Chapter 16: The Monetary System
Suppose Joe changes his $1,000 demand deposit from Bank A to Bank B. If the reserve requirement is 10 percent, what is the potential change in demand deposits as a result of Joe's action?
$0
A bank has capital of $200 and a leverage ratio of 5. If the value of the bank's assets declines by 10 percent, then its capital will be reduced to
$100
If the reserve ratio is ¼ and the central bank increases the quantity of reserves in the banking system by $120, the money supply increases by
$480
suppose the Fed purchases a $1,000 government bond from you. If you deposit the entire $1,000 in your bank, what is the total potential change in the money supply as a result of the Fed's action if reserve requirements are 20 percent?
$5000
If the reserve ratio is 25 percent, the value of the money multiplier is
4
Which of the following statements about a bank's balance sheet is true? a. An increase in a bank's capital increases its leverage ratio. b. Assets minus liabilities equals owner's equity or capital. c. The largest liability on the bank's balance sheet is its loans. d. Because a bank is highly leveraged, a large change in the value of its assets has little impact on its capital. e. None of the above is correct.
Assets minus liabilities equals owner's equity or capital.
Which of the following is not a function of money?
Protection against inflation
fractional reserve banking
a banking system in which banks hold only a fraction of deposits as reserves
Which of the following actions by the Fed would tend to increase the money supply?
a decrease in reserve requirements
capital requirement
a government regulation specifying a minimum amount of bank capital
lender of last resort
a lender to those who cannot borrow anywhere else
Which of the following is NOT true about the Federal Reserve? a. It was established by the U.S. Constitution. b. It conducts open-market operations. c. It lends to banks. d. It regulates the banking system.
a. It was established by the U.S. Constitution.
Central bank
an institution designed to oversee the banking system and regulate the quantity of money in the economy
medium of exchange
an item that buyers give to sellers when they want to purchase goods and services
Store of value
an item that people can use to transfer purchasing power from the present to the future
Which of the following statements is true? a. The primary tool of monetary policy is the reserve requirement. b. When the Fed sells government bonds, the money supply decreases. c. The FOMC meets once per year to discuss monetary policy. d. The Federal Reserve was created in 1871 in response to the Civil War.
b. When the Fed sells government bonds, the money supply decreases.
Demand Deposits
balances in bank accounts that depositors can access on demand by writing a check
If the Fed wants to increase the money supply, it can
buy bonds in open-market operations.
Which of the following policy combinations would consistently work to increase the money supply?
buy government bonds, decrease reserve requirements, decrease the discount rate
The money stock includes all of the following EXCEPT a. bank balances accessible with debit cards. b. metal coins. c. lines of credit accessible with credit cards. d. paper currency.
c. lines of credit accessible with credit cards.
The M1 money supply is composed of
currency, demand deposits, traveler's checks, and other checkable accounts.
Fiat money is
d. a type of money set by government decree.
If the Fed raises the interest rate it pays on reserves, it will ________ the money supply by increasing ________.
decrease, excess reserves
Required reserves of banks are a fixed percentage of their
deposits
Reserves
deposits that banks have received but have not loaned out
Commodity money
has intrinsic value.
Isabella takes $100 of currency from her wallet and deposits it into her checking account. If the bank adds the entire $100 to reserves, the money supply ________, but if the bank lends out some of the $100, the money supply ________.
is unchanged, increases
intrinsic value
means that the item would have value even if it were not used as money
commodity money
money that takes the form of a commodity with intrinsic value
fiat money
money without intrinsic value that is used as money by government decree
In a system of fractional-reserve banking, even without any action by the central bank, the money supply declines if households choose to hold ________ currency or if banks choose to hold ________ excess reserves.
more, more
The Fed's tools of monetary control are
open-market operations, lending to banks, reserve requirements, and paying interest on reserves
An example of fiat money is
paper dollars
Which of the following policy actions by the Fed is likely to increase the money supply?
reducing reserve requirements
reserve requirement
regulations on the minimum amount of reserves that banks must hold against deposits
To insulate the Federal Reserve from political pressure,
the Board of Governors are appointed to fourteen-year terms.
money multiplier
the amount of money the banking system generates with each dollar of reserves
Federal Reserve (FED)
the central bank of the United States, often called the FED
Liquidity
the ease with which an asset can be converted into the economy's medium of exchange
reserve ratio
the fraction of deposits that banks hold as reserves
federal funds rate
the interest rate at which banks make overnight loans to one another
The discount rate is
the interest rate the Fed charges on loans to banks.
If banks increase their holdings of excess reserves
the money multiplier and the money supply decrease.
A decrease in the reserve requirement causes
the money multiplier to rise.
Suppose all banks maintain a 100 percent reserve ratio. If an individual deposits $1,000 of currency in a bank,
the money supply is unaffected.
Currency
the paper bills and coins in the hands of the public
open market operations
the purchase and sale of U.S. government bonds by the Fed
money supply
the quantity of money available in the economy
Leverage ratio
the ratio of assets to bank capital
Bank Capital
the resources a bank's owners have put into the institution
Money
the set of assets in an economy that people regularly use to buy goods and services from other people
monetary policy
the setting of the money supply by policymakers in the central bank
Leverage
the use of borrowed money to supplement existing funds for purposes of investment
Unit of account
the yardstick people use to post prices and record debts
The Board of Governors of the Federal Reserve System consists of
up to seven members appointed by the president.
If the Fed engages in an open-market purchase, and at the same time, it raises reserve requirements,
we cannot be certain what will happen to the money supply.
