16 Questions
What happens when a bank receives a new deposit or CD?
It must keep a percentage of it as part of the bank’s reserves.
How much of the $1,000 deposit from Kim can be lent out if the reserve requirement is 20 percent?
$800
What happens if Bill puts the $800 loan into a checking account for convenience?
The $800 becomes a new deposit subject to a 20 percent reserve requirement.
How much can the bank charge interest on if it makes $5,000 in new loans?
$4,000
What happens if the Fed lowers the reserve requirement to 10 percent?
Every new loan can be as much as 90 percent of each deposit.
What does it mean when the bank is 'loaned out'?
The bank is unable to make any more loans.
What is the role of the Fed in regulating banks?
Monitoring reserves and demand deposits
What is the 'spread' in the context of bank profits?
The difference between deposit interest and loan interest
In what ways can a bank earn money from investments?
By buying U.S. bonds
What are some examples of fees that banks may charge customers?
Penalties for late bill payments
How does an increase in the reserve requirement affect a bank's operations?
It requires finding more reserves to back existing loans
What agency heavily regulates banks alongside the Fed?
The Federal Deposit Insurance Corporation (FDIC)
What is the primary source of a bank’s profits from lending?
The difference between deposit interest and loan interest
How do banks use the profits generated from the 'spread'?
To cover operating costs and bills
What type of fees can be especially challenging for customers with minimal balances?
'Maintaining an account' fees
How do increases in fees impact customers with minimal balances?
'Maintaining an account' fees become more burdensome
This quiz explores the process of money creation through fractional reserve banking, where banks can expand deposits by lending out a portion of the funds they receive. The quiz discusses how the reserve requirement set by the Fed impacts the lending and deposit expansion process.
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