macroeconomics ch 4

People use money as a medium of exchange when they: A) hold money to transfer purchasing power into the future. B) use money as a measure of economic transactions. C) use money to buy goods and services. D) hold money to gain power and esteem.

C) use money to buy goods and services

In a system with fractional-reserve banking: A) all banks must hold reserves equal to a fraction of their loans. B) no banks can make loans. C) the banking system completely controls the size of the money supply. D) all banks must hold reserves equal to a fraction of their deposits.

D) all banks must hold reserves equal to a fraction of their deposits

In a 100-percent-reserve banking system, banks: A) can increase the money supply. B) can decrease the money supply. C) can either increase or decrease the money supply. D) cannot affect the money supply.

D) cannot affect the money supply

When banks borrow through the Term Auction Facility, the price of borrowing is determined by: A) the Federal Reserve. B) a competitive bidding process. C) the difference between the discount rate and the interest rate on three-month Treasury securities. D) open-market operations.

B) a competitive bidding process

Banks create money in: A) a 100-percent-reserve banking system but not in a fractional-reserve banking system. B) a fractional-reserve banking system but not in a 100-percent-reserve banking system. C) both a 100-percent-reserve banking system and a fractional-reserve banking system. D) neither a 100-percent-reserve banking system nor a fractional-reserve banking system.

B) a fractional-reserve banking system but not in a 100-percent-reserve banking system

The reserve-deposit ratio is determined by: A) the Federal Reserve. B) business policies of banks and the laws regulating banks. C) preferences of households about the form of money they wish to hold. D) the Federal Deposit Insurance Corporation (FDIC).

B) business policies of banks and the laws regulating banks

In 1932, the U.S. government imposed a two-cent tax on checks written on deposits in bank accounts. This action would be expected to ______ the currency-deposit ratio and ______ the money supply. A) increase; increase B) increase; decrease C) decrease; increase D) decrease; decrease

B) increase; decrease

In a system with 100-percent-reserve banking: A) all banks must hold reserves equal to 100 percent of their loans. B) no banks can make loans. C) the banking system completely controls the size of the money supply. D) no banks can accept deposits.

B) no banks can make loans

Quantitative easing is most closely akin to: A) discount lending. B) open-market operations. C)fractional-reserve banking. D)capital requirements.

B) open-market operations

The amount of capital that banks are required to hold depends on the: A) amount of deposits held at a bank. B) riskiness of the bank's assets. C) reserve requirements set by the Fed. D) level of deposit insurance coverage.

B) riskiness of the bank's assets

In the United States, bank reserves consist of: A) currency and demand deposits. B) vault cash and deposits at the Federal Reserve. C) gold deposits at the Federal Reserve. D) the money supply.

B) vault cash and deposits at the Federal Reserve

All of the following are considered major functions of money except as a: A) medium of exchange. B) way to display wealth. C) unit of account. D) store of value.

B) way to display wealth

"Some economists believe that the large decline in the money supply was the primary cause of the Great Depression of the 1930s." Explain how this can be the case.

Banks defaulted on their deposits. This caused current-deposit ratios to fall, and hence there was a reduction in the money multiplier. So, despite the increase in the monetary base, the money supply was reduced further, making the depression worse.

Explain at least three factors that will affect the quantity of reserves that a bank wishes to hold.

Banks' demand for reserves will be affected by (1) legal reserve requirements, (2) the size and regularity of customer deposits and withdrawals, (3) the interest rate paid on reserves relative to alternative bank investments and (4) the number of bank failures and level of uncertainty in the economy

If currency held by the public equals $100 billion, reserves held by banks equal $50 billion, and bank deposits equal $500 billion, then the monetary base equals: A) $50 billion. B) $100 billion. C) $150 billion. D) $600 billion.

C) $150 billion

If the monetary base equals $400 billion and the money multiplier equals 2, then the money supply equals: A) $200 billion. B) $400 billion. C) $800 billion. D) $1,000 billion.

C) $800 billion

Economists use the term money to refer to: A) income. B) profits. C) assets used for transactions. D) earnings from labor.

C) assets used for transactions

The interest rate charged on loans by the Federal Reserve to banks is called the: A) federal funds rate. B) prime rate. C) discount rate. D) Treasury bill rate.

C) discount rate

John withdraws $100 from his checking account and deposits it in his saving account. What will be the effect of this transaction on different measures of money, i.e. C, M1, and M2?

Checking accounts are included in M1 and M2, but not in C. Saving accounts are included only in M2. So this transaction will have no effect on C and M2, but M1 will be reduced by $100

If the currency-deposit ratio equals 0.5 and the reserve-deposit ratio equals 0.1, then the money multiplier equals: A) 0.6. B) 1.67. C) 2.0. D) 2.5.

D) 2.5

The minimum amount of owners' equity in a bank mandated by regulators is called a _____ requirement. A) reserve B) margin C) liquidity D) capital

D) capital

Two ways for banks to borrow reserves from the Federal Reserve are through: A) the discount window and the Term Auction Facility. B) open-market operations and excess reserve swaps. C) decreasing the reserve-deposit ratio and decreasing the currency-deposit ratio. D) fractional-reserve banking and financial intermediation.

A) the discount window and the Term Auction Facility

Why does the Federal Reserve not have complete control over the size of the money supply? Give at least two reasons.

for a given monetary base, controlled by the Federal Reserve, the money supply also depends on: (1) the amount of currency the public chooses to hold relative to deposits, and (2) the amount of reserves that banks choose to hold relative to deposits. Therefore, actions of both the public and banks influence the size of the money supply in addition to the actions of the Fed

An important factor in the evolution of commodity money to fiat money is: A) a desire to reduce transaction costs. B) a desire to increase transaction costs. C) the fact that gold is no longer highly valued. D) a desire to use gold for jewelry.

A) a desire to reduce transaction costs

The quantitative easing policy conducted by the Federal Reserve between 2007 and 2011 resulted in a large increase in the monetary base that was partially offset by: A) a significant increase in the reserve-deposit ratio. B) a significant decrease in the reserve-deposit ratio. C) open-market purchases. D) open-market sales.

A) a significant increase in the reserve-deposit ratio

If the Federal Reserve wishes to increase the money supply, it should: A) decrease the discount rate. B) increase interest paid on reserves. C) sell government bonds. D) decrease the monetary base.

A) decrease the discount rate

In a fractional-reserve banking system, banks create money because: A) each dollar of reserves generates many dollars of demand deposits. B) banks have the legal authority to issue new currency. C) funds are transferred from households wishing to save to firms wishing to borrow. D) the wealth of the economy expands when borrowers undertake new debt obligations.

A) each dollar of reserves generates many dollars of demand deposits

Money that has no value other than as money is called ______ money. A) fiat B) intrinsic C) commodity D) government

A) flat

People use money as a store of value when they: A) hold money to transfer purchasing power into the future. B) use money as a measure of economic transactions. C) use money to buy goods and services. D) hold money to gain power and esteem.

A) hold money to transfer purchasing power into the future

If many banks fail, this is likely to: A) increase the ratio of currency to deposits. B) decrease the ratio of currency to deposits. C) have no effect on the ratio of currency to deposits. D) decrease the amount of currency in circulation, if the Fed takes no action.

A) increase the ratio of currency to deposits

When the Fed increases the interest rate paid on reserves, it: A) increases the reserve-deposit ratio (rr). B) decreases the reserve-deposit ratio (rr). C) increases the monetary base (B). D) decreases the monetary base (B).

A) increases the reserve-deposit ratio (rr)

The banking system creates: A) liquidity. B) wealth. C) reserves. D) currency.

A) liquidity

The most frequently used tool of monetary policy is: A) open-market operations. B) changes in the discount rate. C) changes in reserve requirements. D) changes in interest rate paid on reserves

A) open-market operations

When the Federal Reserve conducts an open-market purchase, it buys bonds from the: A) public. B) U.S. Treasury. C) Internal Revenue Service. D) International Monetary Fund.

A) public

If there is no currency and the proceeds of all loans are deposited somewhere in the banking system and if rr denotes the reserve-deposit ratio, then the total money supply is: A) reserves divided by rr. B) 1/rr. C) reserves times rr. D) reserves divided by (1 - rr).

A) reserves divided by rr

The size of monetary base is determined by: A) the Federal Reserve. B) the Federal Reserve and banks. C) preferences of households about the form of money they wish to hold. D) business policies of banks and the laws regulating banks.

A) the Federal Reserve

If many banks fail, this is likely to: A) cause surviving banks to lower their ratios of reserves to deposits. B) cause surviving banks to raise their ratios of reserves to deposits. C) have no effect on the ratio of reserves to deposits in surviving banks. D) cause surviving banks to hold less currency.

B) cause surviving banks to raise their ratios of reserves to deposits

In prisoner of war camps during World War II, the "currency" used was: A) chocolates. B) cigarettes. C) gold. D) IOUs.

B) cigarettes

Payment is deferred by using _______, but immediate access to funds occurs when using ______. A) currency; demand deposits B) credit cards; debit cards C) demand deposits; savings deposits D) debit cards; credit cards

B) credit cards; debit cards

The preferences of households determine the: A) reserve-deposit ratio. B) currency-deposit ratio. C) size of the monetary base. D) loan-deposit ratio.

B) currency-deposit ratio

The money supply will decrease if the: A) monetary base increases. B) currency-deposit ratio increases. C) discount rate decreases. D) reserve-deposit ratio decreases.

B) currency-deposit ratio increases

When the Fed decreases the interest rate paid on reserves, it: A) increases the reserve-deposit ratio (rr). B) decreases the reserve-deposit ratio (rr). C) increases the monetary base (B). D) decreases the monetary base (B).

B) decreases the reserve-deposit ratio (rr)

The use of fei as money on the island of Yap illustrates the idea of money as a social convention because: A) only fei physically in the possession of the owner is accepted in transactions. B) legal claim to a fei never seen by current generations was accepted in transactions. C) the central bank of Yap accepts fei in exchange for paper certificates. D) the government of Yap verifies the authenticity of fei used for transactions.

B) legal claim to a fei never seen by current generations was accepted in transactions

The use of borrowed funds to supplement existing funds for purposes of investment is called: A) arbitrage. B) leverage. C) convergence. D) intermediation.

B) leverage

In a fractional-reserve banking system, banks create money when they: A) accept deposits. B) make loans. C) hold reserves. D) exchange currency for deposits.

B) make loans

If the Federal Reserve increases the interest rate paid on reserves, banks will tend to hold _____ excess reserves, which will _____ the money multiplier. A) more; increase B) more; decrease C) fewer; increase D) fewer; decrease

B) more; decrease

To reduce the money supply, the Federal Reserve: A) buys government bonds. B) sells government bonds. C) creates demand deposits. D) destroys demand deposits.

B) sells government bonds

When the Fed decreases the interest rate paid on reserves, if the ratio of currency to deposits decreases also while the monetary base is constant, then: A) it cannot be determined whether the money supply increases or decreases. B) the money supply increases. C) the money supply decreases. D) the two changes exactly offset each other.

B) the money supply increases

When a pizza maker lists the price of a pizza as $10, this is an example of using money as a: A) store of value. B) unit of account. C) medium of exchange. D) flow of value.

B) unit of account

People use money as a unit of account when they: A) hold money to transfer purchasing power into the future. B) use money as a measure of economic transactions. C) use money to buy goods and services. D) hold money to gain power and esteem.

B) use money as a measure of economic transactions

A bank balance sheet consists of only the following items: Deposits $1,000 Reserves $100 Securities $400 Debt $500 Loans $2,000 What is the value of bank capital? A) -$1,000 B) +$500 C) +$1,000 D) +$1,500

C) +$1,000

The quantity of money in the United States is essentially controlled by the: A) President of the United States. B) Department of the Treasury. C) Federal Reserve. D) system of commercial banks.

C) Federal Reserve

In a country on a gold standard, the quantity of money is determined by the: A) government. B) central bank. C) amount of gold. D) buying and selling of government securities.

C) amount of gold

Checking account balances that are linked to debit cards are included in: A) M1. B) M2 only. C) both M1 and M2. D) neither M1 nor M2.

C) both M1 and M2

The value of banks' owners' equity is called bank: A) deposits. B) reserves. C) capital. D) liquidity.

C) capital

Demand deposits are funds held in: A) currency. B) certificates of deposit. C) checking accounts. D) money markets.

C) checking accounts

The money supply consists of: A) currency plus reserves. B) currency plus the monetary base. C) currency plus demand deposits. D) the monetary base plus demand deposits.

C) currency plus demand deposits

The more funds that the Federal Reserve makes available for banks to borrow through the Term Auction Facility, the _____ the monetary base and the _____ the money supply. A) smaller; smaller B) smaller; greater C) greater; greater D) greater; smaller

C) greater; greater

If the reserve-deposit ratio is less than one, and the monetary base increases by $1 million, then the money supply will: A) increase by $1 million. B) decrease by $1 million. C) increase by more than $1 million. D) decrease by more than $1 million.

C) increase by more $1 million

In the United States, the money supply is determined: A) only by the Fed. B) only by the behavior of individuals who hold money and of banks in which money is held. C) jointly by the Fed and by the behavior of individuals who hold money and of banks in which money is held. D) according to a constant-growth-rate rule.

C) jointly by the Fed and by the behavior of individuals who hold money and of banks in which money is held

The quantitative easing operations conducted by the Federal Reserve between 2007 and 2011 resulted in _____ increases in the monetary base and _____ increases in money supply. A) no; no B) large; larger C) large; smaller D) small; smaller

C) large; smaller

Assets of banks include: A) money market mutual funds. B) currency in the hands of the public. C) loans to customers. D) demand deposits.

C) loans to customers

The money supply will increase if the: A) currency-deposit ratio increases. B) reserve-deposit ratio increases. C) monetary base increases. D) discount rate increases.

C) monetary base increases

Open-market operations change the ______; changes in interest rate paid on reserves change the ______; and changes in the discount rate change the ______. A) monetary base; monetary base; monetary base B) money multiplier; money multiplier; money multiplier C) monetary base; money multiplier; monetary base D) money multiplier; monetary base; money multiplier

C) monetary base; money multiplier; monetary base

Macroeconomists call assets used to make transactions: A) real income. B) nominal income. C) money. D) consumption.

C) money

The currency-deposit ratio is determined by: A) the Federal Reserve. B) business policies of banks and the laws regulating banks. C) preferences of households about the form of money they wish to hold. D) the Federal Deposit Insurance Corporation (FDIC).

C) preferences of households about the form of money they wish to hold

To prevent banks from using excess reserves to make loans that would increase the money supply, the Federal Reserve could conduct open-market ______ and _____ the interest rate paid on bank reserves. A) purchases; raise B) purchases; lower C) sales; raise D) sales; lower

C) sales; raise

In the United States, monetary policy is controlled by: A) the President. B) the Congress. C) the Federal Reserve. D) the Treasury Department.

C) the Federal Reserve

High-powered money is another name for: A) currency. B) demand deposits. C) the monetary base. D) M2.

C) the monetary base

If you hear in the news that the Federal Reserve conducted open-market purchases, then you should expect ______ to increase. A) reserve requirements B) the discount rate C) the money supply D) the reserve-deposit ratio

C) the money supply

If the ratio of currency to deposits (cr) increases, while the ratio of reserves to deposits (rr) is constant and the monetary base (B) is constant, then: A) it cannot be determined whether the money supply increases or decreases. B) the money supply increases. C) the money supply decreases. D) the money supply does not change.

C) the money supply decreases

If the ratio of reserves to deposits (rr) increases, while the ratio of currency to deposits (cr) is constant and the monetary base (B) is constant, then: A) it cannot be determined whether the money supply increases or decreases. B) the money supply increases. C) the money supply decreases. D) the money supply does not change.

C) the money supply decreases

Financial intermediation is the process of: A) settling disputes between borrowers and lenders. B) advising corporations on whether to expand using debt or equity. C) transferring funds from savers to borrowers. D) converting from a barter economy to a money economy.

C) transferring funds from savers to borrowers

The central bank in the United States is the: A) Bank of America. B) U.S. Treasury. C) U.S. National Bank. D) Federal Reserve.

D) Federal Reserve

To make a trade in a barter economy requires: A) currency. B) a check. C) scrip. D) a double coincidence of wants.

D) a double coincidence of wants

Excess reserves are reserves that banks keep: A) in their vaults. B) at the central bank. C) to meet legal reserve requirements. D) above the legally required amount.

D) above the legally required amount

The difference between banks and other financial intermediaries is that only banks have the legal authority to: A) transfer funds from savers to borrowers. B) pay interest on debt obligations. C) manage portfolios of assets. D) create assets that are part of the money supply.

D) create assets that are part of the money supply

When the Fed makes an open-market sale, it: A) increases the money multiplier (m). B) increases the currency-deposit ratio (cr). C) increases the monetary base (B). D) decreases the monetary base (B).

D) decreases the monetary base (B)

Liabilities of banks include: A) reserves. B) currency in the hands of the public. C) loans to customers. D) demand deposits.

D) demand deposits

Bank reserves equal: A) gold kept in bank vaults. B) gold kept at the central bank. C) currency plus demand deposits. D) deposits that banks have received but have not lent out.

D) deposits that banks have received but have not lent out

Credit cards: A) are part of the M1 money supply. B) are part of the M2 money supply. C) are part of both the M1 and M2 money supply. D) do not affect the money supply.

D) do not affect the money supply

When the Fed increases the discount rate, it: A) increases the reserve to deposit ratio (rr). B) decreases the reserve to deposit ratio (rr). C) is likely to increase the monetary base (B) D) is likely to decrease the monetary base (B).

D) is likely to decrease the monetary base (B)

To increase the money multiplier, the Fed can: A) conduct open-market purchases. B) conduct open-market sales. C) raise the interest rate paid on reserves. D) lower the interest rate paid on reserves.

D) lower the interest paid on reserves

Money's liquidity refers to the ease with which: A) coins can be melted down. B) illegally obtained money can be laundered. C) loans can be floated. D) money can be converted into goods and services.

D) money can be converted into goods and services

All of the following assets are included in M1 except: A) currency. B) demand deposits. C) traveler's checks. D) money market deposit accounts.

D) money market deposit accounts

Credit card balances are included in: A) M1 only. B) M2 only. C) both M1 and M2. D) neither M1 nor M2.

D) neither M1 nor M2

For borrowing from the discount window, the Fed sets the _____ of borrowing, compared to borrowing using the Term Auction Facility, where the Fed sets the _____ of borrowing. A) maximum quantity; minimum quantity B) minimum price; maximum price C) quantity; price D) price; quantity

D) price; quantity

In a 100-percent-reserve banking system, if a customer deposits $100 of currency into a bank, then the money supply: A) increases by $100. B) decreases by $100. C) increases by more than $100. D) remains the same.

D) remains the same

Between August 1929 and March 1933, the money supply fell 28 percent. At that time the monetary base ______ and the currency-deposit and reserve-deposit ratios both ______. A) fell; fell B) fell; rose C) rose; fell D) rose; rose

D) rose; rose

If the monetary base fell and the currency-deposit ratio rose but the reserve-deposit ratio remained the same, then: A) the money supply would fall, but not by as much as it would have fallen if the reserve-deposit ratio had risen. B) the money supply would fall, but not by as much as it would have fallen if the reserve-deposit ratio had fallen. C) the money supply would fall more than it would have fallen if the reserve-deposit ratio had risen. D) it is impossible to be certain whether the money supply would fall or rise in this case.

A) the money supply would fall, but not by as much as it would have fallen if the reserve-deposit ratio had risen

If the monetary base is denoted by B, rr is the ratio of reserves to deposits, and cr is the ratio of currency to deposits, then the money supply is equal to ______ divided by ______ multiplied by B. A) (rr + 1); (rr + cr) B) (cr + 1); (cr + rr) C) (rr + cr); (rr + 1) D) (rr + cr); (cr + 1)

B) (cr+1); (cr+rr)

Open-market operations are: A) Commerce Department efforts to open foreign markets to international trade. B) Federal Reserve purchases and sales of government bonds. C) Securities and Exchange Commission rules requiring open disclosure of market trades. D) Treasury Department purchases and sales of the U.S. gold stock.

B) Federal Reserve purchases and sales of government bonds

Money market mutual fund shares are included in: A) M1 only. B) M2 only. C) both M1 and M2. D) neither M1 nor M2.

B) M2 only

The Federal Reserve's tools to control the money supply include: open-market operations, the discount rate, and interest payments on reserves. a. How should each instrument be changed if the Fed wishes to decrease the money supply? b. Will the change affect the monetary base and/or the money multiplier?

a. the Fed would conduct open-market sales, raise the discount rate, and raise interest paid on reserves b. open-market operations and discount rate changes affect the monetary base. Changing payments on reserves alters the money multiplier

To increase the money supply, the Federal Reserve: A) buys government bonds. B) sells government bonds. C) buys corporate stocks. D) sells corporate stocks.

A) buy government bonds

A country that is on a gold standard primarily uses: A) commodity money. B) fiat money. C) credit money. D) the barter system.

A) commodity money

To increase the monetary base, the Fed can: A) conduct open-market purchases. B) conduct open-market sales. C) raise the interest rate paid on reserves. D) lower the required reserve ratio.

A) conduct open-market purchases

The monetary base consists of: A) currency held by the public, plus reserves held by banks. B) all outstanding currency, plus reserves held by banks. C) all outstanding currency, plus demand deposits. D) all bank reserves.

A) currency held by the public

Compared to typical open-market operations, when pursuing quantitative easing, Federal Reserve purchases tended to be _____ securities. A) safer and shorter-term B) tax-favored and foreign C) smaller-denomination and higher-grade D) riskier and longer-term

D) riskier and loner-term

The ratio of the money supply to the monetary base is called: A) the currency-deposit ratio. B) the reserve-deposit ratio. C) high-powered money. D) the money multiplier.

D) the money multiplier

Currency equals: A) M1. B) the sum of funds in checking accounts. C) the sum of checking accounts and paper money. D) the sum of coins and paper money.

D) the sum of coins and paper money

The development of fiat money is quite perplexing, as people began to value something that is intrinsically useless. Explain why fiat money came into use.

Fiat money fulfills all the three purposes of money better than other types of money. Fiat money provides a store of value, i.e. it can be stored to be used in future. It has a unit of account, e.g., dollar, euro, etc. And it is a widely accepted medium of exchange.

Construct a bank balance sheet with the following items: reserves, deposits, loans, securities, capital, and debt. Choose values so that the reserve-deposit ratio is 10 percent and the leverage ratio is 10. Give an example of a change in asset values that would push bank capital to zero. What happens when bank capital is gone?

Many values are possible in the balance sheet, but (1) assets should equal liabilities and net worth, (2) items should be correctly categorized as assets or liabilities, (3) the ratio of reserves to deposits should be 10 percent, and (4) the ratio of assets to capital should be 10, as in the example below. If asset values fall by 10 percent of total assets (for example, if loans fall from 100,000 to 85,000 in the example below), then capital equals zero. When capital is exhausted, the bank will not have sufficient resources to pay off depositors or debt holders if there is a further decline in asset values.

The monetary base of Moneyland is $500 million. The current-deposit ratio (cr) is 0.2 and reserve-deposit ratio (rr) is 0.2. Calculate the money multiplier and money supply.

Money multiplier = (1 + cr) / (rr + cr) = 1.2/0.4 = 3 Money supply = money multiplier x monetary base Money supply = (3)(500) = $1500 million

The Federal Reserve wants to increase the money supply by printing and distributing 1 million dollars worth of currency notes. What will be the actual increase in money supply if the public holds one fourth of the currency as cash, and deposits rest of the money in banks that hold 5 percent of their deposits as reserves?

Money multiplier = 1 / reserve-deposit ratio = 1/.05 = 20. As 0.25 million will be held by the public and 0.75 million will be deposited in the bank, the money deposited in banks will increase the money supply by ((.75)(20))($5 million). The net increase in money supply will be = .25 + 15 = $15.25 million.

Why can the Federal Reserve not control the money supply with complete accuracy?

The Federal Reserve cannot completely control the money supply because it has no control on how much money the public will hold as currency and not deposit in banks. Another reason is that it cannot control how much reserve banks will keep against the deposits they have.

How do credit card transactions affect the measurement of money?

When a credit card is used, there is no actual payment made by the credit card holder at the moment, since this payment is deferred. So this transaction does not affect any measure of money. Only when a credit card payment is made to the bank is the transaction included in different measures of money.

How much effect do the purchase and sale of bonds through open-market operations have on the money supply?

When the Federal Reserve purchases bonds through open-market operations, it increases the monetary base and the money supply, while the selling of the bonds to the public decreases the monetary base and money supply

As the 2008-2009 financial crisis unfolded, one major U.S. bank had a leverage ratio of 54. In Canada regulators put a ceiling on bank leverage ratios of 20. Compare the change in asset values that would push the capital in the U.S. bank to zero with the change required to eliminate capital in a Canadian bank at the ceiling-leverage ratio. What is the implication of the differences in maximum leverage ratios for the stability of the banking system?

With a leverage ratio of 54, a 1.85 percent fall in asset values wipes out capital, while with a leverage ratio of 20, a 5 percent fall in asset values wipes out capital. The higher leverage ratio of the US bank makes it much more susceptible to losing capital and being able to pay off depositors. The higher leverage ratio puts the US system at greater risk for bank runs, bank failures, and greater instability

As the U.S. economy approached the millennium, January 1, 2000, many people cautiously began to hold larger than normal quantities of currency as protection against a possible disruption of banking services that could result from computer glitches. a. How did this greater preference for currency affect the money supply? b. How could the Federal Reserve offset such an increase in currency preferences?

a. the greater preference for currency increased the currency-deposit ratio, which reduces money multiplier and reduced the money supply for a given monetary base b. the Fed could engage in open-market purchases to increase the monetary base to offset decline in the money multiplier

Economists occasionally speak of "helicopter money" as a short-hand approach to explaining increases in the money supply. Suppose the Chairman of the Federal Reserve flies over the country in a helicopter dropping 10,000,000 in newly printed $100 bills (a total of $1 billion). By how much will the money supply increase if, holding everything else constant: a. all of the new bills are held by the public? b. all of the new bills are deposited in banks that choose to hold 10 percent of their deposits as reserves (and no one in the economy holds any currency)? c. all of the new bills are deposited in banks that practice 100-percent-reserve banking? d. people in the economy hold half of their money as currency and half as deposits, while banks choose to hold 10 percent of their deposits as reserves?

a. $1 billion b. $10 billion c. $1 billion d. $5.5 billion

Some economists have advocated replacing government deposit insurance with 100-percent- reserve banking. Under this plan, banks would hold all deposits as reserves. Deposit insurance would no longer be necessary, because banks would always have the reserves to meet customer withdrawals. a. What would happen to the money supply (defined as currency and bank deposits) in the transition from fractional-reserve to 100-percent-reserve, if this plan were implemented, holding other factors constant? b. What will be the value of the money multiplier?

a. In the process of moving fractional-reserve to 100-percent-reserve banking, the money supply would have to contract if the monetary base remained unchanged. Deposits will contract to equal the quantity of reserves b. the money multiplier equals 1=[(1+cr)/(1+cr)]

What is the effect of the following on the money supply? a. Increase in currency-deposit ratio, keeping all other things constant b. Decrease in reserve-deposit ratio, keeping all other things constant

a. This will decrease the money multiplier and so the money supply will also decrease. b. This will increase the money multiplier and so the money supply will also increase.

A macroeconomist threatens to call the Secret Service to have Mr. Biggy Rich arrested for counterfeiting because Mr. Rich claims he "makes a lot of money." a. Carefully explain why the macroeconomist is making this threat based on the macroeconomic definition of money. Be sure to explain the macroeconomic functions of money. b. Suggest an alternative phrase that Mr. Rich can use that will not result in a charge of counterfeiting.

a. money consists of the assets used to make transactions. Money serves as a store of value of account and medium of exchange. In most fiat money economies, the government maintains a monopoly over the supply of money. If Mr. Rich is "making money" increasing the supply of money, this is counterfeiting and is illegal b. Mr. Rich could say he "earns a large income" or "is very wealthy" or "has a lot of money" or "makes big profits"

Assume that the monetary base (B) is $100 billion, the reserve-deposit ratio (rr) is 0.1, and the currency-deposit ratio (cr) is 0.1. a. What is the money supply? b. If rr changes to 0.2, but cr is 0.1 and B is unchanged, what is the money supply? c. If rr is 0.1 and cr is 0.2, but B is unchanged, what is the money supply?

a. the money supply is $550 billion b. the money supply is $366.67 billion c. the money supply is $400 billion