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
Which of the following counts as part of M1?
Answer: Demand deposits (checking accounts)
M1 includes the most liquid assets: currency in circulation and demand deposits such as checking accounts.
If the Fed raises the discount rate, commercial banks will most likely:
Answer: Borrow less from the Fed and tighten lending
A higher discount rate makes borrowing from the Fed more expensive, so banks borrow less and lend less.
Which of the following is a liability on a commercial bank's balance sheet?
Answer: Deposits held by customers
Customer deposits are liabilities because the bank owes that money back to depositors.
The monetary base (M0) consists of:
Answer: Currency in circulation plus bank reserves held at the Fed
The monetary base includes physical currency in circulation plus bank reserves on deposit at the Federal Reserve.
When the Fed sells government securities through open market operations, the immediate effect is:
Answer: Bank reserves decrease
When the Fed sells securities, buyers pay with funds that leave the banking system, reducing bank reserves.
Required reserves are calculated as:
Answer: Total deposits × reserve requirement
Required reserves equal total deposits multiplied by the reserve requirement ratio set by the Fed.
Which scenario would cause the money supply to contract?
Answer: Consumers withdraw cash and hold it instead of depositing it
When people hold cash instead of depositing it, banks have fewer reserves to lend, shrinking the money multiplier effect.