Chapter 14

Assume that banks are always fully loaned and people hold no cash. Given a required reserve ratio of 10%, an infusion of $100 billion in reserves will result in a maximum of _______ in deposits.

$1,000 billion

M1

M1 is the most basic measure of money used in the United States and it is the most liquid form of money.

_______ involves increasing or decreasing the money supply and interest rates to expand or contract the economy. Open market operations are one example of how the Fed conducts monetary policy.

Monetary policy

The actions the Federal Reserve takes to manage the money supply and interest rates in order to pursue economic objectives are called ________.

monetary policy

Credit cards are ________.

not part of the money supply

The Fed conducts monetary policy primarily through ________.

open market operations

The Fed conducts monetary policy primarily through____.

open market operations

When we say that money serves as a unit of account, we mean that _______.

prices are quoted in terms of money

When we say that one of the functions of the Fed is to be a lender of last resort, we mean that the Fed ______.

provides funds to troubled banks that cannot find any other source of funds

When we say that one of the functions of the Fed is to be a lender of last resort, we mean that the ___________.

the Fed provides funds to troubled banks that cannot find any other source of funds

The Federal Reserve System is ________.

the central bank of the United States

The theory concerning the link between the money supply and the price level that assumes the velocity of money is constant is called _______.

the quantity theory of money

Suppose that velocity is 3 and the money supply is $500 million. According to the quantity theory of money, nominal output equals __ billion.

$1.5 According to the quantity theory of money M x V = P x Q. Because P x Q is equal to output, if V = 3 and M = $500 million then the nominal output is equal to 3 x $500 million = $1.5 billion

Suppose that the reserve ratio is 25% and that banks loan out all their excess reserves. If a person deposits $100 cash in a bank, checking account balances will increase by a maximum of ____.

$400 (deposit*1/reserve ratio)

When we say that money serves as a unit of account, we mean that ______.

prices are quoted in terms of money

Fiscal policy

Fiscal policy is the government's use of taxation and spending to impact the economy.

The sum of all currency in the hands of the public plus demand deposits and other checkable deposits plus traveler's checks is the official definition of:

M1

The Federal Open Market Committee

The Board of Governors is in charge of the Federal Reserve and each of these seven members is also a member of the FOMC.

______ buys bonds to expand the money supply and sells bonds to contract the money supply.

The Fed

Who is the chairperson of the Federal Open Market Committee (FOMC)?

The chairperson of the Board of Governors

To increase the money supply, the FOMC directs the trading desk located at the Federal Reserve Bank of New York to buy _________. This process is known as open market operations since the Fed enters the open market to buy (or sell) U.S. Treasury securities. When the Fed buys securities, it puts additional money in circulation and expands the money supply. When the Fed sells securities, it takes money out of circulation and contracts the money supply.

U.S. Treasury securities from the public

Velocity

Velocity is defined as V = (P x Q) / M. You can easily solve for V using the quantity equation as follows: The quantity equation is M x V = P x Q where: M = money supply V = velocity of money P = price level Q = real output You simply divide both sides by M to obtain V = (P x Q) / M. Simply defined, velocity is the average number of times a dollar is spent in a given year.

Assuming there are no leakages out of the banking system, a money multiplier equal to 5 means that _________. The money multiplier shows the relationship between the changes in deposits that will result from a given change in reserves.

each additional dollar of reserves creates $5 of deposits

Increases in bank lending are the sign of economic ____ and open market operations are carried out on a weekly basis to expand or contract the money supply as needed.

growth

U.S. currency is fiat money which means it __________.

has no value except as money. Fiat money has value because the government says it has value.

The Fed

is the banker's bank and serves as lender of last resort when banks get in financial trouble. One of the primary reasons for the creation of the Fed was a series of financial panics in the late 1800s and early 1900s that indicated the need for a national banking system that could restore confidence in U.S. banks.

Deposits are ______ to a bank since it will eventually have to give those funds back to depositors.

liabilities

On the balance sheet of a bank ____ are the most important asset.

loans

The actions the Federal Reserve takes to manage the money supply and interest rates in order to pursue economic objectives are called ______.

monetary policy

The actions the Federal Reserve takes to manage the money supply and interest rates in order to pursue economic objectives are called _______.

monetary policy

Monetary policy

Monetary policy involves increasing or decreasing the money supply and interest rates to expand or contract the economy. Open market operations are one example of how the Fed conducts monetary policy.

A______ occurs when many banks experience runs at the same time. When many depositors decide simultaneously to withdraw their money from a bank, there is a bank run.

bank panic

The Open Market Desk

carries out the monetary policy directives of the FOMC via buying and selling U.S. Treasury securities on the open market.

Assuming there are no leakages out of the banking system, a money multiplier equal to 5 means that _______.

each additional dollar of reserves creates $5 of deposits

The following fact is true about the creation of the Federal Reserve System:__________.

the Fed was created in 1913

The FOMC

the committee that makes actual decisions on monetary policy. It is a 12-member committee consisting of the seven members of the Board of Governors, the President of the New York Federal Reserve bank, and four other district bank presidents that serve on a rotating basis.

To increase the money supply, the FOMC directs the trading desk located at the Federal Reserve Bank of New York _____.

to buy U.S. Treasury securities from the public