7) If a bank has $100,000 of checkable deposits, a required reserve ratio of 20

Question

7) If a bank has $100,000 of checkable deposits, a required reserve ratio of 20 percent, and it holds $40,000 in reserves, then the maximum deposit outflow it can sustain without altering its balance sheet is

A) $20,000. B) $25,000. C) $10,000. D) $30,000.

8) Holding large amounts of bank capital helps prevent bank failures because

A) it means that the bank has a higher income.

B) it makes it easier to call in loans.
C) it can be used to absorb the losses resulting from bad loans.

D) it makes loans easier to sell.

9) Both ________ and ________ are Federal Reserve assets.
A) securities; loans to financial institutions B) securities; reserves
C) currency in circulation; reserves D) currency in circulation; securities

Explanation / Answer

7. Ans: $25,000

Explanation:

Maximum deposit outflow = ( 40,000 - (0.2*100,000)) / (1- 0.2) = $25,000

8. Ans: it can be used to absorb the losses resulting from bad loans

9. Ans: securities; loans to financial institutions

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