Economics-Ch14

Who sets the Federal Funds Rate?

Member banks

Which of the following is NOT true?

The Federal Reserve sets the federal funds rate it charges member banks for loans between member banks to cover overages of reserved requirements.

If a recession was beginning, which of the following actions would the Fed most likely take?

To reduce the impact of a recession, the Fed would most likely buy large amounts of government securities and lower the reserve requirement.

Whichof the following is NOT true?

The higher the reserve requirement goes, the greater the expansion of the money supply from a given injection of new reserves. If the reserve requirement was 100%, the impact of new reserves would have its maximum effect.

Which of the following reserve requirements empowers the Fed to have the greatest impact on the money supply by purchasing securities?

5% reserve requirement.

Which tool is most commonly used by the Fed to manipulate the money supply?

Bond buying through the F.O.M.C.

Which of the following is NOT true about Excess Reserves?

Excess reserves must be held by banks in the form of cash or credits at the Federal Reserve Banks.

This interest rate is charged by member banks of the FED to each other for overnight loans to cover shortages in reserve requirements.

Federal Funds Rate

Which federal agency or institution has authority to manage the money supply?

Federal Reserve System

How do banks "create money"?

New injections of reserves into the banking system empower banks to expand the money supply by an amount much greater than the reserves. The simple money multiplier multiplies the amount the money supply expands well beyond the injection of the new reserves. If the required reserve ratio is 5% and the Fed injects $5 billion of new reserves into the commercial banking system, the money supply increases by $100 billion.

Which of the following is NOT a method by which the Federal Reserve (Fed) expands or contracts the money supply?

The Fed regulates the money supply through changes in requirements concerning fiat and commodity money.

If the Fed fears that a recession has just begun or is about to unfold, what action is it likely to take?

The Fed will buy large amounts of government securities from banks and other financial institutions which will create a massive increase in excess reserves throughout the banking system. In response, the incidence of inter-bank loans will decrease, leading to a decrease in the federal funds rate. A lower federal funds rate leads to lower interest rates throughout the banking system. Lower interest rates boost borrowing by people and firms, which increases investment, jobs, incomes and output.

Which of the following correctly describes how the Federal Funds Rate is set?

The Federal Funds Rate is NOT set by the Fed but rather results from the rate banks charge each other for short term loans, usually overnight loans.

Which of the following is NOT true?

The Federal Reserve sets the Federal Funds Rate by sending a fax to all member banks first thing each work day morning.

Which of the following is the correct definition and description of the "federal funds rate?"

The federal funds rate is the rate that member banks charge each other for very short term loans, usually overnight.

Which of the following correctly identifies the impact on the money supply when the Fed sells massive amounts of government securities?

The money supply contracts.

Which of the following is NOT correct about Required Reserve Ratio?

The required reserve ratio is set by individual banks and rarely is less than 90%.

What is the relationship between the required reserve ratio and the simple money multiplier?

The simple money multiplier is 1/r, where "r" is the required reserve ratio. If the required reserve ratio is 50%, the simple money multiplier is 2. If the required reserve ratio is 5%, the simple money multiplier is 20. The lower the reserve requirement, the greater the multiplier.

What is the correct sequence of effects when the FED buys large volumes of government bonds from banks and other financial institutions?

When the FOMC buys government securities, it expands the money supply which serves to increase excess reserves in banks, which reduces the demand for interbanks loans, which then reduces the federal funds rate. A lower federal funds rate leads to lower interest rates throughout the commercial banking system. Lower interest rates lead to more borrowing by people and firms, which leads to more investment, more jobs and higher incomes.

Which of the following is NOT true about the impact of new injections of money into the banking system by the Fed?

When the FOMC sells government securities, it injects fresh reserves into the commercial banking system. The impact of the new reserves on the total money supply is limited to the value of the new reserves.