.00 per cent

2. Mia puts money into a piggy bank so she can spend it later. What function of money does this illustrate?

store of value
medium of exchange
unit of account
None of the above is correct.

3. Under a fractional-reserve banking system, banks

hold more reserves than deposits.
generally lend out a majority of the funds deposited.
cause the money supply to fall by lending out reserves.
All of the above are correct.

4. Over one-time horizon or another, Fed policy decisions influence

inflation and employment.
inflation but not employment.
employment but not inflation.
neither inflation nor employment.

5. If a bank desires to hold no excess reserves, the reserve requirement is 5 per cent, and it receives a new deposit of $1,000

its required reserves increase by $50.
its total reserves initially increase by $1,000.
it will be able to make a new loan of up to $950.
All of the above are correct.

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ECO 304L Study Guide - Midterm Guide: Fractional-Reserve Banking, Money Creation, Bank Reserves

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