32.1 What
is the difference between an asset and a liability on a bank’s balance
sheet? How does net worth relate to each? Why must a balance sheet
always balance? What are the major assets and claims on a commercial
bank’s balance sheet?
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32.2 Explain
why merchants accepted gold receipts as a means of payment even though
the receipts were issued by goldsmiths, not the government. What risk
did goldsmiths introduce into the payments system by issuing loans in
the form of gold receipts?
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32.3 Why
is the banking system in the United States referred to as a fractional
reserve bank system? What is the role of deposit insurance in a
fractional reserve system?
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32.4
Why
does the Federal Reserve require commercial banks to have reserves?
Explain why reserves are an asset to commercial banks but a liability to
the Federal Reserve Banks. What are excess reserves? How do you
calculate the amount of excess reserves held by a bank? What is the
significance of excess reserves?
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32.5 “Whenever
currency is deposited in a commercial bank, cash goes out of
circulation and, as a result, the supply of money is reduced.” Do you
agree? Explain why or why not.
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32.6 “When a commercial bank makes loans, it creates money; when loans are repaid, money is destroyed.” Explain.
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32.7 Suppose
that Mountain Star Bank discovers that its reserves will temporarily
fall slightly below those legally required. How might it temporarily
remedy this situation through the Federal funds market? Now assume
Mountain Star finds that its reserves will be substantially and
permanently deficient. What remedy is available to this bank? (Hint:
Recall your answer to question 6.)
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32.8 Explain
why a single commercial bank can safely lend only an amount equal to
its excess reserves but the commercial banking system as a whole can
lend by a multiple of its excess reserves. What is the monetary
multiplier, and how does it relate to the reserve ratio?
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32.9 How
would a decrease in the reserve requirement affect the (a) size of the
money multiplier, (b) amount of excess reserves in the banking system,
and (c) extent to which the system could expand the money supply through the creation of checkable deposits via loans?
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32.10 LAST WORD
Explain how the bank panics of 1930–1933 produced a decline in the
nation’s money supply. Why are such panics highly unlikely today?
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