ch. 13 review - MacEcon
The main purpose of the Fed is to
maintain the proper functioning of our money system.
One advantage of a money system compared to a barter system is that
money is more efficient.
Money is used as a unit of account. This means
money is used to measure the exchange value and costs of goods, services, assets and resources.
During the economic crisis of 2008, the Fed acquired the authority to
pay interest to commercial banks on their reserves.
If uncertainty causes commercial banks to increase their holdings of excess reserves, other things constant, this will
reduce the size of the deposit expansion multiplier.
If a bank has actual reserves of $40,000 and a 20 percent reserve requirement, then the maximum amount of checkable deposits the bank can have if excess reserves are zero is
$200,000
As debit cards become more popular, individuals will reduce their holdings of currency. Other things constant, how will this impact the money supply?
Because more money is held as deposits at banks, the money supply will expand.
In response to the recession of 2008-2009, the Fed doubled its asset holdings from $925 billion at mid-year 2008 to more than $2 trillion by mid-year 2009. This policy
Increased the reserves available to banks, leading to a larger money supply.
Which of the following provides the best explanation of why money is valuable?
Money is valuable because it is scarce relative to the demand for the services it provides. Correct
Why did the monetary base increase rapidly during the economic crisis of 2008?
The Fed purchased more assets and extended more loans.
The sale of government securities by the Fed will cause
a decrease in both the monetary base and the money supply.
On a certain date, the banking system had $40 billion in excess reserves. The legally required reserve ratio was 20 percent. Potentially, if these funds were loaned and eventually the entire amount re-deposited with a bank, the banking system as a whole could increase the money supply by
a maximum of $200 billion.
Which one of the following is the largest component of the money supply (M1) in the United States?
demand and other checking deposits
If you deposit $100 of currency into a demand deposit at a bank, this action by itself
does not change the money supply.
When the monetary authorities expand the supply of money rapidly,
holding money is a poor method of storing value.
If the public decides to hold less currency and more deposits in banks, bank reserves
increase and the money supply eventually increases.
If many people were to suddenly deposit into their checking accounts large sums of cash previously held in their homes and/or wallets, and there were no offsetting actions by the Fed or change in institutional policies, this would
increase the excess reserves of banks and expand the money supply if these reserves are used to make additional loans.
In defining the money supply (M1), economists exclude savings deposits because
savings deposits are not generally used as a means of payment.
Fiat money is money
that has little intrinsic value and is not backed by a commodity.
The Federal Reserve System is owned by
the banks that are members of the Federal Reserve System.
Banks are considered a safer place to deposit money now than they were prior to 1933 because
the creation of the FDIC reduced the likelihood of bank runs.
The main source of profit for financial institutions is
the difference between interest paid on deposits and interest received on loans.
A bank finds itself short of required reserves and therefore borrows from another commercial bank. The interest rate on this loan is
the federal funds rate.
The primary source of revenue for the Federal Reserve is
the interest earned on the bonds held by the Fed.
The interest rate in the federal funds market
will tend to rise when the quantity of funds demanded by banks seeking additional reserves exceeds the quantity supplied by banks with excess reserves.
