Banking System Flashcards
7 cards from real AP practice questions. Tap to flip, then mark Knew It or Still Learning — missed cards come back until you master them.
Read the first 7 Banking System flashcards as text
If the reserve requirement is 10% and a bank receives a $5,000 deposit, how much can it loan out?
Answer: $4,500
The bank must hold 10% ($500) as reserves and can loan out the remaining $4,500.
Which of the following best describes the money multiplier?
Answer: The ratio of total money supply to the monetary base
The money multiplier equals 1/reserve requirement and measures how much the money supply expands per dollar of base money.
When a commercial bank borrows from the Federal Reserve, the interest rate charged is called the:
Answer: Discount rate
The discount rate is the interest rate the Fed charges commercial banks for short-term loans from the discount window.
Which action by the Federal Reserve would INCREASE the money supply?
Answer: Buying government bonds on the open market
When the Fed buys bonds, it injects reserves into the banking system, expanding the money supply.
Excess reserves are best defined as:
Answer: Reserves held above the required minimum
Excess reserves are funds a bank holds beyond what is legally required, which can be loaned out.
A bank run occurs when:
Answer: Many depositors simultaneously withdraw funds fearing bank insolvency
A bank run happens when depositors lose confidence and rush to withdraw funds before the bank fails.
Which federal agency was primarily created to prevent bank runs by insuring deposits?
Answer: The FDIC
The Federal Deposit Insurance Corporation (FDIC) insures deposits up to $250,000, reducing incentives for bank runs.