3311 Ch 14 Practice Questions
The First National Bank receives an extra $100 of reserves but decides not to lend any of these reserves. How much deposit creation takes place for the entire banking system?
$0
If the required reserve ratio is 0.03, currency in circulation is $700 billion, deposits are $1000 billion, and excess reserves is $1 billion, then the money multiplier is equal to
(1+(700/1000))/(0.3+(1/1000)+(700/1000))
An open market sale of a $100 government security to a bank results to the T-account entries for the Federal Reserve of
-$100 in securities and -$100 in reserves
Reserves are
-Deposits at the Fed plus vault cash -assets for banks -liabilities for the Fed All of the above are correct.
Under 100% reserve banking, the money multiplier will be:
1
The monetary base is affected by:
All of the above are correct.
By definition, when the Fed conducts an open market purchase, it is:
Both B and C are correct. -buying bonds -increasing the quantity of reserves
If a bank sells $10 million of bonds to the Fed to pay back $10 million on the loan it owes, what will be the effect on the level of checkable deposits? Assume that the required reserve ratio on checkable deposits is 10%, banks do not hold any excess reserves, and the public's holdings of currency do not change.
Checkable deposits do not change.
If you decide to hold $100 less cash than usual and therefore deposit $100 more cash in the bank, what effect will this have on checkable deposits in the banking system if the rest of the public keeps its holdings of currency constant? Assume the required reserve ratio is 10% and banks do not hold any excess reserves.
Checkable deposits increase by $1,000.
Suppose that the Fed buys $1 million of bonds from the First National Bank. If the First National Bank and all other banks use the resulting increase in reserves to purchase securities only and not to make loans, what will happen to checkable deposits? Assume the required reserve ratio is 10 percent.
Checkable deposits increase by $10 million.
Which of the following players can affect the money supply by its holdings of currency versus currency versus deposits?
Depositors
The currency that is physically held by banks is known as vault cash. The interest rate charged for borrowed interest rate charged for borrowed reserves is known as the
Discount rate
When a bank pays off its borrowings from the Fed, the amount of reserves in the banking system
Drops
Reserves that the banks choose to hold in addition to the amount required is known as
Excess reserves
"The Fed can perfectly control the amount of reserves in the system." Is this statement true, false, or uncertain? Explain your answer.
False. A shift from deposits to currency will affect the amount of reserves, and since other players are involved in this process, the Fed ultimately cannot control the level of reserves in the system.
"The Fed can perfectly control the amount of the monetary base, but has less control over the composition of the monetary base." Is this statement true, false, or uncertain? Explain your answer.
False. Since the Fed cannot control the amount of discount lending to financial institutions, it does not have perfect control over the amount of reserves in the banking system and hence the monetary base.
In the United States, the central bank is known as the ____. Of the three players, the _______ is the most important.
Fed Central bank
If there is a sharp rise in the currency ratio, then people begin to hold _____ deposits relative to currency and the level of multiple deposit expansion _____. This causes the money multiplier to _____,which in turn causes the money supply to ________.
Fewer; decreases fall; decrease
In October 2008, the Federal Reserve began paying interest on the amount of excess reserves held by banks. How, if at all, might this affect the multiplier process and the money supply?
Holding the monetary base constant, paying interest on reserves should raise the excess reserves ratio, which reduces the money multiplier and reduces the money supply.
Following the financial crisis in 2008, the Federal Reserve began injecting the banking system with massive amounts of liquidity, and at the same time, very little lending occurred. As a result, the M1 money multiplier was below 1 for most of the time from October 2008 through 2011. How does this relate to your answer to the previous step?
If large amounts of reserves enter the banking system but are held as excess reserves, it is possible for the money multiplier to fall below one.
what effect might a financial panic have on the money multiplier and the money supply? Why?
In a financial panic, you would expect the money multiplier to decrease and the money supply to decrease, which would cause the excess reserves ratio to increase. Thus depositors are likely to increase their holdings of currency.
If Jane Brown closes her account at the First National Bank and uses the money instead to open a money market mutual fund account, what happens to M1? Why?
M1 does not change because the funds that go to the money market mutual fund are first deposited into the mutual fund's bank account
r = required reserve ratio = 0.10 c = {C/D} = currency ratio = 0.45 e = {ER/D} = excess reserve ratio = 0.05 MB = the monetary base = $1,000 billion Given that the formula for the money multiplier is (1+c/r+e+c), find the value for M, the money supply.
Money supply is $2,417 billion Use the money multiplier to find the new value for the money supply if open market operations increase the monetary base by $300 billion. The money supply is now $3,142 billion.
Suppose that the Federal Reserve System set the required reserve ratio equal to 0.1 and that the banking system holds $60 billion in excess reserves. If the amount of deposits is $1000 billion and the amount of currency holdings is $55 billion, then the currency ratio is 0.06.
Referring to part a, the excess reserve ratio is 0.06.
If a bank depositor withdraws $1,000 of currency from an account, what happens to reserves, checkable deposits, and the monetary base? Assume that the required reserve ratio on checkable deposits is 10% and banks do not hold any excess reserves.
Reserves fall by $1,000, checkable deposits fall by $10,000, and the monetary base remains unchanged.
__________ lists the changes that occur in balance sheet items, starting from the initial balance sheet position.
T-account
r = required reserve ratio = 0.10 c = {C/D} = currency ratio = 0.25 e = {ER/D} = excess reserves ratio = 0.05 t = {T/D} = time deposit ratio = 1 mm = {MM/D} = money market fund ratio = 0.50 MB = the monetary base = $3,000 billion Given that the formula for the M2 money multiplier is m2= 1+c+t+mm/r+e+c, find the value for the M2 money supply
The M2 money supply is $20,625 billion. Use the M2 money multiplier to find the new value for the money supply if open market operations increase the monetary base by $100 billion. The M2 money supply is now $21,313 billion.
Which of the following players can affect the money supply through open market operations through open market operations?
The central bank
Suppose the Fed increases the interest rate it pays on excess reserves held at the Fed. What would happen to the level of e (the excess reserve/deposit ratio)?
The level of e would rise.
Predict what will happen to the money supply if there is a sharp rise in the currency ratio.
The money supply falls
If the economy starts to boom and loan demand picks up, what do you predict will happen to the money supply?
The money supply will increase
What do you predict would happen to the money supply if expected inflation suddenly increased?
The money supply will increase
The "cast of characters" in the money supply story include the following except the
U.S. Treasury.
When the nonbank public decides to hold more currency, then we expect
a fall in the money supply
An open market sale of $300300 of government security to the nonbank public results to ________ in checkable deposits in the Nonbank Public's T-account. An open market sale of government securities to the nonbank public _______ the monetary base.
a reduction; lowers
As financial intermediaries, banks:
accept deposits and make loans
The Federal Reserve's act of controlling the monetary base through its purchases or sales of securities is known as
an open market operation.
When the Federal Reserve buy a government security on the open market, it is called
an open market purchase
The Federal Reserve System is the ___________ for the United States, which is defined as the government agency responsible for __________.
central bank; the conduct of monetary policy
The operation of the Fed and its monetary policy involve actions that affects its record of holdings known as the Fed's balance sheet. Which of the following are found on the liability side of the Fed's balance sheet?
currency in circulation
The monetary base is comprised of:
currency in circulation and reserves.
The interest rate charged to banks that borrow funds from the Fed is known as the:
discount rate
An open market purchase increases the monetary base if the proceeds are kept in _______. If the seller of securities keep the proceeds in deposits after an open market purchase by the Fed, then the effect on monetary base is ________ if the proceeds are kept as currency instead.
either currency or deposit; the same
The money supply is expected to rise when a decrease in ________ is observed.
excess reserves
The monetary base is known as
high-powered money
A purchase of government bonds from the public by the Federal Reserve Bank:
increases the monetary base directly and may increase reserves.
monetary base
is comprised of currency in circulation plus total reserves
An open market purchase has ___________ when the proceeds from the sale are kept in currency.
no effect
The amount of lending in the economy is __________ controlled by the Fed.
not completely
When the Fed wants to reduce reserves in the banking system, it will
sell government bonds
The money multiplier when people hold currency and when banks hold excess reserves is the simple multiplier (the multiplier found when currency held and excess reserves are both zero).
smaller than
A shift from currency to deposits will increase the reserves in the banking system. If Steffi withdraws $400 in cash from her checking account, then
the amount of reserves decline
A bank has a required reserve ratio of 10%. If the bank has deposits of $100,000 and is holding $12,000 in reserves:
the bank is holding $2,000 in excess reserves.
When the Fed gives a discount loan of $100 to a bank,
the monetary base increases by $100
The ratio of the money supply to the monetary base is called:
the money multiplier
Traveler's checks have no reserve requirements and are included in the M1 measure of the money supply. When people travel during the summer and convert some of their checking account deposits into traveler's checks, what happens to the money supply? Why?
the money supply increases due to a shift from one component of the money supply (checkable deposits) with less multiple expansion to another (traveler's checks) with more.
The Fed buys $100 million of bonds from the public and also lowers the reserve requirement r. What will happen to the money supply?
the money supply will increase.
The monetary base less borrowed reserves is called
the nonborrowed monetary base.
Suppose the required reserve ratio is 0.12, the currency ratio is 0.6, and the excess reserves ratio is 0.03. If the Fed decreases the monetary base by $5 billion, the money supply will fall by
$10.67 billion
If the required reserve ratio on checkable deposits increases to 20%, how much multiple deposit creation will take place when reserves are increased by $100? Assume that banks do not hold any excess reserves and the public's holdings of currency do not change.
$500.
An open market sale of a $100 to a bank results to the T-account entries for the Banking System of
+$100 in securities and -$100 in reserves
Loans that the Fed makes to banks appear on the balance sheet as part of its __________, and deposits made by banks appear on the Fed's balance sheet as part of its ____________.
assets; liabilities