MACRO - Chapter 15 & 16

The accompanying table gives data for a commercial bank or thrift. When the legal reserve ratio is 20 percent, the money-creating potential of the entire banking system is

$10,000

Refer to the graph. If the equilibrium interest rate is 4 percent, the supply of money must be

$100 billion

Suppose a commercial banking system has $240,000 of outstanding checkable deposits and actual reserves of $85,000. If the reserve ratio is 25 percent, the banking system can expand the supply of money by a maximum of

$100,000

Answer the question on the basis of the following information: For transactions, households and businesses want to hold an amount of money equal to one-half of nominal GDP. The table shows the amounts of money they want to hold as an asset at various interest rates. If nominal GDP is $200 and the interest rate is 6 percent, the total amount of money that households and businesses will want to hold is

$160

A commercial bank has $100 million in checkable-deposit liabilities and $12 million in actual reserves. The required reserve ratio is 10 percent. How big are the bank's excess reserves?

$2 million

Only one commercial bank in the banking system has an excess reserve, and its excess reserve is $400,000. This bank makes a new loan of $300,000 and keeps an excess reserve of $100,000. If the required reserve ratio for all banks is 12.5 percent, the potential expansion of the money supply from this new loan is

$2.4 million

If nominal GDP is $800 billion and, on average, each dollar is spent four times in the economy over a year, then the quantity of money demanded for transactions purposes will be

$200 billion

A goldsmith has $2 million of gold in his vaults. He issues $5 million in gold receipts. His gold holdings are what fraction of the paper money (gold receipts) he has issued?

2/5

The accompanying table gives data for a commercial bank or thrift. When the legal reserve ratio is 30 percent, the monetary multiplier is

3.33

If the reserve ratio is 15 percent and commercial bankers decide to hold additional excess reserves equal to 5 percent of any newly acquired checkable deposits, then the relevant monetary multiplier for the banking system will be

5

The accompanying balance sheet is for the First Federal Bank. Assume the required reserve ratio is 20 percent. If the original bank balance sheet was for the whole commercial banking system rather than a single bank, loans and deposits could have been expanded by a maximum of

$200,000

Refer to the accompanying balance sheet for the First National Bank. Assume the reserve ratio is 15 percent. First National Bank can make new loans of up to

$32,000

Suppose that Serendipity Bank has excess reserves of $14,000 and checkable deposits of $200,000. If the reserve ratio is 10 percent, what is the size of the bank's actual reserves?

$34,000 ($200,000*.10 + 14,000)

The accompanying balance sheet is for the First Federal Bank. Assume the required reserve ratio is 20 percent. This bank can safely expand its loans by a maximum of

$40,000

Answer the question on the basis of the given consolidated balance sheet of the commercial banking system. Assume that the reserve requirement is 20 percent. All figures are in billions. If the Fed increased the reserve requirement from 20 percent to 25 percent, a deficiency of reserves in the commercial banking system of _____ would occur and the monetary multiplier would fall to ____.

$50 billion; 4

A commercial bank has checkable-deposit liabilities of $500,000, reserves of $150,000, and a required reserve ratio of 20 percent. The amount by which a single commercial bank and the amount by which the banking system can increase loans are

$50,000 and $250,000, respectively.

The commercial banking system, because of a recent change in the required reserve ratio from 8 percent to 10 percent, finds that it is $50 million short of reserves. If it is unable to obtain any additional reserves, it must reduce deposits and money supply by

$500 million

Assume the required reserve ratio is 16.67 percent and that the commercial banking system has $110 million in excess reserves. The maximum amount of new money that the banking system could create is about

$660 million

Refer to the accompanying consolidated balance sheet for the commercial banking system. Assume the required reserve ratio is 10 percent. All figures are in billions. After the deposit of $10 billion of new currency, the maximum amount by which this commercial banking system can expand the supply of money by lending is

$90 billion

Refer to the accompanying table of information for the Moolah Bank, and assume that Moolah Bank is "loaned up." If it receives a $100 deposit of currency, the banking system of which Moolah is a part could expand loans by

$900

If the reserve ratio is 100 percent, the value of the monetary multiplier is

1

Refer to the accompanying table of information for the Moolah Bank. If Moolah Bank is legally "loaned up," the banking system's monetary multiplier must be

10

Suppose that the banking system in Canada has a required reserve ratio of 10 percent while the banking system in the United States has a required reserve ratio of 20 percent. In which country would $100 of initial excess reserves be able to cause a larger total amount of money creation?

Canada

Consider the following statement: "Whenever currency is deposited in a commercial bank, cash goes out of circulation and, as a result, the supply of money is reduced." Is this statement true or false?

False, because a checkable deposit in a commercial bank is also part of the money supply

The conduct of monetary policy in the United States is the main responsibility of the

Federal Reserve System.

Which line in the graph would best illustrate the asset demand for money curve?

Line 1

Which of the following would not be a consequence of negative interest rates?

People would want to put more money in banks

Which of the following Fed actions will increase bank lending?

The Fed lowers the discount rate from 4 percent to 2 percent

Suppose the target range for the federal funds rate is 2 to 2.5 percent but that the equilibrium federal funds rate is currently 2.3 percent. Assume that the equilibrium federal funds rate falls (rises) by 1 percent for each $90 billion in repo (reverse repo) bond transactions the Fed undertakes. If the Fed wishes to raise the equilibrium federal funds rate to the top end of the target range, will it repo or reverse repo bonds to non-bank financial firms? How much will it have to repo or reverse repo?

reverse repo ; $18 billion (2.5-2.3 = .2 * $90 billion)

Other things equal, if there is an increase in nominal GDP,

the interest rate will rise

A restrictive monetary policy is designed to shift the

aggregate demand curve leftward

When bond prices go up, interest rates go _______________

down

Answer the question on the basis of the given consolidated balance sheet of the commercial banking system. Assume that the reserve requirement is 20 percent. All figures are in billions. Suppose the Fed wants to increase the money supply by $1,000 billion to drive down interest rates and stimulate the economy. To accomplish this, it could lower the reserve requirement from 20 percent to

10 percent

The accompanying balance sheet is for the First Federal Bank. Assume the required reserve ratio is 20 percent. The monetary multiplier is

5.00

Refer to the accompanying consolidated balance sheet for the commercial banking system. Assume the required reserve ratio is 12 percent. All figures are in billions of dollars. If commercial bankers decide to hold additional excess reserves equal to 7 percent of any newly acquired deposits, then the relevant monetary multiplier for this banking system will be

5.26

If the required reserve ratio were 15 percent, the value of the monetary multiplier would be

6.67

Suppose that Big Bucks Bank has the simplified balance sheet shown below. The reserve ratio is 10 percent. a. What is the maximum amount of new loans that Big Bucks Bank can make? b. By how much has the supply of money changed? c. How will the bank's balance sheet appear after checks drawn for the entire amount of the new loans have been cleared against the bank? Show the new balance sheet in columns 2 and 2'. d. Using the original figures, revisit questions a, b, and c based on the assumption that the reserve ratio is now 5 percent. What is the maximum amount of new loans that this bank can make? Show in columns 3 and 3' (below) how the bank's balance sheet will appear after the bank has lent this additional amount. By how much has the supply of money changed? How will the bank's balance sheet appear after checks drawn for the entire amount of the new loans have been cleared against the bank? Show the new balance sheet in columns 4 and 4' in the table above.a.

Checkable deposits:100,000 Calculate Required Reserves:(.10 x 100,000 = 10,000) Actual Reserves:25,000 Calculate Excess Reserves: AR - RR = ER(25,000 - 10,000 = 15,000) What is the maximum amount of new loans that Big Bucks Bank can make? $15,000 By how much has the supply of money changed? $15,000 Checkable deposits:100,000 Calculate Required Reserves:(.05 x 100,000 = 5,000) Actual Reserves:25,000 Calculate Excess Reserves: AR - RR = ER(25,000 - 5,000 = 20,000) What is the maximum amount of new loans that this bank can make? $20,000 By how much has the supply of money changed? $20,000

If m equals the maximum number of new dollars that can be created for a single dollar of excess reserves and R equals the required reserve ratio, then for the banking system,

D = E ×m.

Refer to the table below and assume that the Fed's reserve ratio is 10 percent and the economy is in a severe recession. Also suppose that the commercial banks are hoarding all excess reserves (not lending them out) because of their fear of loan defaults. Finally, suppose that the Fed is highly concerned that the banks will suddenly lend out these excess reserves and possibly contribute to inflation once the economy begins to recover and confidence is restored. a. By how many percentage points would the Fed need to increase the reserve ratio to eliminate 46.43 percent of the excess reserves? b. What would be the size of the monetary multiplier before the change in the reserve ratio? What would be the size after the change? c. By how much would the lending potential of the banks decline as a result of the increase in the reserve ratio?

a. 15% (8,400(excess reserves) - 8,400*.4643 = 4,500 --> closest to 25% --> 25%-10%) b. 10 (1/.10) 4 (1/.25) c. 66,000 (10(monetary multiplier)*8,400(excess reserves) - 4(monetary multiplier)*4500(excess reserves))

Suppose a bond with no expiration date has a face value of $10,000 and annually pays a fixed amount of interest of $950. a. In the table provided below, calculate and enter either the interest rate that the bond would yield to a bond buyer at each of the bond prices listed below or the bond price at each of the interest yields shown. Bond Price Interest Yield, % $8,500 10.00% $10,500 $11,500 7.04% b. What generalization can be drawn from the completed table?

a. Bond Price Interest Yield, % 11.18% $9,500 9.05% 8.26% $13,494 b. Bond prices and interest rates are inversely related.

a. The basic objective of monetary policy is to b. A major strength of monetary policy is c. Monetary policy is easier to conduct than fiscal policy because

a. assist the economy in achieving a full-employment, noninflationary level of total output b. its speed and flexibility. c. monetary policy has a much shorter administrative lag than fiscal policy.

a. The banking system in the United States is referred to as a fractional reserve bank system because b. In a fractional reserve system, deposit insurance

a. banks hold a fraction of deposits in reserve. b. guarantees that depositors will always get their money, avoiding bank runs

a. The basic determinant of the transactions demand for money is the b. The basic determinant of the asset demand for money is the c. Total money demand is the d. The equilibrium interest rate is determined e. Suppose there is an increase in the total demand for money. In this case,

a. level of nominal GDP. b. interest rate c. horizontal sum of the transactions demand for money and the asset demand for money. d. at the intersection of the total demand for money curve and the supply of money curve e. the equilibrium interest rate will rise.

a. A single commercial bank can safely lend only an amount equal to its excess reserves, but the commercial banking system as a whole can lend by a multiple of its excess reserves because b. What is the monetary multiplier? c. The monetary multiplier is

a. one bank loses reserves to other banks, but the banking system as a whole does not. b. 1/reserve ratio c. inversely related to the reserve ratio.

a. An asset on a bank's balance sheet is something b. Net worth is equal to c. A balance sheet must always balance because the sum of d. The major assets on a commercial bank's balance sheet include e. The major claim on a commercial bank's balance sheet is

a. owned by the bank, whereas a liability is something owed by the bank b. Assets - liabilities c. assets must equal the sum of liabilities plus net worth d. reserves, securities, loans, and vault cash e. checkable deposits.

a. The federal funds rate is b. The federal funds rate is c. Changes in the federal funds rate and the prime interest rate closely track one another because

a. the interest rate that banks charge one another on overnight loans, whereas the prime interest rate is the interest rate that banks charge on loans to their most creditworthy customers b. lower than the prime interest rate because federal funds are loaned overnight. c. both rates are related to the relative scarcity or availability of reserves.

In the cause-effect chain linking changes in the banks' excess reserves and the resulting changes in output and employment in the economy,

an increase in the money supply will decrease the rate of interest.

Refer to the diagram of the market for money. The downward slope of the money demand curve Dm is best explained in terms of the

asset demand for money.

Answer the question on the basis of the information in the table. Suppose the legal reserve requirement is 10 percent and initially there are no excess reserves in the banking system. If the Fed wished to reduce the interest rate by 1 percentage point, it would

buy $10 of government bonds in the open market.

If the economy were encountering a severe recession, proper monetary and fiscal policies would call for

buying government securities, reducing the reserve ratio, reducing the discount rate, reducing interest paid on reserves held at Fed banks, and a budgetary deficit.

Consider the following statement: "When a commercial bank makes loans, it creates money; when loans are repaid, money is destroyed." This statement is

correct, because lending increases the money supply while the repayment reduces checkable deposits, which lowers the money supply.

If a portion of the loans extended by commercial banks is taken as cash rather than as checkable deposits, the maximum money-creating potential of the commercial banking system will

decrease

Refer to the graphs, in which the numbers in parentheses near the AD1, AD2, and AD3 labels indicate the level of investment spending associated with each curve. All numbers are in billions of dollars. The interest rate and the level of investment spending in the economy are at point D on the investment demand curve. To achieve the long-run goal of a noninflationary, full-employment output Qf in the economy, the Fed should try to

decrease aggregate demand by increasing the interest rate from 4 to 6 percent.

Refer to the table, in which investment is in billions. Suppose the Fed reduces the interest rate from 6 to 5 percent at a time when the investment demand declines from that shown by columns (1) and (2) to that shown by columns (1) and (3). As a result of these two occurrences, investment will

decrease by $10 billion.

A bond with no expiration has an original price of $10,000 and a fixed annual interest payment of $1,000. If the price of this bond increases by $2,500, the interest rate in effect will

decrease by 2 percentage points.

If the Board of Governors of the Federal Reserve System increases the legal reserve ratio, this change will

decrease the excess reserves of member banks and thus decrease the money supply.

Refer to the graphs, in which the numbers in parentheses near the AD1, AD2, and AD3 labels indicate the level of investment spending associated with each curve. All numbers are in billions of dollars. The interest rate and the level of investment spending in the economy are at point B on the investment demand curve. To achieve the long-run goal of a noninflationary, full-employment output Qf in the economy, the Fed should

decrease the interest rate from 8 to 6 percent.

Refer to the diagram of the market for money. Given Dm and Sm, an interest rate of i3 is not sustainable because the

demand for bonds in the bond market will rise and the interest rate will fall.

A single commercial bank in a multibank banking system can lend only an amount equal to its initial preloan ___________________

excess reserves

Maximum checkable-deposit expansion in the banking system is equal to

excess reserves times the monetary multiplier.

Refer to the accompanying consolidated balance sheet for the commercial banking system. Assume the required reserve ratio is 30 percent. All figures are in billions. If the commercial banking system actually loans the maximum amount it is able to lend,

excess reserves will be reduced to zero.

Which of the following is correct? When the Federal Reserve buys government securities from the public, the money supply

expands and commercial bank reserves increase.

Based on the given table, an increase in the money supply of $20 billion will cause the equilibrium interest rate to

fall by 2 percentage points.

If there is an increase in the nation's money supply, the interest rate will

fall, investment spending will rise, aggregate demand will shift right, and real GDP and the price level will rise.

When the Fed undertakes a "repo" transaction with a financial institution, the Fed in essence

grants a collateralized loan to the financial institution.

The impact of monetary policy on investment spending may be weakened

if the investment-demand curve shifts to the right during inflation and to the left during recession.

Other things equal, an increase in productivity will

increase both aggregate supply and real output.

Other things equal, an improvement in the expected rate of net profit would

increase investment spending, real GDP, and the price level.

Refer to the diagrams. The numbers in parentheses after the AD1, AD2, and AD3 labels indicate the levels of investment spending associated with each curve, respectively. All numbers are in billions of dollars. If the interest rate is 4 percent and the Fed desires to reduce or eliminate demand-pull inflation, it should

increase the interest rate from 4 percent to 6 percent.

A decrease in the reserve requirement causes the size of the monetary multiplier to

increase, the amount of excess reserves in the banking system to increase, and the money supply to increase.

A commercial bank sells a Treasury bond to the Federal Reserve for $100,000. Assume that all proceeds from this bond sale are lent out. The money supply:

increases by $100,000

The multiple by which the commercial banking system can expand the supply of money on the basis of excess reserves

is larger, the smaller the required reserve ratio.

The greater the required reserve ratio, the

lower is the monetary multiplier.

In an effort to stabilize the banking sector and keep banks lending, from October 2008 to September 2009, the Fed

lowered the federal funds target rate.

If m equals the maximum number of new dollars that can be created for a single dollar of excess reserves and R equals the required reserve ratio, then for the banking system,

m = R/1

The purchase and sale of government securities by the Fed is called

open-market operations

Which of the following tools of monetary policy is considered the most important on a day-to-day basis?

open-market operations

The two conflicting goals facing commercial banks are:

profit and liquidity

The interest rate will fall when the

quantity of money supplied exceeds the quantity of money demanded.

If the monetary authorities want to reduce the monetary multiplier, they should

raise the required reserve ratio.

Which of the following actions by the Fed most likely increase commercial bank lending?

reducing the interest paid on excess reserves held at the Fed

The equilibrium rate of interest in the market for money is determined by the intersection of the

supply-of-money curve and the total-demand-for-money curve.

If the Fed sells government securities to the general public in the open market,

the Fed gives the securities to the public; the public pays for the securities by writing checks that, when cleared, will decrease commercial bank reserves at the Fed.

The level of GDP, ceteris paribus, will tend to increase when

the Federal Reserve buys government securities in the open market.

Assuming that the Federal Reserve Banks sell $40 million in government securities to commercial banks and the reserve ratio is 20 percent, then the effect will be to reduce

the money supply by potentially $200 million.

When bankers hold excess reserves,

the money-creating potential of the banking system decreases.

The multiple by which the commercial banking system can increase the supply of money on the basis of each dollar of excess reserves is equal to

the reciprocal of the required reserve ratio.

The multiple by which the commercial banking system can expand the supply of money is equal to the reciprocal of

the reserve ratio

Other things equal, if the required reserve ratio was lowered,

the size of the monetary multiplier would increase.

The actual reason that banks must hold required reserves is:

to give the Fed control over the lending ability of commercial banks

Refer to the accompanying consolidated balance sheet for the commercial banking system. Assume the required reserve ratio is 12 percent. All figures are in billions of dollars. If the commercial banking system actually loans out the maximum amount it is able to lend, excess reserves will fall

to zero

When the interest rate falls, the

total amount of money demanded increases

The opportunity cost of holding money

varies directly with the interest rate.

Answer the question on the basis of the given consolidated balance sheet of the commercial banking system. Assume that the reserve requirement is 20 percent. All figures are in billions. The commercial banking system has excess reserves of

zero