ECN Monetary Policy
Suppose that a bank with no excess reserves receives a deposit into a checking account of $5000 in currency. If the required reserve is 0.11, what is the maximum amount a bank can lend out?
$4450 1-0.11=0.89 0.89x$5000=$4450
Monetary policy refers to the actions the
Federal reserve takes to manage the money supply and interest rates to pursue its economic objectives
Which of the Fed's traditional monetary policy tools was the most important?
Open market operations
If the Fed cuts the required reserve ratio from 14% to 12%, calculate the change in the value of the simple deposit multiplier.
The simple multiplier would increase by 1.19. 1/0.14=7.14 1/0.12=8.33 8.33-7.14=1.19
If the Fed's policy is contractionary, it will
Use open market operations to sell treasury bills
What is a simple deposit multiplier?
the ratio of the amount of deposits created by banks to the amount of new reserves
If the Fed wished to decrease the money supply, it could
Lower the interest rate
Suppose that a bank with no excess reserves receives a deposit into a checking account of $27,000 in currency. If the required reserve is 0.15, what is the maximum amount a bank can lend out?
$22950 1-0.15=0.85 0.85x$27000=$22950
If the required reserve ratio is 5%, what is the value of the simple deposit multiplier?
20 1/0.05=20
Monetary policy is conducted by the U.S. treasury department
False
The Fed's monetary policy tools
Have allowed the Fed to achieve its monetary policy goals indirectly.
What is the aim of monetary policy?
Advance the economic well-being of the country's citizens.
Assuming a required reserve ratio of 10% and the Fed purchased $1 million worth of mortgage-backed securities, make use of the simple deposit multiplier to determine by how much checking deposits would change.
Increase by $10 million 1/0.10=10 10x1,000,000=10,000,000
The Fed can implement open market operations
More rapidly than either changes in the discount rate or changes in reserve requirements
The most commonly used means of changing the money supply is
Open market operations
Before the financial crisis of 2007-2009, what were the monetary policy tools the Fed relied on?
Open market operations, reserve requirements, and discount policy
Which of the following are goals of the monetary policy?
Price stability, economic growth, and high employment
What is meant by economic well-being? Economic well-being is typically determined by the
Quantity and quality of goods and services that individuals can enjoy.
How can the Fed increase banks holdings of reserves and potentially lower the money supply?
Raising interest rates
What do reserve requirements imply?
Requiring banks to hold a fraction of checkable deposits as vault cash or deposits with the Fed
Open market sales shrink ———, thereby decreasing ———.
The monetary base; the money supply
Monetary policy refers to the actions the Federal Reserve takes to manage
The money supply and interest rates to pursue its economic objectives
One of the monetary policy goals of the Federal Reserve is price stability.
True
