1. Banks are required by law to keep a fraction of their deposits as ______.
2. When reserves do not pay interest, banks prefer to keep reserves rather than make loans. ______ (True/False)
3. If the reserve ratio is 0.2 and a deposit of $100 is made into a bank, the bank can lend out ______.
4. If the reserve ratio is 0.2, the simplified money multiplier will be ______.
5. Bad Loans to South America. During the 1980s, U.S. banks made loans to South American countries. Many of these loans turned out to be worthless. How did this affect the assets, liabilities, and owners equity of these banks?
6. Banks versus Insurance Companies. Both insurance companies and banks are financial intermediaries. Why do macroeconomists study banks more intensively than insurance companies?
7. Understanding M1 and M2. If you write a check from your checking account to your money market account, what happens to M1 and M2?
8. Cash Withdrawals and Changes in the Money Supply. If a customer withdrew $2,000 in cash from a bank and the reserve ratio was 0.2, by how much could the supply of money eventually be reduced?
9. Money Market Mutual Funds, Banks, and Reserves. Money market mutual funds typically invest in government securities and other financial instruments that can be easily bought and sold. They are not subject to reserve requirements and, in fact, hold minimal reserves. Banks, on the other hand, make loans to businesses for investment purposes. If there were no reserve requirements for banks, how do you think their reserve holdings would compare to money market mutual funds?
10. Setting the Interest Rate on Reserves. What would be the danger if the Fed set an interest rate on reserves close to the market interest rate on loans?