Question

1. The goldsmith's ability to create money was based on the fact that:

a) withdrawals of gold tended to exceed deposits of gold in any given time period.

b) consumers and merchants preferred to use gold for transactions, rather than paper money.

c) the goldsmith was required to keep 100 percent gold reserves.

d) deposits of gold tended to exceed withdrawals of gold in any given time period.

2. In a fractional reserve banking system:

a) deposit insurance increases the possibility of bank “runs” or “panics.”

b) the monetary system must be backed by gold.

c) banks can create money through the lending process.

d) the Federal Reserve has no control over the amount of money in circulation.

3. The primary purpose of the legal reserve requirement is to:

a) prevent banks from hoarding too much vault cash.

b) provide a means by which the monetary authorities can influence the lending ability of commercial

banks.

c) prevent commercial banks from earning excess profits.

d) provide a dependable source of interest income for commercial banks.

4. Suppose a commercial bank has checkable deposits of $100,000 and the legal reserve ratio is 10

percent. If the bank's required and excess reserves are equal, then its total (or “actual”) reserves:

a) are $1,000,000.

b) are $10,000.

c) are $20,000.

d) cannot be determined from the given information.

5. When a check is drawn and cleared, the

a) reserves and deposits of both the bank against which the check is cleared and the bank receiving

the check are unchanged by this transaction.

b) bank against which the check is cleared loses reserves and deposits equal to the amount of the

check.

c) bank receiving the check loses reserves and deposits equal to the amount of the check.

d) bank against which the check is cleared acquires reserves and deposits equal to the amount of the

check.

Answer 1

1. d) deposits of gold tended to exceed withdrawals of gold in any given time period.

Explanation: This phenomenon helped the goldsmith in creating more money.

2. c) banks can create money through the lending process.

Explanation: In the fractional reserve system, banks are required to hold a portion of their deposits as reserve and they can loan out the remaining.

3. b) provide a means by which the monetary authorities can influence the lending ability of commercial

Explanation: The reserve requirement helps monetary authorities in controlling the money supply.

4. c) are $20,000.

Explanation: The required reserve = 10% of $100,000 = $10,000. So, the excess reserve = $10,000. So, total reserve = $10,000 + $10,000 = $20,000.