Chapter 14: The Money Supply Process

If a bank receives $100 in reserves but decides not to lend any out how much deposit creation takes place for the entire banking system?

$0

under 100% reserve banking, the money multiplier will be

1

"The Fed can perfectly control the amount of the monetary base, but has less control over the compositions of the monetary base" Is this true, false or uncertain?

False, since the Fed cannot control the amount of discount lending to financial institutions, it does not have perfect control over the amount of reserves in the banking system and hence the monetary base

"The Fed can perfectly control the amount of reserves in the system" Is this statement true, false or uncertain?

False. A shift from deposits to currency will affect the amount of reserves, and since other players are involved in this process, the Fed ultimately cannot control the level of reserves in the system

Why might the procyclical behavior of interest rates (rising during business cycle expansions and falling during recessions) lead to procyclical movements in the money supply?

The excess reserves ratio e falls with rising interest rates and the money supply rises when e falls. Discount loan borrowing is positively related to interest rates and the money supply is positively related to the level of discount loans form the Fed

As financial intermediaries, banks:

accept deposits and make loans

The Fed provides an emergency loan to a bank for $1,000,000

assets and liabilities for both banks and the Fed increase

Loans that the Fed makes to banks appear on the balance sheet as part of it s _________, and deposits made by banks appear on the Fed's balance sheet as part of its _____________

assets; liabilities

By definition, when the Fed conducts an open market purchase, it is:

buying bonds and increasing the quantity of reserves

The Federal Reserve System is the ___________ for the US, which is defined as the government agency responsible for ____________

central bank; the conduct of monetary policy

If a bank sells $10 million of bonds to the Fed to pay back $10 million on the loan it owes what will be the effect on the level of checkable deposits? rr=10%

checkable deposits do not change

If you decide to hold $100 less cash than usual and therefore deposit $100 more cash in the bank, what effect will this have on checkable deposits in the banking system if the rest of the public keeps its holding of currency constant?

checkable deposits increase by $1,000

Suppose that the Fed buys $1 million of bonds from the First National Bank. If this bank and all other banks use the resulting increase in reserves to purchase securities only and not to make loans, what will happen to checkable deposits? Assuming the rr is 10%

checkable deposits increase by $10 million (1/.10 * 1 million)

What happens to checkable deposits in the banking system when the Fed lends an additional $1 million to the First National Bank, assuming the rr=10%

checkable deposits rise by $10 million

the monetary base is comprise of:

currency in circulation and reserves

What happens to checkable deposits in the banking system when the Fed sells $2 million of bonds to the First National Bank assuming that the required reserve ratio on checkable deposits is 10%.

decline by $20 million

Reserves are:

deposits at the Fed plus vault cash, assets for banks, liabilities for the Fed

Two primary assets of the Federal Reserve System are:

government securities and loans to commercial banks

If the economy starts to boom and loan demand picks up, what do you predict will happen to the money supply?

it will increase

If a bank depositor withdraws $1,000 of currency from an account, what happens to reserves, checkable deposits, and the monetary base? rr=10%

reserves fall by 1,000, checkable deposits fall by 10,000 and the monetary base remains unchanged

If the central bank sells 1 million of bonds and banks reduce their borrowings from their central bank by 1 million, what will happen tot he money supply?

the monetary base would fall by 2 million, leading to a decline in the money supply

Predict what will happen to the money supply if there is a sharp rise in the currency ratio

the money supply falls

The Fed buys $100 million of bonds from the public and also lowers the reserve requirement r. What will happen to the money supply?

the money supply will increase

what would happen to the money supply if expected inflation suddenly increased?

the money supply will increase

The players in the money supply process include all of the following except:

the treasury

During the great depression and recent financial crisis the money multiplier decline significantly but the money supply decreased by 25% during the depression but increased by more than 20% during the crisis. What explains the difference in outcome

there was a significant increase in the monetary base during the recent financial crisis

The money multiplier is necessarily greater than 1. true or flase?

true, because in reality, the required and excess reserve ratios typically add up to less than one