Test Your KnowledgeFractional Reserve Banking

Click on the letter choices to test your understanding

A B C

Question 1

• Fractional reserve banking is a concept

•that is predominantly used only in the U.S.

A

•that was created by the Federal Reserve during the Great Depression.

B

•that dates back to the 17th century and is still used worldwide.

C

Question 2Banks earn profits by

•charging a higher interest rate on money loaned than the interest rate paid on deposits held.

A

•increasing their holdings of reserves and decreasing their lending.

B

•lending to the Federal Reserve at the discount rate.

C

Question 3

• The money supply includes

•all currency in circulation.

A

•a fraction of currency in circulation

B

•all currency in circulation plus the total deposits in depository institutions.

C

Question 4

• Required reserves are the fraction of deposits

•that commercial banks hold to meet customer demands for liquidity.

A

•that commercial banks lend out to earn profits.

B

•that commercial banks hold as required by the FDIC.

C

Question 5

• The required reserve ratio

•is set by the Federal Reserve’s Board of Governors.

A

•varies by state.

B

•is a regularly used tool of monetary policy.

C

Question 6

• Excess reserves are

•reserves that exceed the capacity of a bank’s vaults.

A

•the total amount of money in circulation outside the United States.

B

•the amount of money left for lending after the reserve requirement is met.

C

Question 7

• Which of the following is correct?

•a decrease in the reserve requirement means there is more money available to lend, so the money supply expands.

A

•a decrease in the reserve requirement means there is less money available to lend, so the money supply contracts.

B

•an increase in the reserve requirement means there is more money available to lend so the money supply expands.

C

Question 8• The simple money multiplier is calculated as

•10 times the initial deposit amount.

A

•1 divided by the required reserve ratio.

B

•the required reserve ratio divided by the initial deposit amount.

C

Question 9

• The “Money Creation” formula is stated as

•1 divided by the required reserve ratio.

A

•Excess reserves divided by the simple money multiplier

B

•The simple money multiplier times excess reserves.

C

Question 10• Calculate the maximum money creation

potential of a $1000 deposit when there is a 20% required reserve ratio.

•$1,000 is expanded by $4,000 to become $5,000 of potential money creation.

A

•$1,000 is expanded by $9,000 to become $10,000 of potential money creation.

B

•$1,000 is expanded by $2,000 to become $3,000 of potential money creation.

C

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