Question

1) Bank 1 has deposits of $4141 and reserves of $455. If the required reserve ratio is 10%, what is the value of the bank's excess reserves? Enter a whole number with no dollar sign. Round to the nearest whole number.

2) In a fractional reserve banking system

a. banks hold a fraction of deposits as reserves.

b. the reserve ratio measures the percentage of deposits available to be lent out.

c. banks hold a fraction of reserves as deposits.

d. banks do not make loans.

3) All interest rates in the economy are set by the Federal Reserve. True or False

4) When you compare the prices of two goods, you are using money as a unit of account. True or False

5) Stocks and bonds are considered to be less liquid types of assets than a house or a car. True or False

6) Bank 1 loans $20,000 to a customer. The customer takes the $20,000 and buys a car. When the loan is made, how is the bank's t-account (balance sheet) affected?

a. loans increase and deposits increase

b. loans decrease and deposits increase

c. loans decrease and deposits decrease

d. loans increase and deposits decrease

Answer 1

1).

Deposits = 4141
Reserved ratio = 10%

Therefore, amount to be reserved = 10%*4141 = 414.10

Current reserves = 455

Hence, excess reserve = (455 - 414.10) = 40.9 = 41

Therefore, excess reserve = 41

2). In a fractional reserve banking system, only a fraction of bank deposits are backed by cash and hence, only fraction of deposits are reserved. Hence, correct option is a.

3). The statement is true as all interest rates in economy are set by Federal Reserve.

4). Prices of two goods are always compared considering money as unit. Hence, the statement is true.

5). Stocks and bonds are more liquid assets in comparison to house and cars, as they can be exchanged into cash any time which is not in case of house and car. Hence, the statement is false.

6). Once the loan is paid, loan decreases but deposits to the Bank increase in terms of cash.Hence, correct option is b.