AP Macroeconomics Practice Quiz: Banking and the Expansion of the Money Supply

Correct Answer: C

According to the provided content, 'Banks' reserves are divided into required reserves and excess reserves.' This is a fundamental concept of how depository institutions manage their funds under fractional reserve banking.

Correct Answer: B

The provided content explicitly states, 'Excess reserves are the basis of expansion of the money supply by the banking system.' Banks lend out their excess reserves, which creates new deposits and thus expands the money supply.

Correct Answer: C

The content states, 'The maximum value of the money multiplier can be calculated as the reciprocal of the required reserve ratio.' The reciprocal of 10% (or 0.10) is 1 / 0.10, which equals 10.

Correct Answer: B

First, calculate the required reserves: $50,000 * 20% = $10,000. The remaining amount is excess reserves: $50,000 - $10,000 = $40,000. Since 'Excess reserves are the basis of expansion of the money supply,' the bank can lend out its entire excess reserves, which is $40,000.

Correct Answer: D

The provided content specifies that 'The amount predicted by the simple money multiplier may be overstated because it does not take into account a bank's desire to hold excess reserves or the public holding more currency.' These actions are 'leaks' from the deposit expansion process.

Correct Answer: B

The content directly states, 'Depository institutions operate using fractional reserve banking.' This is a definitional question based on the provided text.

Correct Answer: D

First, calculate the money multiplier: 1 / required reserve ratio = 1 / 0.05 = 20. Then, multiply the initial deposit by the multiplier to find the total money supply: $10,000 * 20 = $200,000. This calculation demonstrates the effect of changes in the banking system, as mentioned in the content.

Correct Answer: D

This is a direct definition from the content, which states: 'The money multiplier is the ratio of the money supply to the monetary base.'

Correct Answer: B

The required reserve ratio is the required reserves divided by total deposits. In this case, $100,000 / $1,000,000 = 0.10, or 10%. The amount of excess reserves is extra information not needed for this specific calculation.

Correct Answer: C

The content explicitly states, 'The size of expansion of the money supply depends on the money multiplier.' A larger multiplier leads to a larger potential expansion from any given amount of new reserves.

Correct Answer: B

The content explains that 'Excess reserves are the basis of expansion of the money supply by the banking system.' This expansion occurs when banks make loans with their excess reserves. The loan amount is then deposited, creating new reserves and allowing for further lending, thus creating money.

Correct Answer: A

The simple money multiplier (1/0.25 = 4) is overstated because the bank desires to hold excess reserves. The actual amount being held in reserve per deposit is 25% + 5% = 30%. The realistic multiplier is 1 / 0.30 = 3.33. The total expansion is $1,000 * 3.33 = $3,333.33. This reflects the content point that the simple multiplier is overstated if banks desire to hold excess reserves.

Correct Answer: C

The provided text states, 'Depository institutions (such as commercial banks) organize their assets and liabilities on balance sheets.'

Correct Answer: C

The maximum value of the money multiplier is the reciprocal of the required reserve ratio (RRR). Therefore, Multiplier = 1 / RRR. Rearranging the formula, RRR = 1 / Multiplier. So, RRR = 1 / 4 = 0.25, or 25%.

Correct Answer: C

Initially, required reserves are 10% of $100B = $10B. When the RRR is lowered to 8%, required reserves become 8% of $100B = $8B. This frees up $10B - $8B = $2B in excess reserves. The new money multiplier is 1/0.08 = 12.5. The maximum potential increase in the money supply is the newly created excess reserves times the new multiplier: $2B * 12.5 = $25B. This question requires calculating the effects of changes in the banking system.

Correct Answer: C

This action represents the public holding more currency, which is one of the reasons the simple money multiplier may be overstated. When cash is withdrawn, it drains reserves from the banking system, reducing the amount of excess reserves available for lending and thus shrinking the potential for money supply expansion.