Chapter 14 The Money Supply Process

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In the simple deposit expansion model, if the required reserve ratio is 10 percent and the Fed increases reserves by $100, checkable deposits can potentially expand by

$1,000

If the required reserve ratio is 10 percent, currency in circulation is $400 billion, checkable deposits are $800 billion, and excess reserves total $0.8 billion, then the money supply is ________ billion.

$1,200

If the required reserve ratio is 10 percent, currency in circulation is $400 billion, checkable deposits are $1000 billion, and excess reserves total $1 billion, then the money supply is ________ billion.

$1,400

In the simple deposit expansion model, if the Fed extends a $100 discount loan to a bank that previously had no excess reserves, the bank can now increase its loans by

$100

In the simple deposit expansion model, if the Fed purchases $100 worth of bonds from a bank that previously had no excess reserves, the bank can now increase its loans by

$100

In the simple deposit expansion model, if the Fed extends a $100 discount loan to a bank that previously had no excess reserves, deposits in the banking system can potentially increase by

$100 times the reciprocal of the required reserve ratio

In the simple deposit expansion model, if the Fed purchases $100 worth of bonds from a bank that previously had no excess reserves, deposits in the banking system can potentially increase by

$100 times the reciprocal of the required reserve ratio

If a bank has excess reserves of $4,000 and demand deposit liabilities of $100,000, and if the reserve requirement is 15 percent, then the bank has actual reserves of

$19,000

If a bank has excess reserves of $10,000 and demand deposit liabilities of $80,000, and if the reserve requirement is 20 percent, then the bank has actual reserves of

$26,000

In the simple deposit expansion model, if the banking system has excess reserves of $75, and the required reserve ratio is 20%, the potential expansion of checkable deposits is

$375

If the required reserve ratio is 10 percent, currency in circulation is $400 billion, checkable deposits are $800 billion, and excess reserves total $0.8 billion, then the monetary base is

$480.8 billion

A bank has excess reserves of $10,000 and demand deposit liabilities of $100,000 when the required reserve ratio is 20 percent. If the reserve ratio is raised to 25 percent, the bank's excess reserves will be

$5,000

In the simple deposit expansion model, if the required reserve ratio is 20 percent and the Fed increases reserves by $100, checkable deposits can potentially expand by

$500

A bank has excess reserves of $1,000 and demand deposit liabilities of $80,000 when the reserve requirement is 20 percent. If the reserve requirement is lowered to 10 percent, the bank's excess reserves will be

$9,000

A bank has excess reserves of $4,000 and demand deposit liabilities of $100,000 when the required reserve ratio is 20 percent. If the reserve ratio is raised to 25 percent, the bank's excess reserves will be

-$1,000

A bank has no excess reserves and demand deposit liabilities of $100,000 when the required reserve ratio is 20 percent. If the reserve ratio is raised to 25 percent, the bank's excess reserves will now be

-$5,000

If the required reserve ratio is 10 percent, currency in circulation is $400 billion, checkable deposits are $800 billion, and excess reserves total $0.8 billion, then the excess reserves-checkable deposit ratio is

.001

If reserves in the banking system increase by $100, then checkable deposits will increase by $667 in the simple model of deposit creation when the required reserve ratio is

.15

If reserves in the banking system increase by $100, then checkable deposits will increase by $400 in the simple model of deposit creation when the required reserve ratio is

.25

If reserves in the banking system increase by $100, then checkable deposits will increase by $1000 in the simple model of deposit creation when the required reserve ratio is

0.10

If reserves in the banking system increase by $100, then checkable deposits will increase by $500 in the simple model of deposit creation when the required reserve ratio is

0.20

If the required reserve ratio is 10 percent, the simple deposit multiplier is

10

A simple deposit multiplier equal to one implies a required reserve ratio equal to

100 percent

If the required reserve ratio is 15 percent, currency in circulation is $400 billion, checkable deposits are $800 billion, and excess reserves total $0.8 billion, then the M1 money multiplier is

2.3

If the required reserve ratio is 10 percent, currency in circulation is $400 billion, checkable deposits are $800 billion, and excess reserves total $0.8 billion, then the M1 money multiplier is

2.5

A simple deposit multiplier equal to four implies a required reserve ratio equal to

25 percent

If the required reserve ratio is 25 percent, the simple deposit multiplier is

4

If the required reserve ratio is 20 percent, the simple deposit multiplier is

5

A simple deposit multiplier equal to two implies a required reserve ratio equal to

50 percent

If the required reserve ratio is 15 percent, the simple deposit multiplier is

6.67

The government agency that oversees the banking system and is responsible for the conduct of monetary policy in the United States is

The Federal Reserve System

U.S. Treasury deposits at the Fed are ________ for the Fed but ________ for the Treasury. Thus an increase in U.S. Treasury deposits ________ the monetary base.

a liability; an asset; decreases

Factors causing an increase in currency holdings include

an increase in illegal activity

Everything else held constant, a decrease in the currency-checkable deposit ratio will mean

an increase in money supply

Everything else held constant, a decrease in holdings of excess reserves will mean

an increase in the money supply

Everything else held constant, a decrease in the required reserve ratio on checkable deposits will mean

an increase in the money supply

Everything else held constant, an increase in the excess reserve ratio will mean ________ in the M2 money multiplier and ________ in the M2 money supply.

an increase; a decrease

Everything else held constant, an increase in the interest rate paid on checkable deposits will cause ________ in the amount of checkable deposits held relative to currency holdings and ________ in the currency ratio.

an increase; a decrease

Everything else held constant, a decrease in the currency ratio will mean ________ in the M1 money multiplier and ________ in the M2 money multiplier.

an increase; an increase

Everything else held constant, an increase in the money market fund ratio will mean ________ in the M2 money multiplier and ________ in the M2 money supply.

an increase; an increase

Everything else held constant, an increase in the time deposit ratio will mean ________ in the M2 money multiplier and ________ in the M2 money supply.

an increase; an increase

Total Reserves minus vault cash equals

bank deposits with the Fed

The factor accounting for the steepest rise in the currency ratio since 1892 is

bank panics

When a member of the nonbank public withdraws currency from her bank account,

bank reserves fall, but the monetary base remains unchanged

When a member of the nonbank public deposits currency into her bank account,

bank reserves rise, but the monetary base remains unchanged

The three players in the money supply process include

banks, depositors, and the central bank

The Fed does not tightly control the monetary base because it does not completely control

borrowed reserves

Part of the increase in currency holdings in the 1960s and 1970s can be attributed to

bracket creep due to inflation and progressive income taxes

The simple deposit multiplier can be expressed as the ratio of the

change in deposits divided by the change in reserves in the banking system

High-powered money minus reserves equals

currency in circulation

The monetary base minus reserves equals

currency in circulation

The monetary base consists of

currency in circulation and reserves

The monetary liabilities of the Federal Reserve include

currency in circulation and reserves

Both ___ and ___ are monetary liabilities of the Fed.

currency in circulation; reserves

An increase in the monetary base that goes into ________ is not multiplied, while an increase that goes into ________ is multiplied.

currency; deposits

If the Fed injects reserves into the banking system and they are held as excess reserves, then the money supply

does not change

Total reserves are the sum of ___ and ___.

excess reserves; required reserves

If a member of the nonbank public purchases a government bond from the Federal Reserve in exchange for currency, the monetary base will ___, but reserves will ___.

fall; remain unchanged

In the early 1930s, the currency ratio rose, as did the level of excess reserves. Money supply analysis predicts that, everything else held constant, the money supply should have

fallen

A decrease in ___ leads to an equal ___ in the monetary base in the short run.

float; decreases

An increase in ___ leads to an equal ___ in the monetary base in the short run.

float; increase

An assumption in the model of the money supply process is that the desired levels of currency and excess reserves

grow proportionally with checkable deposits

The effect of an open market purchase on reserves differs depending on how the seller of the bonds keeps the proceeds. If the proceeds are kept in currency, the open market purchase ___ reserves; if the proceeds are kept as deposits, the open market purchase ___ reserves.

has no effect on; increases

The increase in the currency ratio during World War II was due to

high taxes and illegal activities

When an individual sells a $100 bond to the Fed, she may either deposit the check she receives or cash it for currency. In both cases

high-powered money increases

The Fed can exert more precise control over ________ than it can over ________.

high-powered money; reserves

When the Fed buys $100 worth of bonds from First National Bank, reserves in the banking system

increase by $100

When the Fed extends a $100 discount loan to the First National Bank, reserves in the banking system

increase by $100

Everything else held constant, an increase in wealth will cause the holdings of checkable deposits to the holdings of currency to ________ and the currency ratio will ________.

increase; decrease

Everything else held constant, a decrease in the currency ratio causes the M1 money multiplier to ________ and the money supply to ________.

increase; increase

Everything else held constant, a decrease in the excess reserves ratio causes the M1 money multiplier to ________ and the money supply to ________.

increase; increase

Everything else held constant, a decrease in the required reserve ratio on checkable deposits causes the M1 money multiplier to ________ and the money supply to ________.

increase; increase

When a bank sells a government bond to the Federal Reserve, reserves in the banking system ___ and the monetary base ___, everything else held constant.

increase; increases

When the Federal Reserve purchases a government bond from a bank, reserves in the banking system ___ and the monetary base ___, everything else held constant.

increase; increases

When the Fed supplies the banking system with an extra dollar of reserves, deposits ___ by ___ than one dollar—a process called multiple deposit creation.

increase; more

During the 2007-2009 financial crisis the excess reserve ratio

increased sharply

During the bank panics of the Great Depression the currency ratio

increased sharply

During the bank panics of the Great Depression the excess reserve ratio

increased sharply

When the Federal Reserve extends a discount loan to a bank, the monetary base ___ and reserves ___.

increases; increase

If the Fed injects reserves into the banking system and they are held as excess reserves, then the monetary base ________ and the money supply ________.

increases; remains unchanged

If the required reserve ratio is equal to 10 percent, a single bank can increase its loans up to a maximum amount equal to

its excess reserves

The ratio that relates the change in the money supply to a given change in the monetary base is called the

money multiplier

Since the Federal Reserve sets the required reserve ratio to less than one, one dollar of reserves can support ________ of checkable deposits.

more than one dollar

When the Fed supplies the banking system with an extra dollar of reserves, deposits increase by more than one dollar—a process called

multiple deposit creation

The money multiplier is

negatively related to the required reserve ratio

The amount of borrowed reserves is ________ related to the discount rate, and is ________ related to the market interest rate.

negatively; positively

The money supply is ________ related to expected deposit outflows, and is ________ related to the market interest rate.

negatively; positively

The relationship between borrowed reserves, the nonborrowed monetary base, and the monetary base is

BR = MB - MBn.

Everything else held constant, an increase in the required reserve ratio will result in ________ in M1 and ________ in M2.

a decrease; a decrease

Which of the following are not assets on the Fed's balance sheet?

Deferred availability cash items

When the Treasury acquires gold or SDRs, it issues certificates to the ________, which are a claim on the gold or SDRs, and in turn is credited with deposit balances at the ________.

Federal Reserve System; Fed

An increase in which of the following leads to a decline in the monetary base?

Foreign deposits at the Fed

Special Drawing Rights (SDRs) are issued to governments by the ________ to settle international debts and have replaced ________ in international transactions.

International Monetary Fund; gold

The formula linking the money supply to the monetary base is

M = m × MB.

The equation that shows the amount of the monetary base needed to support existing levels of checkable deposits, excess reserves, and currency is

MB = (rr × D) + ER + C

For which of the following is the change in reserves necessarily different from the change in the monetary base?

Open market purchases from an individual who cashes the check

The Fed's holdings of securities consist primarily of ________, but also in the past have included ________.

Treasury securities; bankers' acceptances

Which of the following are not assets on the Fed's balance sheet?

U.S. Treasury deposits

Everything else held constant, an increase in the currency-checkable deposit ratio will mean

a decrease in the money supply

Suppose, while cleaning out its closets, a worker at the Federal Reserve bank branch in Memphis discovers a painting of Elvis (medium: acrylic on velvet) that used to grace the walls of the conference room. Suppose further that, at a public auction, the bank sells the painting for $19.95. This sale will cause ________ in the monetary base, everything else held constant.

a decrease of $19.95

Everything else held constant, an increase in the currency ratio will mean ________ in the M2 money multiplier and ________ in the M2 money supply.

a decrease; a decrease

Everything else held constant, an increase in the excess reserve ratio will mean ________ in the M1 money multiplier and ________ in the M2 money multiplier.

a decrease; a decrease

Everything else held constant, an increase in the required reserve ratio will mean ________ in the M2 money multiplier and ________ in the M2 money supply.

a decrease; a decrease

The effect of an open market purchase on reserves differs depending on how the seller of the bonds keeps the proceeds. If the proceeds are kept in ___, the open market purchase has no effect on reserves; if the proceeds are kept as ___, reserves increase by the amount of the open market purchase.

currency; deposits

Decisions by depositors to increase their holdings of ________, or of banks to hold ________ will result in a smaller expansion of deposits than the simple model predicts.

currency; excess reserves

Decisions by depositors to increase their holdings of ________, or of banks to hold excess reserves will result in a ________ expansion of deposits than the simple model predicts.

currency; smaller

All else the same, when the Fed calls in a $100 discount loan previously extended to the First National Bank, reserves in the banking system

decrease by $100

When the Fed sells $100 worth of bonds to First National Bank, reserves in the banking system

decrease by $100

Assuming initially that rr = 10%, c = 40%, and e = 0, an increase in c to 50% causes the M1 money multiplier to ________, everything else held constant.

decrease from 2.8 to 2.5

Assuming initially that rr = 10%, c = 40%, and e = 0, an increase in rr to 15% causes the M1 money multiplier to ________, everything else held constant.

decrease from 2.8 to 2.55

Everything else held constant, an increase in the currency ratio causes the M1 money multiplier to ________ and the money supply to ________.

decrease; decrease

Everything else held constant, an increase in the excess reserves ratio causes the M1 money multiplier to ________ and the money supply to ________.

decrease; decrease

Everything else held constant, an increase in the required reserve ratio on checkable deposits causes the M1 money multiplier to ________ and the money supply to ________.

decrease; decrease

When a bank buys a government bond from the Federal Reserve, reserves in the banking system ___ and the monetary base ___, everything else held constant.

decrease; decreases

When the Federal Reserve sells a government bond to a bank, reserves in the banking system ___ and the monetary base ___, everything else held constant.

decrease; decreases

The increase in the availability of ATM's has caused the cost of acquiring currency to ________ which will cause the currency ratio to ________, everything else held constant.

decrease; increase

Suppose a person cashes his payroll check and holds all the funds in the form of currency. Everything else held constant, total reserves in the banking system ___ and the monetary base ___.

decrease; remains unchanged

During the 2007-2009 financial crisis the currency ratio

decreased sharply

When the Federal Reserve calls in a discount loan from a bank, the monetary base ____ and reserves ___.

decreases; decrease

Individuals that lend funds to a bank by opening a checking account are called

depositors

Decisions by ________ about their holdings of currency and by ________ about their holdings of excess reserves affect the money supply.

depositors; banks

When banks borrow money from the Federal Reserve, these funds are called

discount loans

Which of the following are not liabilities on the Fed's balance sheet?

discount loans

The interest rate the Fed charges banks borrowing from the Fed is the

discount rate

The volume of loans that the Fed makes to banks is affected by the Fed's setting of the interest rate on these loans, called the

discount rate

Suppose that from a new checkable deposit, First National Bank holds eight million dollars on deposit with the Federal Reserve, one million dollars in required reserves, and faces a required reserve ratio of ten percent. Given this information, we can say First National Bank has ___ million dollars in excess reserves.

nine

Everything else held constant, an increase in the money market fund ratio will result in ________ in the M1 money multiplier and ________ in the M2 money multiplier.

no change; an increase

Everything else held constant, an increase in the time deposit ratio will result in ________ in the M1 money multiplier and ________ in the M2 money multiplier.

no change; an increase

An increase in the monetary base that goes into currency is ________, while an increase that goes into deposits is ________.

not multiplied; multiplied

Suppose that from a new checkable deposit, First National Bank holds two million dollars in vault cash, eight million dollars on deposit with the Federal Reserve, and nine million dollars in excess reserves. Given this information, we can say First National Bank has ___ million dollars in required reserves.

one

Purchases and sales of government securities by the Federal Reserve are called

open market operations

The M2 money multiplier is

positively related to the time deposit ratio

The excess reserves ratio is ________ related to expected deposit outflows, and is ________ related to the market interest rate.

positively; negatively

The money supply is ________ related to the nonborrowed monetary base, and ________ related to the level of borrowed reserves.

positively; positively

The total amount of required reserves in the banking system is equal to the ________ the required reserve ratio and checkable deposits.

product of

A Fed purchase of gold, SDRs, a deposit denominated in a foreign currency or any other asset is just an open market ________ of these assets, ________ the monetary base.

purchase, raising

Suppose the Bank of China permanently decreases its purchases of U.S. government bonds and, instead, holds more dollars on deposit at the Federal Reserve. Everything else held constant, a open market ________ would be the appropriate monetary policy action for the Fed to take to offset the expected ________ in the monetary base in the United States.

purchase; decrease

There are two ways in which the Fed can provide additional reserves to the banking system: it can ___ government bonds or it can ___ discount loans to commercial banks.

purchase; extend

In the simple deposit expansion model, an expansion in checkable deposits of $1,000 when the required reserve ratio is equal to 10 percent implies that the Fed

purchased $100 in government bonds

In the simple deposit expansion model, an expansion in checkable deposits of $1,000 when the required reserve ratio is equal to 20 percent implies that the Fed

purchased $200 in government bonds

If a person selling bonds to the Fed cashes the Fed's check, then reserves ___ and currency in circulation ___, everything else held constant.

remain unchanged; increases

Suppose your payroll check is directly deposited to your checking account. Everything else held constant, total reserves in the banking system ___ and the monetary base ___.

remain unchanged; remains unchanged

The percentage of deposits that banks must hold in reserve is the

required reserve ratio

The amount of deposits that banks must hold in reserve is

required reserves

Reserves are equal to the sum of

required reserves and excess reserves

High-powered money minus currency in circulation equals

reserves

The monetary base minus currency in circulation equals

reserves

An increase in U.S. Treasury deposits at the Fed reduces both ________ and the ________.

reserves; monetary base

A ________ in market interest rates relative to the discount rate will cause discount borrowing to ________.

rise; increase

If a member of the nonbank public sells a government bond to the Federal Reserve in exchange for currency, the monetary base will ___, but ___.

rise; reserves will remain unchanged

Which is the most important category of Fed assets?

securities

The two most important categories of assets on the Fed's balance sheet are ________ and ________ because they earn interest.

securities; discount loans

Both ___ and ___ are Federal Reserve assets.

securities; loans to financial institutions

If the Fed decides to reduce bank reserves, it can

sell government bonds

In the simple model of multiple deposit creation in which banks do not hold excess reserves, the increase in checkable deposits equals the product of the change in reserves and the

simple deposit expansion multiplier

In the simple deposit expansion model, a decline in checkable deposits of $1,000 when the required reserve ratio is equal to 10 percent implies that the Fed

sold $100 in government bonds

In the simple deposit expansion model, a decline in checkable deposits of $1,000 when the required reserve ratio is equal to 20 percent implies that the Fed

sold $200 in government bonds

The total amount of reserves in the banking system is equal to the ________ required reserves and excess reserves.

sum of

Suppose that from a new checkable deposit, First National Bank holds two million dollars in vault cash, eight million dollars on deposit with the Federal Reserve, and one million dollars in required reserves. Given this information, we can say First National Bank faces a required reserve ratio of ___ percent.

ten

The monetary base declines when

the Fed sells securities

Of the three players in the money supply process, most observers agree that the most important player is

the Federal Reserve System

The steepest increase in the currency ratio since 1892 occurred during

the Great Depression

In the model of the money supply process, the depositor's role in influencing the money supply is represented by

the currency holdings

In the model of the money supply process, the bank's role in influencing the money supply process is represented by

the excess reserve

The sum of the Fed's monetary liabilities and the U.S. Treasury's monetary liabilities is called

the monetary base

When the Fed purchases artwork to decorate the conference room at the Federal Reserve Bank of Kansas City,

the monetary base rises

An increase in Treasury deposits at the Fed causes

the monetary base to decrease

Models describing the determination of the money supply and the Fed's role in this process normally focus on ________ rather than ________, since Fed actions have a more predictable effect on the former.

the monetary base; reserves

An increase in the nonborrowed monetary base, everything else held constant, will cause

the money supple to rise

Everything else held constant, an increase in currency holdings will cause

the money supply to fall

Everything else held constant, an increase in the required reserve ratio on checkable deposits will cause

the money supply to fall

Subtracting borrowed reserves from the monetary base obtains

the nonborrowed monetary base

In the model of the money supply process, the Federal Reserve's role in influencing the money supply is represented by

the required reserve ratio, nonborrowed reserves, and borrowed reserves

Suppose that from a new checkable deposit, First National Bank holds eight million dollars on deposit with the Federal Reserve, one million dollars in required reserves, and faces a required reserve ratio of ten percent. Given this information, we can say First National Bank has ___ million dollars in vault cash.

two

Total reserves minus bank deposits with the Fed equals

vault cash

Excess reserves are equal to

vault cash plus deposits with Federal Reserve banks minus required reserves


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