CH 14: Test Bank

Question 1

The government agency that oversees the banking system and is responsible for the conduct of monetary policy in the United States is
A) the Federal Reserve System.
B) the United States Treasury.
C) the U.S. Gold Commission.
D) the House of Representatives.

Answer 1

A) the Federal Reserve System.

Question 2

Individuals that lend funds to a bank by opening a checking account are called
A) policyholders.
B) partners.
C) depositors.
D) debt holders.

Answer 2

C) depositors.

Question 4

The three players in the money supply process include
A) banks, depositors, and the U.S. Treasury.
B) banks, depositors, and borrowers.
C) banks, depositors, and the central bank.
D) banks, borrowers, and the central bank.

Answer 4

C) banks, depositors, and the central bank.

Question 5

Of the three players in the money supply process, most observers agree that the most important player is
A) the United States Treasury.
B) the Federal Reserve System.
C) the FDIC.
D) the Office of Thrift Supervision.

Answer 5

B) the Federal Reserve System.

Question 6

Both ________ and ________ are Federal Reserve assets.
A) currency in circulation; reserves
B) currency in circulation; securities
C) securities; loans to financial institutions
D) securities; reserves

Answer 6

C) securities; loans to financial institutions

Question 7

The monetary liabilities of the Federal Reserve include
A) securities and loans to financial institutions.
B) currency in circulation and reserves.
C) securities and reserves.
D) currency in circulation and loans to financial institutions.

Answer 7

B) currency in circulation and reserves.

Question 8

The monetary base consists of
A) currency in circulation and Federal Reserve notes.
B) currency in circulation and the U.S. Treasury’s monetary liabilities.
C) currency in circulation and reserves.
D) reserves and Federal Reserve Notes.

Answer 8

C) currency in circulation and reserves.

Question 9

The amount of deposits that banks must hold in reserve is
A) excess reserves.
B) required reserves.
C) total reserves.
D) vault cash.

Answer 9

B) required reserves.

Question 10

The percentage of deposits that banks must hold in reserve is the
A) excess reserve ratio.
B) required reserve ratio.
C) total reserve ratio.
D) currency ratio.

Answer 10

B) required reserve ratio.

Question 11

Suppose that from a new checkable deposit, First National Bank holds two million dollars in vault cash, eight million dollars on deposit with the Federal Reserve, and one million dollars in required reserves. Given this information, we can say First National Bank has ________ million dollars in excess reserves.
A) three
B) nine
C) ten
D) eleven

Answer 11

B) nine
Excess reserves are the reserves held by a bank over and above its required reserves. Required reserves are the minimum amount of reserves a bank is required to hold by law, and excess reserves are any reserves held in excess of this minimum.

In this case, First National Bank has:

$2 million in vault cash
$8 million on deposit with the Federal Reserve
$1 million in required reserves

The total reserves of the bank are the sum of the vault cash and the deposit with the Federal Reserve, which is $2 million + $8 million = $10 million.

The excess reserves are then the total reserves minus the required reserves. So, the excess reserves are $10 million - $1 million = $9 million.

So, we can say First National Bank has nine million dollars in excess reserves. Therefore, the correct answer is (B) nine.

Question 12

Suppose that from a new checkable deposit, First National Bank holds two million dollars in vault cash, eight million dollars on deposit with the Federal Reserve, and one million dollars in required reserves. Given this information, we can say First National Bank faces a required reserve ratio of ________ percent.
A) ten
B) twenty
C) eighty
D) ninety

Answer 12

A) ten
The required reserve ratio is the percentage of deposits that a bank is legally required to keep on hand as reserves.

In this case, First National Bank has:

$2 million in vault cash
$8 million on deposit with the Federal Reserve
$1 million in required reserves

The total reserves of the bank are the sum of the vault cash and the deposit with the Federal Reserve, which is $2 million + $8 million = $10 million.

The required reserve ratio is then the required reserves divided by the total reserves, multiplied by 100 to get a percentage. So, the required reserve ratio is

(1/10)×100=10%

So, we can say First National Bank faces a required reserve ratio of ten percent. Therefore, the correct answer is (A) ten.

Question 13

Suppose that from a new checkable deposit, First National Bank holds two million dollars in vault cash, eight million dollars on deposit with the Federal Reserve, and nine million dollars in excess reserves. Given this information, we can say First National Bank has ________ million dollars in required reserves.
A) one
B) two
C) eight
D) ten

Answer 13

A) one
The total reserves of a bank are the sum of the vault cash and the deposit with the Federal Reserve. In this case, First National Bank has:

$2 million in vault cash
$8 million on deposit with the Federal Reserve
$9 million in excess reserves

So, the total reserves of the bank are $2 million + $8 million = $10 million.

Required reserves are the total reserves minus the excess reserves. So, the required reserves are $10 million - $9 million = $1 million.

So, we can say First National Bank has one million dollars in required reserves. Therefore, the correct answer is (A) one.

Question 14

Suppose that from a new checkable deposit, First National Bank holds eight million dollars on deposit with the Federal Reserve, one million dollars in required reserves, and faces a required reserve ratio of ten percent. Given this information, we can say First National Bank has ________ million dollars in vault cash.
A) two
B) eight
C) nine
D) ten

Answer 14

A) two
The total reserves of a bank are the sum of the vault cash and the deposit with the Federal Reserve. In this case, First National Bank has:

$8 million on deposit with the Federal Reserve
$1 million in required reserves
A required reserve ratio of 10%

Solve for x (vault cash).
$1 million in required reserves = 10% of total reserves = 10 million total reserves

$8 million on deposit with the Federal Reserve + x (vault cash) = 10 million total reserves
x(vault cash) = 10 - 8 = 2 million

Question 15

When banks borrow money from the Federal Reserve, these funds are called
A) federal funds.
B) discount loans.
C) federal loans.
D) Treasury funds.

Answer 15

B) discount loans.

Question 16

The monetary base minus currency in circulation equals
A) reserves.
B) the borrowed base.
C) the nonborrowed base.
D) discount loans.

Answer 16

A) reserves.

Question 17

The monetary base minus reserves equals
A) currency in circulation.
B) the borrowed base.
C) the nonborrowed base.
D) discount loans.

Answer 17

A) currency in circulation.

Question 18

Suppose your payroll check is directly deposited to your checking account. Everything else held constant, total reserves in the banking system ________ and the monetary base ________.
A) remain unchanged; remains unchanged
B) remain unchanged; increases
C) decrease; increases
D) decrease; decreases

Answer 18

A) remain unchanged; remains unchanged
When your payroll check is directly deposited into your checking account, the bank’s total reserves do not change because the money is simply transferred from your employer’s account to your account. It’s a reshuffling of funds within the banking system, not an addition or subtraction of funds.

The monetary base, which consists of currency in circulation and reserve balances (deposits held by banks and other depository institutions in their accounts at the Federal Reserve), also remains unchanged. This is because a direct deposit does not alter the amount of money in the economy, it just changes the account in which it is held.

Therefore, the correct answer is (A) total reserves in the banking system remain unchanged and the monetary base remains unchanged.

Question 19

If the required reserve ratio is equal to 10 percent, a single bank can increase its loans up to a maximum amount equal to
A) its excess reserves.
B) 10 times its excess reserves.
C) 10 percent of its excess reserves.
D) its total reserves.

Answer 19

A) its excess reserves.
The maximum amount a single bank can loan out is equal to its excess reserves. This is because banks are required to hold a certain percentage (the required reserve ratio) of their deposits as reserves, and any reserves above this amount (excess reserves) can be loaned out.

So, if the required reserve ratio is 10 percent, the bank must keep 10 percent of its deposits as reserves. The rest, the excess reserves, can be loaned out.

Therefore, the correct answer is (A) its excess reserves.

Question 20

The simple deposit multiplier can be expressed as the ratio of the
A) change in reserves in the banking system divided by the change in deposits.
B) change in deposits divided by the change in reserves in the banking system.
C) required reserve ratio divided by the change in reserves in the banking system.
D) change in deposits divided by the required reserve ratio.

Answer 20

B) change in deposits divided by the change in reserves in the banking system.
The simple deposit multiplier can be expressed as the ratio of the change in deposits divided by the change in reserves in the banking system. So, the correct answer is B.

Here’s why: The deposit multiplier is a concept derived from the fractional reserve banking system, which only requires banks to hold a fraction of their deposit liabilities in reserve. The rest can be loaned out or invested.

The deposit multiplier is the maximum amount of money that banks can create for each unit of reserves. In other words, it’s the “money multiplier” effect of the banking system.

If the reserves in the banking system increase, banks have more funds to loan out, which can lead to an increase in deposits (as loans become deposits once they are spent). Therefore, the deposit multiplier is the ratio of the change in deposits (the potential increase in the money supply) to the change in reserves (the initial increase in the banking system’s reserves).

This is why the deposit multiplier is expressed as the change in deposits divided by the change in reserves. It shows how much the money supply could potentially increase for each unit increase in reserves.

So, the simple deposit multiplier is not related to the required reserve ratio directly (option C and D), and it’s not about the change in reserves divided by the change in deposits (option A). Hence, option B is the correct answer.

Question 21

Unemployment rates in Canada after the Great Depression rose close to ________.
A) 20 percent
B) 25 percent
C) 30 percent
D) 10 percent

Answer 21

A) 20 percent

Question 22

Bank of Canada started operations in ________.
A) 1935
B) 1925
C) 1915
D) 1945

Answer 22

A) 1935

Question 23

The Great Depression ________.
A) was of fundamental importance in the creation of the Bank of Montreal
B) contributed to significant changes in government policy
C) involved the largest increase in the level of economic activity in the history of Canada
D) contributed to significant changes in foreign affairs policy

Answer 23

B) contributed to significant changes in government policy

Question 24

Which of the following are entities of the Bank of Canada?
A) The Office of the Superintendent of Financial Institutions (OSFI)
B) The Governing Council
C) The Canada Deposit Insurance Corporation (CDIC)
D) The Federal Reserve

Answer 24

B) The Governing Council

Question 25

All of the following have served as Bank of Canada governors except for ________.
A) Roy Romanow
B) David Dodge
C) Gordon Thiessen
D) John Crow

Answer 25

A) Roy Romanow

Question 26

Which of the following is an element of the Bank of Canada?
A) The Office of the Superintendent of Financial Institutions (OSFI)
B) The Governing Council
C) The Board of Directors
D) B and C only

Answer 26

D) B and C only

Question 27

The Board of Directors appoints the governor of the Bank of Canada for a renewable term
of ________ years.
A) seven
B) five
C) eight
D) six

Answer 27

A) seven

Question 28

Foreign exchange reserves are held by ________.
A) the federal government
B) the department of finance
C) the Ministry of Central Banking
D) individual provinces and territories

Answer 28

A) the federal government

Question 29

The benefit of the Bank of Canada’s role as the lender-of-last-resort include ________.
A) easing liquidity problems of any financial institution
B) deterring bank runs and panics
C) reducing the monetary base to increase liquidity
D) A and B only

Answer 29

D) A and B only

Question 30

Which of the following functions are not performed by the Bank of Canada?
A) Cheque clearing
B) Conducting economic research
C) Setting interest rates payable on time deposits
D) Issuing new currency

Answer 30

C) Setting interest rates payable on time deposits

Question 31

In its role as the federal government’s fiscal agent, the Bank of Canada provides debt
management services for the federal government such as ________.
A) advising on provincial government borrowings
B) managing new debt offerings by the federal government
C) servicing the federal government’s outstanding debt
D) B and C only.

Answer 31

D) B and C only.

Question 32

Which of the following functions are not performed by the Bank of Canada in its role as the
federal government’s fiscal agent?
A) Advising on federal government borrowings
B) Managing new debt offerings by the federal government
C) Setting interest rates payable on time deposits
D) Servicing the federal government’s outstanding debt

Answer 32

C) Setting interest rates payable on time deposits

Question 33

Because of its unique power to ________ base money, the Bank of Canada can ease the
liquidity problems of ________.
A) create; financial institutions
B) create; provincial governments
C) save; financial institutions
D) save; provincial governments

Answer 33

A) create; financial institutions

Question 34

Canada’s national payments system currently clears and settles payments and transactions, at
a volume that is currently ________ times our annual GDP.
A) 15
B) 10
C) 5
D) 2

Answer 34

A) 15

Question 35

The Bank of Canada’s goal of low inflation is closely tied to ________.
A) economic growth
B) price volatility
C) low interest rates
D) growth in the money supply

Answer 35

A) economic growth

Question 36

The responsibility of monetary policy in Canada was given by the 1967 Bank of Canada Act
to the ________.
A) government
B) Bank of Canada
C) provincial governments
D) parliament

Answer 36

A) government

Question 37

Instrument independence is the ability of ________ to set monetary policy ________.
A) the central bank; goals
B) Parliament; goals
C) Parliament; instruments
D) the central bank; instruments

Answer 37

D) the central bank; instruments

Question 38

Goal independence is the ability of ________ to set monetary policy ________.
A) the central bank; goals
B) Congress; goals
C) Congress; instruments
D) the central bank; instruments

Answer 38

A) the central bank; goals

Question 39

Under the current “joint responsibility system,” ________.
A) in the event of a serious policy conflict the minister of finance can issue a directive that the
Bank of Canada must follow
B) the government accepts full responsibility for monetary policy
C) the Bank of Canada does not have considerable autonomy in the conduct of day-to-day
monetary policy
D) A and B only.

Answer 39

D) A and B only.

Question 40

The case for Bank of Canada independence includes the idea that ________.
A) a politically insulated Bank of Canada would be more concerned with long-run objectives
and thus be a defender of a sound dollar and a stable price level
B) a Bank of Canada under the control of the government might make the so-called political
business cycle more pronounced
C) the principal-agent problem is perhaps worse for the Bank than for politicians since the
former does not answer to the voters on election day
D) A and B only.

Answer 40

D) A and B only.

Question 41

Which of the following statements concerning an independent central bank are true?
A) Politicians may prefer an independent central bank, as it can be used as a “whipping boy” or
“scapegoat” for poor economic performance.
B) Politicians in a democratic society may be shortsighted because of their desire to win
reelection; thus, the political process may generate a political business cycle, in which just
before an election expansionary policies are pursued to lower unemployment and interest rates.
C) Putting the Bank of Canada under control of the government may place too much pressure
on the Bank to finance federal budget deficits, thereby imparting an inflationary bias to
monetary policy.
D) All of the above are true statements.

Answer 41

D) All of the above are true statements.

Question 42

Advocates of Bank of Canada independence fear that subjecting the Bank to direct
government control would ________.
A) impart an anti-inflationary bias to monetary policy
B) force monetary authorities to sacrifice the long-run objective of price stability
C) make the so-called political business cycle even more pronounced
D) B and C only.

Answer 42

D) B and C only.

Question 43

Supporters of the current system of Bank of Canada independence believe that a less
autonomous Bank would ________.
A) adopt a short-run bias toward policymaking
B) pursue overly expansionary monetary policies
C) be more likely to create a political business cycle
D) do each of the above

Answer 43

D) do each of the above

Question 44

Politicians in a democratic society may be shortsighted because of their desire to win
reelection; thus, the political process can ________.
A) impart an inflationary bias to monetary policy
B) impart a deflationary bias to monetary policy
C) generate a political business cycle, in which just before an election expansionary policies are
pursued to lower unemployment and interest rates
D) cause A and C only

Answer 44

D) cause A and C only

Question 45

The case for Bank of Canada independence includes the idea that ________.
A) a politically insulated Bank of Canada would be more concerned with long-run objectives
and thus be a defender of a sound dollar and a stable price level
B) a Bank of Canada under the control of the government might make the so-called political
business cycle more pronounced
C) the principal-agent problem is perhaps worse for the Bank than for politicians since the
former does not answer to the voters on election day
D) A and B only.

Answer 45

D) A and B only.

Question 46

Which of the following statements concerning an independent central bank are true?
A) Politicians may prefer an independent central bank, as it can be used as a “whipping boy” or
“scapegoat” for poor economic performance.
B) Politicians in a democratic society may be shortsighted because of their desire to win
reelection; thus, the political process may generate a political business cycle, in which just
before an election expansionary policies are pursued to lower unemployment and interest rates.
C) Putting the Bank of Canada under control of the government may place too much pressure
on the Bank to finance federal budget deficits, thereby imparting an inflationary bias to
monetary policy.
D) All of the above are true statements.

Answer 46

D) All of the above are true statements.

Question 47

Advocates of Bank of Canada independence fear that subjecting the Bank to direct
government control would ________.
A) impart an anti-inflationary bias to monetary policy
B) force monetary authorities to sacrifice the long-run objective of price stability
C) make the so-called political business cycle even more pronounced
D) B and C only.

Answer 47

D) B and C only.

Question 48

Supporters of the current system of Bank of Canada independence believe that a less
autonomous Bank would ________.
A) adopt a short-run bias toward policymaking
B) pursue overly expansionary monetary policies
C) be more likely to create a political business cycle
D) do each of the above

Answer 48

D) do each of the above

Question 49

Politicians in a democratic society may be shortsighted because of their desire to win
reelection; thus, the political process can ________.
A) impart an inflationary bias to monetary policy
B) impart a deflationary bias to monetary policy
C) generate a political business cycle, in which just before an election expansionary policies are
pursued to lower unemployment and interest rates
D) cause A and C only

Answer 49

D) cause A and C only

Question 50

The theory of bureaucratic behaviour suggests that the objective of a bureaucracy is to
maximize ________.
A) the public’s welfare
B) profits
C) its own welfare
D) conflict with the executive and legislative branches of government

Answer 50

C) its own welfare

Question 51

The theory of bureaucratic behaviour suggests that the Bank of Canada will fight ________.
A) to preserve the public’s welfare
B) to maximize profits
C) minimize its own welfare
D) to preserve autonomy

Answer 51

D) to preserve autonomy

Question 52

The simple deposit multiplier can be expressed as the ratio of the
A) change in reserves in the banking system divided by the change in deposits.
B) change in deposits divided by the change in reserves in the banking system.
C) required reserve ratio divided by the change in reserves in the banking system.
D) change in deposits divided by the required reserve ratio.

Answer 52

B) change in deposits divided by the change in reserves in the banking system.

Question 53

If reserves in the banking system increase by $100, then checkable deposits will increase by $1,000 in the simple model of deposit creation when the required reserve ratio is
A) 0.01.
B) 0.10.
C) 0.05.
D) 0.20.

Answer 53

B) 0.10.

Question 54

If the required reserve ratio is 10 percent, the simple deposit multiplier is
A) 5.0.
B) 2.5.
C) 100.0.
D) 10.0

Answer 54

D) 10.0
The simple deposit multiplier is calculated as the reciprocal of the required reserve ratio. If the required reserve ratio is 10 percent (or 0.10), then the simple deposit multiplier is 1 divided by 0.10, which equals 10. So, the correct answer is D) 10.0.

Here’s why: The deposit multiplier shows how much the money supply can potentially increase for each unit increase in reserves. If banks are required to hold 10% of deposits in reserve, then they can loan out 90% of each deposit they receive. This loaned money can then become a new deposit in another bank, which can loan out 90% of that deposit, and so on. This process can theoretically continue until the initial increase in reserves has created an increase in deposits that is 10 times the size of the initial increase in reserves. Hence, the deposit multiplier is 10 in this case.

Question 55

A simple deposit multiplier equal to one implies a required reserve ratio equal to
A) 100 percent.
B) 50 percent.
C) 25 percent.
D) 0 percent.

Answer 55

A simple deposit multiplier equal to one implies a required reserve ratio equal to 100 percent. So, the correct answer is A) 100 percent.

Here’s why: The simple deposit multiplier is calculated as the reciprocal of the required reserve ratio. If the deposit multiplier is 1, this means that banks are not creating any new money through lending, because they are required to hold all deposits in reserve. In other words, for every dollar deposited in the bank, the bank must keep that entire dollar in reserve and cannot loan it out. This situation corresponds to a required reserve ratio of 100 percent.

Question 56

A simple deposit multiplier equal to two implies a required reserve ratio equal to
A) 100 percent.
B) 50 percent.
C) 25 percent.
D) 0 percent.

Answer 56

B) 50 percent

Question 57

A simple deposit multiplier equal to four implies a required reserve ratio equal to
A) 100 percent.
B) 50 percent.
C) 25 percent.
D) 0 percent.

Answer 57

C) 25 percent

Question 58

In the simple deposit expansion model, if the banking system has excess reserves of $75, and the required reserve ratio is 20%, the potential expansion of checkable deposits is
A) $75.
B) $750.
C) $37.50.
D) $375

Answer 58

D) $375
The potential expansion of checkable deposits is calculated by dividing the excess reserves by the required reserve ratio. If the banking system has excess reserves of $75 and the required reserve ratio is 20% (or 0.20), then the potential expansion of checkable deposits is $75 divided by 0.20, which equals $375. So, the correct answer is D) $375.

Here’s why: The deposit multiplier shows how much the money supply can potentially increase for each unit increase in reserves. If banks are required to hold 20% of deposits in reserve, then they can loan out 80% of each deposit they receive. This loaned money can then become a new deposit in another bank, which can loan out 80% of that deposit, and so on. This process can theoretically continue until the initial increase in reserves (in this case, the $75 of excess reserves) has created an increase in deposits that is five times the size of the initial increase in reserves (since 1 divided by 0.20 equals 5). Hence, the potential expansion of checkable deposits is $375 in this case.

Question 59

The Maastricht Treaty which established the European Central Bank, defined price stability
as an inflation rate equal to ________.
A) It did not specify exactly.
B) 0 percent
C) 1 percent
D) 2 percent

Answer 59

A) It did not specify exactly

Question 60

Regarding central bank independence, ________.
A) the Fed is more independent than the European Central Bank
B) the European Central Bank is more independent than the Fed
C) the trend in industrialized nations has been to reduce central bank independence
D) the Bank of England has the longest tradition of independence of any central bank in the
world

Answer 60

B) the European Central Bank is more independent than the Fed

Question 61

Which of the following statements about central bank structure and independence are true?
A) In recent years, with the exception of the Bank of England and the Bank of Japan, most
countries have reduced the independence of their central banks, subjecting them to greater
democratic control.
B) Before the Bank of England was granted greater independence, the Federal Reserve was the
most independent of the world’s central banks.
C) Both theory and experience suggest that more independent central banks produce better
monetary policy.
D) While the European Central Bank is independent, it is not as independent as the Federal Reserve

Answer 61

C) Both theory and experience suggest that more independent central banks produce better
monetary policy

Question 62

If a bank has excess reserves of $10,000 and demand deposit liabilities of $80,000, and if the reserve requirement is 20 percent, then the bank has actual reserves of
A) $16,000.
B) $20,000.
C) $26,000.
D) $36,000.

Answer 62

C) $26,000
The actual reserves of a bank can be calculated by adding the excess reserves to the required reserves. The required reserves are calculated as the demand deposit liabilities multiplied by the reserve requirement.

In this case, the bank has excess reserves of $10,000 and demand deposit liabilities of $80,000. The reserve requirement is 20 percent, or 0.20.

So, the required reserves are $80,000 * 0.20 = $16,000.

Adding the excess reserves to the required reserves gives the actual reserves: $16,000 (required reserves) + $10,000 (excess reserves) = $26,000.

So, the bank has actual reserves of $26,000. Therefore, the correct answer is C) $26,000.

Question 63

If a bank has excess reserves of $20,000 and demand deposit liabilities of $80,000, and if the reserve requirement is 20 percent, then the bank has total reserves of
A) $16,000.
B) $20,000.
C) $26,000.
D) $36,000.

Answer 63

D) $36,000

Question 64

If a bank has excess reserves of $15,000 and demand deposit liabilities of $80,000, and if the reserve requirement is 20 percent, then the bank has total reserves of
A) $11,000.
B) $21,000.
C) $31,000.
D) $41,000

Answer 64

C) $31,000

Question 65

If a bank has excess reserves of $4,000 and demand deposit liabilities of $100,000, and if the reserve requirement is 15 percent, then the bank has actual reserves of
A) $17,000.
B) $19,000.
C) $24,000.
D) $29,000

Answer 65

B) $19,000

Question 66

A bank has excess reserves of $6,000 and demand deposit liabilities of $100,000 when the required reserve ratio is 20 percent. If the reserve ratio is raised to 25 percent, the bank’s excess reserves will be
A) -$5,000.
B) -$1,000.
C) $1,000.
D) $5,000

Answer 66

C) $1,000
The reserve requirement is the amount of funds a bank holds in reserve to ensure that it is able to meet liabilities in case of sudden withdrawals.

Let’s calculate the required reserves before and after the change in reserve ratio:

Before the change: The required reserve ratio is 20%, so the required reserves are 20% of $100,000, which equals $20,000.

After the change: The required reserve ratio is raised to 25%, so the new required reserves are 25% of $100,000, which equals $25,000.

The bank initially has excess reserves of $6,000 when the required reserves were $20,000. This means the bank’s total reserves were $26,000 ($20,000 + $6,000).

When the required reserves increase to $25,000, the bank’s excess reserves become the total reserves minus the new required reserves, which is $26,000 - $25,000 = $1,000.

So, the correct answer is C) $1,000. The bank will have $1,000 in excess reserves after the reserve ratio is raised to 25%.

Question 67

A bank has excess reserves of $4,000 and demand deposit liabilities of $100,000 when the required reserve ratio is 20 percent. If the reserve ratio is raised to 25 percent, the bank’s excess reserves will be
A) -$5,000.
B) -$1,000.
C) $1,000.
D) $5,000

Answer 67

B) -$1,000

Question 68

A bank has no excess reserves and demand deposit liabilities of $100,000 when the required reserve ratio is 20 percent. If the reserve ratio is raised to 25 percent, the bank’s excess reserves will now be
A) -$5,000.
B) -$1,000.
C) $1,000.
D) $5,000

Answer 68

A) -$5,000

Question 69

A bank has excess reserves of $1,000 and demand deposit liabilities of $80,000 when the reserve requirement is 20 percent. If the reserve requirement is lowered to 10 percent, the bank’s excess reserves will be
A) $1,000.
B) $8,000.
C) $9,000.
D) $17,000

Answer 69

C) $9,000