These are original Marlbridge practice questions, not past exam questions. All questions use Valdoria, a fictional country whose currency is the valda (VD); all banks and figures are fictional. The rubrics are a suggested Marlbridge rubric to help you check your work; they are not an official scoring guideline. Unless a question says otherwise, assume banks lend all their excess reserves, every loan is fully redeposited, and the public holds no extra currency.
Question 1 (multiple choice · foundation)
Valdoria’s required reserve ratio is 12.5%. What is the maximum value of the money multiplier?
- (A) 0.125
- (B) 7
- (C) 8
- (D) 12.5
Answer and explanation
Answer: (C). Maximum money multiplier = 1 ÷ rr = 1 ÷ 0.125 = 8.
- (A) is the reserve ratio itself, not its reciprocal.
- (B) subtracts 1 from the multiplier (8 − 1). The multiplier is simply 1 ÷ rr.
- (D) uses the ratio written as a percentage (12.5%) as the multiplier. The multiplier is the reciprocal of the ratio written as a decimal: 1 ÷ 0.125 = 8.
Question 2 (multiple choice · core)
Lakeside Bank has demand deposits of VD 800 million and total reserves of VD 120 million. The required reserve ratio is 10%. What is the largest amount Lakeside Bank can lend?
- (A) VD 40 million
- (B) VD 80 million
- (C) VD 120 million
- (D) VD 400 million
Answer and explanation
Answer: (A). Required reserves = 0.1 × 800 = 80. Excess reserves = 120 − 80 = 40. A single bank can lend at most its excess reserves.
- (B) is the required reserves, which the bank must keep.
- (C) is all its reserves. Lending them all would leave the bank below its requirement.
- (D) multiplies the excess reserves by the multiplier (40 × 10). That is the maximum for the whole banking system, not for one bank.
Question 3 (multiple choice · core)
The required reserve ratio is 25%, and no bank has excess reserves. A household deposits VD 2,000 million of cash in a checking account. What is the maximum increase in the money supply?
- (A) VD 500 million
- (B) VD 1,500 million
- (C) VD 6,000 million
- (D) VD 8,000 million
Answer and explanation
Answer: (C). Excess reserves = (1 − 0.25) × 2,000 = 1,500. Multiplier = 1 ÷ 0.25 = 4. Maximum increase in the money supply = 1,500 × 4 = 6,000.
- (A) is the required reserves on the deposit (0.25 × 2,000).
- (B) is the first bank’s maximum loan, not the total for the system.
- (D) is 2,000 × 4: the maximum increase in demand deposits. It wrongly counts the 2,000, which was already money (currency) before it was deposited.
Question 4 (multiple choice · core)
The simple money multiplier predicts a larger increase in the money supply than actually occurs. Which of the following best explains this?
- (A) Banks hold some excess reserves, and borrowers keep part of their loans as cash.
- (B) The required reserve ratio is less than 100%.
- (C) Borrowers deposit their loans in banks other than the lending bank.
- (D) Banks lend out all of their excess reserves.
Answer and explanation
Answer: (A). Excess reserves that banks keep are not lent, and cash that the public holds leaves the banking system. Both make each round of lending smaller than the model assumes.
- (B) is the reason money creation is possible at all. It does not make the multiplier smaller.
- (C) does not matter: a deposit in any bank supports further lending.
- (D) is the model’s own assumption, which gives the maximum expansion, not a smaller one.
Question 5 (calculation · core)
In Valdoria the monetary base is VD 600 billion and the money supply is VD 2,400 billion. The required reserve ratio is 10%.
(a) Calculate the actual money multiplier. (b) Calculate the maximum money multiplier, and the money supply it would give with this monetary base. (c) A bank receives VD 50 billion of new excess reserves. Calculate the maximum possible increase in the money supply. (d) Give two reasons why the actual multiplier in (a) is smaller than the maximum in (b).
Worked solution and suggested Marlbridge rubric
(a) Money multiplier = money supply ÷ monetary base = 2,400 ÷ 600 = 4.
(b) Maximum = 1 ÷ 0.1 = 10. Money supply = 600 × 10 = VD 6,000 billion, which is VD 3,600 billion more than the actual figure.
(c) 50 × 10 = VD 500 billion.
(d) Banks may hold excess reserves instead of lending them (for safety, or because few borrowers want loans). The public may hold part of its money as currency instead of deposits, so it cannot support further lending.
| Point | What earns it |
|---|---|
| 1 | Actual multiplier = 4 |
| 1 | Maximum multiplier = 10 and money supply = 6,000 |
| 1 | Maximum increase = 500 |
| 1 | Two valid reasons: excess reserves held by banks, and currency held by the public |
Other acceptable reasons in (d): weak demand for loans (which leads banks to hold excess reserves). Both reasons are needed for the point.
Question 6 (constructed response · core)
The required reserve ratio is 20%. Ridgeway Bank’s balance sheet is shown (VD million).
| Assets | Liabilities and owners’ equity | ||
|---|---|---|---|
| Reserves | 90 | Demand deposits | 450 |
| Loans | 310 | Owners’ equity | 50 |
| Securities | 100 |
(a) Calculate Ridgeway Bank’s required and excess reserves. (b) A customer deposits VD 30 million of cash in a checking account. Show the new balance sheet. (c) Calculate the bank’s new required and excess reserves. (d) State the most Ridgeway Bank can now lend. (e) Show the balance sheet after the bank makes that loan and the borrower spends it at a shop that banks elsewhere. (f) Calculate the maximum change in the money supply and the maximum change in demand deposits for the whole banking system.
Worked solution and suggested Marlbridge rubric
(a) Required = 0.2 × 450 = 90. Excess = 90 − 90 = 0.
(b) Reserves rise to 120; demand deposits rise to 480. Loans 310, securities 100 and owners’ equity 50 are unchanged. Totals: 120 + 310 + 100 = 530 = 480 + 50.
(c) Required = 0.2 × 480 = 96. Excess = 120 − 96 = 24.
(d) VD 24 million, its excess reserves.
(e)
| Assets | Liabilities and owners’ equity | ||
|---|---|---|---|
| Reserves | 96 | Demand deposits | 480 |
| Loans | 334 | Owners’ equity | 50 |
| Securities | 100 |
Totals: 96 + 334 + 100 = 530 = 480 + 50. Reserves now exactly meet the requirement.
(f) Multiplier = 1 ÷ 0.2 = 5. Maximum change in the money supply = 24 × 5 = VD 120 million. Maximum change in demand deposits = 30 × 5 = VD 150 million.
| Point | What earns it |
|---|---|
| 1 | Required 90 and excess 0 in (a) |
| 1 | Reserves 120 and demand deposits 480 in (b), with the sheet balancing |
| 1 | Required 96, excess 24 and maximum loan 24 in (c)–(d) |
| 1 | Correct balance sheet in (e): reserves 96, loans 334 |
| 1 | Money supply +120, using excess reserves × 5 |
| 1 | Demand deposits +150, using the deposit × 5 |
Accept values carried forward from an earlier error. A money supply answer of 150 earns no point in (f), because the 30 was already money.
Question 7 (constructed response · stretch)
The required reserve ratio in Valdoria is 10%, and no bank holds excess reserves. A business withdraws VD 50 million of cash from its checking account at Pinecrest Bank to keep in its own safe.
(a) What is the immediate effect of the withdrawal on M1? Explain. (b) Calculate the change in Pinecrest Bank’s required reserves and its reserve shortfall. (c) Explain how the banking system responds, and calculate the maximum decrease in the money supply. (d) Calculate the maximum decrease in the money supply if the required reserve ratio had been 20%. (e) Explain why the actual decrease could be smaller than your answer to (c).
Model answer and suggested Marlbridge rubric
(a) No change. Demand deposits fall by 50 and currency in circulation rises by 50. Both are in M1, so M1 is unchanged.
(b) Reserves fall by 50 (the cash leaves the vault). Required reserves fall by only 0.1 × 50 = 5, because deposits fell by 50. The bank started with no excess reserves, so it is now 45 short of its requirement (50 − 5 = 45).
(c) Pinecrest Bank must rebuild reserves, so it lends less (for example, it does not renew loans as they are repaid). Borrowers repay using deposits, which drains reserves from other banks, so they also cut lending. The process runs in reverse. Maximum decrease in the money supply = 45 × (1 ÷ 0.1) = VD 450 million. (Demand deposits fall by up to 50 × 10 = 500, but currency rises by 50, so the money supply falls by 450.)
(d) Shortfall = 50 − 0.2 × 50 = 40. Maximum decrease = 40 × 5 = VD 200 million.
(e) If banks were holding some excess reserves, they could use them to cover the shortfall instead of cutting loans. Also, if the business later redeposits some of the cash, reserves return to the system.
| Point | What earns it |
|---|---|
| 1 | No change in M1, because currency rises as deposits fall |
| 1 | Required reserves fall by 5; shortfall of 45 |
| 1 | Explains that banks cut lending, so deposits shrink in successive rounds |
| 1 | Maximum decrease of 450 |
| 1 | Maximum decrease of 200 with rr = 20% |
| 1 | Valid reason the decrease is smaller (excess reserves used to cover the shortfall, or cash redeposited) |
An answer of 500 in (c) earns the explanation point but not the calculation point: it is the change in deposits, not in the money supply.
How did you do?
- Q2 or Q6(a)–(e) wrong: re-read “What a bank does”, “Fractional reserve banking” and Worked example 1 in the study guide.
- Q1, Q3, Q5(a)–(c) or Q6(f) wrong: revisit “The money multiplier” and Worked example 2, especially the difference between the change in deposits and the change in the money supply.
- Q4, Q5(d) or Q7(e) wrong: revisit “Why the simple multiplier overstates expansion”.
- Q7(a)–(d) wrong: apply Worked example 1 in reverse: a withdrawal removes reserves, so banks must reduce lending.
Then tick off the topic checklist.