AP Macroeconomics chapter practice15 questions

13 Banks, Reserves, and Deposit Expansion

These questions come directly from the chapter practice in the book. Choose the best answer, check your reasoning, and use the explanation to correct any gap.

Question 1

Question 1 of 15

A customer holds a checkable deposit at a commercial bank. On that bank's balance sheet the deposit is

The bank owes that balance to the customer on demand, and an obligation payable on demand is a liability. Choice A reverses who owes whom. Choice C confuses the deposit with the reserves held against it, D confuses customer funds with owner funds, and E treats a balance as though it were earnings.
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B. a liability of the bank

The bank owes that balance to the customer on demand, and an obligation payable on demand is a liability. Choice A reverses who owes whom. Choice C confuses the deposit with the reserves held against it, D confuses customer funds with owner funds, and E treats a balance as though it were earnings.

Question 2

Question 2 of 15

A bank holds deposits of 500 and faces a required reserve ratio of 0.10. Its required reserves equal

Required reserves are 0.10 500=50. Choice A divides 500 by 100, B applies the ratio to a deposit base of 100, D reports what is left over rather than the requirement, and E reports the deposits themselves.
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C. 50

Required reserves are 0.10 500=50. Choice A divides 500 by 100, B applies the ratio to a deposit base of 100, D reports what is left over rather than the requirement, and E reports the deposits themselves.

Question 3

Question 3 of 15

A bank with deposits of 500 and a required reserve ratio of 0.10 holds actual reserves of 80. Its excess reserves equal

The requirement is 0.10 500=50, so excess reserves are 80-50=30. Choice B reports the requirement itself and D reports total reserves. Choice C computes the requirement from reserves rather than deposits, giving 80-0.10 80=72, and E takes 90 percent of deposits as though every dollar were free to lend.
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A. 30

The requirement is 0.10 500=50, so excess reserves are 80-50=30. Choice B reports the requirement itself and D reports total reserves. Choice C computes the requirement from reserves rather than deposits, giving 80-0.10 80=72, and E takes 90 percent of deposits as though every dollar were free to lend.

Question 4

Question 4 of 15

The required reserve ratio is 0.25 and banks lend every dollar of excess reserves. The simple deposit multiplier equals

The multiplier is (1)/(0.25)=4. Choice A repeats the ratio itself, B counts only the loans created and drops the initial deposit, D uses a ratio of 0.20, and E reports the ratio as a percentage instead of inverting it.
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C. 4

The multiplier is (1)/(0.25)=4. Choice A repeats the ratio itself, B counts only the loans created and drops the initial deposit, D uses a ratio of 0.20, and E reports the ratio as a percentage instead of inverting it.

Question 5

Question 5 of 15

The textbook multiplier assumes that loan proceeds return to banks as deposits. Which behavior breaks that redeposit assumption and shortens the expansion chain?

Currency left in wallets never returns to a bank as reserves, so each round of lending starts from a smaller base than the model assumes. Choice A restates the model's own assumption. Choice C only moves deposits between banks and leaves the system's total untouched, D raises the multiplier instead of lowering expansion, and E changes the price of credit without changing the reserve arithmetic.
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B. The public holds some loan proceeds as currency.

Currency left in wallets never returns to a bank as reserves, so each round of lending starts from a smaller base than the model assumes. Choice A restates the model's own assumption. Choice C only moves deposits between banks and leaves the system's total untouched, D raises the multiplier instead of lowering expansion, and E changes the price of credit without changing the reserve arithmetic.

Question 6

Question 6 of 15

A commercial bank grants a loan to a business customer. On that bank's balance sheet the loan is

The borrower owes repayment to the bank, so the loan is something the bank owns. Choice B reverses the direction of the claim and E reverses the ownership relation. Choice C confuses the loan with the deposit it creates, and A confuses a bank asset with cash held by the public.
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D. an asset of the bank

The borrower owes repayment to the bank, so the loan is something the bank owns. Choice B reverses the direction of the claim and E reverses the ownership relation. Choice C confuses the loan with the deposit it creates, and A confuses a bank asset with cash held by the public.

Question 7

Question 7 of 15

A household deposits currency into a checking account. Which of the following describes the initial effect on the bank's balance sheet?

The currency becomes a reserve asset and the credited account becomes a matching liability, so both sides rise together. Choice A skips ahead to lending that has not happened yet, B forgets that the deposit replaces the currency dollar for dollar, C misstates the effect on assets, and E collapses the whole multiplier process into a single step.
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D. Reserves and deposits rise by equal amounts.

The currency becomes a reserve asset and the credited account becomes a matching liability, so both sides rise together. Choice A skips ahead to lending that has not happened yet, B forgets that the deposit replaces the currency dollar for dollar, C misstates the effect on assets, and E collapses the whole multiplier process into a single step.

Question 8

Question 8 of 15

New reserves of 150 enter a banking system whose required reserve ratio is 0.25. The largest possible increase in deposits is

With (1)/(0.25)=4, the ceiling is 150 4=600. Choice D reports only the new deposits beyond the original reserves, B multiplies by 1-0.25, C omits the multiplier, and A multiplies by the ratio instead of dividing.
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E. 600

With (1)/(0.25)=4, the ceiling is 150 4=600. Choice D reports only the new deposits beyond the original reserves, B multiplies by 1-0.25, C omits the multiplier, and A multiplies by the ratio instead of dividing.

Question 9

Question 9 of 15

Banks choose to hold a larger volume of excess reserves than the simple model assumes. What happens to the deposit expansion process?

Reserves held voluntarily are never lent, so each round adds less than the model assumes and the total falls short of the ceiling. Choice A reverses the effect and B assumes only the required ratio matters. Choice D confuses a smaller multiplier with a halt, and E confuses slower expansion with outright contraction.
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C. It weakens.

Reserves held voluntarily are never lent, so each round adds less than the model assumes and the total falls short of the ceiling. Choice A reverses the effect and B assumes only the required ratio matters. Choice D confuses a smaller multiplier with a halt, and E confuses slower expansion with outright contraction.

Question 10

Question 10 of 15

Required reserves are computed from a bank's own balance sheet. Which of the following calculations produces that amount?

The requirement is a stated fraction of deposit liabilities, so the ratio multiplies deposits and nothing else. Choices A and B apply the right ratio to the wrong base. Choice C reports what is left after reserves are set aside, and D inverts the operation, producing the deposit ceiling instead of the requirement.
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E. The reserve ratio multiplied by deposits

The requirement is a stated fraction of deposit liabilities, so the ratio multiplies deposits and nothing else. Choices A and B apply the right ratio to the wrong base. Choice C reports what is left after reserves are set aside, and D inverts the operation, producing the deposit ceiling instead of the requirement.

Question 11

Question 11 of 15

A bank makes a new loan by crediting the borrower's deposit account. Which of the following happens to checkable deposits?

The bank lends by writing a new deposit balance, so deposits rise the moment the loan is signed. Choice A assumes a currency drain that has not occurred and B reverses the accounting, since the loan asset and the deposit liability rise together. Choice C confuses lending capacity with the act of lending, and D misclassifies a customer balance as owner capital.
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E. They rise immediately.

The bank lends by writing a new deposit balance, so deposits rise the moment the loan is signed. Choice A assumes a currency drain that has not occurred and B reverses the accounting, since the loan asset and the deposit liability rise together. Choice C confuses lending capacity with the act of lending, and D misclassifies a customer balance as owner capital.

Question 12

Question 12 of 15

What assumption must hold for the simple deposit multiplier to deliver its maximum expansion?

The ceiling assumes every dollar above the requirement is lent and every lent dollar comes back as a deposit. Choices A and B name the two leakages that keep expansion below that ceiling, currency held outside banks and reserves held voluntarily. Choice C stops the chain after one round, and E invents an approval step the model does not contain.
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D. Banks lend all of their excess reserves.

The ceiling assumes every dollar above the requirement is lent and every lent dollar comes back as a deposit. Choices A and B name the two leakages that keep expansion below that ceiling, currency held outside banks and reserves held voluntarily. Choice C stops the chain after one round, and E invents an approval step the model does not contain.

Question 13

Question 13 of 15

A bank holds deposits of 1,000 and reserves of 150 while the required reserve ratio is 0.10. Its maximum new loan is

Required reserves are 0.10 1,000=100, leaving 150-100=50 to lend. Choice B reports the requirement, C reports total reserves, and D subtracts reserves from deposits. Choice E treats 90 percent of deposits as lendable, which ignores the reserves the bank actually holds.
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A. 50

Required reserves are 0.10 1,000=100, leaving 150-100=50 to lend. Choice B reports the requirement, C reports total reserves, and D subtracts reserves from deposits. Choice E treats 90 percent of deposits as lendable, which ignores the reserves the bank actually holds.

Question 14

Question 14 of 15

A commercial bank exchanges 50 of securities for reserve balances in a central-bank purchase. Immediately after settlement, the bank's own portfolio shows

The bank hands over securities and receives a credit to its reserve account, so one asset replaces another. Choice B reverses the trade. Choice C applies the result for a nonbank seller, D forgets that a swap of equal value leaves total assets flat, and E jumps ahead to lending the bank has not yet done.
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A. Reserves rise and securities fall.

The bank hands over securities and receives a credit to its reserve account, so one asset replaces another. Choice B reverses the trade. Choice C applies the result for a nonbank seller, D forgets that a swap of equal value leaves total assets flat, and E jumps ahead to lending the bank has not yet done.

Question 15

Question 15 of 15

The simple deposit multiplier rests on restrictive assumptions. Which of the following interpretations of it is most accurate?

The formula gives the most that deposits can grow when no currency leaks out and no bank holds voluntary excess reserves, so realized expansion always falls short. Choice A treats that ceiling as a prediction. Choice C names the reserve ratio itself, E names 1-r, and D attaches the figure to a price rather than a quantity.
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B. An upper bound on deposit expansion

The formula gives the most that deposits can grow when no currency leaks out and no bank holds voluntary excess reserves, so realized expansion always falls short. Choice A treats that ceiling as a prediction. Choice C names the reserve ratio itself, E names 1-r, and D attaches the figure to a price rather than a quantity.

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