AP Macro Banking System 2

Question 1

If the reserve requirement is 10% and a bank receives a $5,000 deposit, how much can it loan out?

Accepted Answer

$4,500

Answer

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?

Accepted Answer

The ratio of total money supply to the monetary base

Answer

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:

Accepted Answer

Discount rate

Answer

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?

Accepted Answer

Buying government bonds on the open market

Answer

When the Fed buys bonds, it injects reserves into the banking system, expanding the money supply.

Question 5

Excess reserves are best defined as:

Accepted Answer

Reserves held above the required minimum

Answer

Excess reserves are funds a bank holds beyond what is legally required, which can be loaned out.

AP Practice Test