AP Macro Banking System 2 — Questions and Answers
Question 1: If the reserve requirement is 10% and a bank receives a $5,000 deposit, how much can it loan out?
- $500
- $4,500 (Correct answer)
- $5,000
- $50,000
Correct answer: $4,500
The bank must hold 10% ($500) as reserves and can loan out the remaining $4,500.
Question 2: Which of the following best describes the money multiplier?
- The interest rate set by the Fed
- The ratio of total money supply to the monetary base (Correct answer)
- The percentage of deposits banks must hold in reserve
- The rate at which money loses value
Correct answer: The ratio of total money supply to the monetary base
The money multiplier equals 1/reserve requirement and measures how much the money supply expands per dollar of base money.
Question 3: When a commercial bank borrows from the Federal Reserve, the interest rate charged is called the:
- Federal funds rate
- Prime rate
- Discount rate (Correct answer)
- Treasury rate
Correct answer: Discount rate
The discount rate is the interest rate the Fed charges commercial banks for short-term loans from the discount window.
Question 4: Which action by the Federal Reserve would INCREASE the money supply?
- Raising the reserve requirement
- Selling government bonds on the open market
- Buying government bonds on the open market (Correct answer)
- Raising the discount rate
Correct answer: Buying government bonds on the open market
When the Fed buys bonds, it injects reserves into the banking system, expanding the money supply.
Question 5: Excess reserves are best defined as:
- Reserves held above the required minimum (Correct answer)
- The total amount a bank has on deposit
- Loans that have not yet been repaid
- Government securities held by a bank
Correct answer: Reserves held above the required minimum
Excess reserves are funds a bank holds beyond what is legally required, which can be loaned out.
Question 6: A bank run occurs when:
- The Fed raises interest rates sharply
- Many depositors simultaneously withdraw funds fearing bank insolvency (Correct answer)
- A bank earns unexpectedly high profits
- The government seizes a bank's assets
Correct answer: Many depositors simultaneously withdraw funds fearing bank insolvency
A bank run happens when depositors lose confidence and rush to withdraw funds before the bank fails.
Question 7: Which federal agency was primarily created to prevent bank runs by insuring deposits?
- The Federal Reserve
- The SEC
- The FDIC (Correct answer)
- The Treasury Department
Correct answer: The FDIC
The Federal Deposit Insurance Corporation (FDIC) insures deposits up to $250,000, reducing incentives for bank runs.
AP Macro Banking System 2
If the reserve requirement is 10% and a bank receives a $5,000 deposit, how much can it loan out?