Banking System Flashcards

Which of the following best describes the process of money creation in a fractional reserve system?

Answer: Banks create money by making loans from their excess reserves

Banks create money when they loan out excess reserves, and those funds are deposited elsewhere, enabling further lending.

Which of the following would be considered an asset on the Federal Reserve's balance sheet?

Answer: Government bonds purchased by the Fed

Government bonds purchased by the Fed are assets it owns, while currency issued is a liability.

If a bank has $200,000 in deposits and a reserve requirement of 25%, its required reserves are:

Answer: $50,000

$200,000 × 0.25 = $50,000 in required reserves.

The primary purpose of deposit insurance (FDIC) from a macroeconomic standpoint is to:

Answer: Prevent bank runs by maintaining depositor confidence

FDIC insurance prevents bank runs by assuring depositors their funds are safe, maintaining stability in the banking system.

Which of the following best explains why a lower reserve requirement leads to a larger money multiplier?

Answer: More of each deposit can be loaned out, creating additional deposits

A lower reserve requirement means banks lend out more of each deposit, which gets re-deposited and lent again, amplifying money creation.

In the context of banking, 'insolvency' means:

Answer: A bank's liabilities exceed its assets

Insolvency occurs when total liabilities exceed total assets, meaning the bank cannot fully pay off what it owes even by selling everything.

Which of the following best describes quantitative easing (QE)?

Answer: The Fed purchases large quantities of financial assets to inject reserves into the banking system

Quantitative easing involves the Fed buying large amounts of securities to flood banks with reserves, encouraging lending when conventional tools are limited.