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 reduced from 20% to 10%, what happens to the money multiplier?
Answer: It increases from 5 to 10
The money multiplier equals 1/reserve requirement; reducing RR from 20% to 10% raises the multiplier from 5 to 10.
In a fractional reserve banking system, banks:
Answer: Hold only a fraction of deposits as reserves and lend the rest
Fractional reserve banking means banks keep only a fraction of deposits as reserves while lending the remainder.
When the Fed conducts contractionary monetary policy, which of the following is most likely?
Answer: The money supply decreases and interest rates rise
Contractionary policy reduces the money supply by removing reserves, which pushes interest rates higher.
The federal funds rate is:
Answer: The overnight rate banks charge each other for reserve loans
The federal funds rate is the interest rate at which banks lend reserves to each other overnight.
Which of the following is a tool of the Federal Reserve used to conduct monetary policy?
Answer: Open market operations
Open market operations — buying or selling government securities — are the Fed's primary tool for controlling the money supply.
If banks decide to hold more excess reserves than usual, the actual money multiplier will be:
Answer: Less than the theoretical multiplier
When banks hold excess reserves rather than lending them out, money creation is reduced, making the actual multiplier smaller.
A bank's balance sheet shows assets of $500,000 and liabilities of $450,000. The bank's net worth (equity) is:
Answer: $50,000
Net worth equals assets minus liabilities: $500,000 − $450,000 = $50,000.