Assignment 3 (Ch. 3 & 5, LS 32 & 34)

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Flashcards on Assignment 3 (Ch. 3 & 5, LS 32 & 34), created by casedlynch on 04/30/2014.

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The banking system in the United States is referred to as a fractional reserve bank system because banks hold a fraction of deposits on reserve
Reserves are an asset to commercial banks but a liability to the Federal Reserve Banks because these funds are cash belonging to commercial banks, but they are a claim the commercial banks have against the Federal Reserve Bank.
Excess reserves are equal to actual reserves minus required reserves.
“Whenever currency is deposited into a commercial bank, cash goes out of circulation and, as a result, the supply of money is reduced.” Is this statement true or false? False, M1 consists of currency and checkable deposits
Consider the following statement: “When a commercial bank makes loans, it creates money; when loans are repaid, money is destroyed.” This statement is correct because lending increases the money supply, and the repayment reduces checkable deposits, lowering the money supply.
Suppose that Mountain Star Bank discovers that its reserves will temporarily fall slightly below those legally required. It can temporarily remedy this situation by borrowing funds from other banks in the Federal funds market.
Assume Mountain Star Bank finds that its reserves will be substantially and permanently deficient. To remedy this situation, Mountain Star Bank can reduce the amount of loans outstanding.
Suppose that Serendipity Bank has excess reserves of $12,000 and checkable deposits of $200,000. If the reserve ratio is 10 percent, what is the size of the bank's actual reserves? $ 32,000
Suppose that Third National Bank has reserves of $10,000 and checkable deposits of $100,000. The reserve ratio is 10 percent. The bank now sells $20,000 in securities to the Federal Reserve Bank in its district, receiving a $20,000 increase in reserves in return. 20,000
Compound interest describes the interest an investment earns when interest is paid on the original amount invested plus all interest payments that have been previously made.
Assume I is the the interest rate, t is the amount of years (time), and X is the is investment amount. What is the present value formula? X/ (1+i)^t
Suppose that you invest $100 today in a risk-free investment and let the 5 percent annual interest rate compound. Rounded to full dollars, what will be the value of your investment 5 years from now? 128
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