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Fractional Reserve Banking: Money Creation Process

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Fractional Reserve Banking: Money Creation Process

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Questions and Answers

What happens when a bank receives a new deposit or CD?

It must keep the entire amount as part of the bank’s reserves.

It can lend the entire amount to customers.

It must invest the entire amount in the stock market.

It must keep a percentage of it as part of the bank’s reserves. (correct)

How much of the $1,000 deposit from Kim can be lent out if the reserve requirement is 20 percent?

$800 (correct)

$100

$200

$500

What happens if Bill puts the $800 loan into a checking account for convenience?

The $800 is invested in stocks.

The $800 is returned to Kim.

The $800 becomes a new deposit subject to a 20 percent reserve requirement. (correct)

The $800 becomes a new deposit subject to a 50 percent reserve requirement.

How much can the bank charge interest on if it makes $5,000 in new loans?

$4,000 Signup and view all the answers

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. Signup and view all the answers

What does it mean when the bank is 'loaned out'?

The bank is unable to make any more loans. Signup and view all the answers

What is the role of the Fed in regulating banks?

Monitoring reserves and demand deposits Signup and view all the answers

What is the 'spread' in the context of bank profits?

The difference between deposit interest and loan interest Signup and view all the answers

In what ways can a bank earn money from investments?

By buying U.S. bonds Signup and view all the answers

What are some examples of fees that banks may charge customers?

Penalties for late bill payments Signup and view all the answers

How does an increase in the reserve requirement affect a bank's operations?

It requires finding more reserves to back existing loans Signup and view all the answers

What agency heavily regulates banks alongside the Fed?

The Federal Deposit Insurance Corporation (FDIC) Signup and view all the answers

What is the primary source of a bank’s profits from lending?

The difference between deposit interest and loan interest Signup and view all the answers

How do banks use the profits generated from the 'spread'?

To cover operating costs and bills Signup and view all the answers

What type of fees can be especially challenging for customers with minimal balances?

'Maintaining an account' fees Signup and view all the answers

How do increases in fees impact customers with minimal balances?

'Maintaining an account' fees become more burdensome Signup and view all the answers