ECON 222 chap 10
The interest rate banks are charged to borrow reserves from other banks is called the
federal funds rate.
As of 1993, the Fed sets targets for which of the following in order to achieve price stability and high employment?
Federal funds rate
The actions the Federal Reserve takes to manage the money supply and interest rates in order to pursue economic objectives are called __________.
Monetary policy
The Board of Governors of the Federal Reserve has _________ members that are appointed for staggered _________ by the __________ and confirmed by the Senate.
Seven, 14-year terms, President
The indirect effect of an increase in the money supply works through
a decrease in the interest rate increasing investment and consumption.
For each of the following, say whether it is an asset on the accounting books of the Federal Reserve or a liability. Federal Reserve notes (outstanding) Bank reserves (from depository institutions) gold Loans to banks Deposits made by the U.S. Treasury U.S. Treasury securities
l l a a l a
Assuming there are no leakages out of the banking system, a money multiplier equal to 5 means that:
each additional dollar of reserves creates $5 of deposits.
Net worth is equal to assets minus liabilities.
true
The Federal Reserve System is __________.
the central bank of the United States
If the FOMC orders the trading desk to sell Treasury securities:
the money supply curve will shift to the left and the equilibrium interest rates will rise.
When money is used to quote the price of a product, it is functioning as a
unit of account.
Monetary policy is defined as:
The actions the Federal Reserve takes to manage the money supply and interest rates.
Who is the chairperson of the Federal Open Market Committee (FOMC)?
The chairperson of the Board of Governors.
Because excess reserves today are considerably above zero, when the time comes that the Fed wants to raise the interest rate, the tool that it will probably use is to increase the rate it pays to banks on their reserves.
True
As of 2015, the asset category with the highest value on the Fed's balance sheet was
U.S. Treasury securities.
Suppose that the reserve ratio is 25% and that banks loan out all their excess reserves. If a person deposits $100 cash in a bank, checking account balances will increase by a maximum of:
$400
The Fed conducts monetary policy primarily through:
open market operations.
A bank's assets include its ________ and a bank's liabilities include its ________.
loans; deposits
What is the coupon payment of a bond with a face value of $5,000 and an annual interest rate of 3%? Coupon payment is equal to ______________
150
Which of the following best describes the money creation process within the banking system? A. The money creation process results from the continual loaning and depositing of money within the banking system. B. The money creation process occurs when the government allows banks to print new money. C. The money creation process is the result of banks choosing to hold most of their deposits as excess reserves. D. It occurs when people decide to hold all their money as cash instead of depositing the money into the banking system.
The money creation process results from the continual loaning and depositing of money within the banking system
As a measure of the money supply, M1 differs from M2 in that
M2 includes M1 plus savings accounts, money market accounts, and other near monies.
Which of the following events caused Congress to begin seriously looking at setting up the Federal Reserve system? A. The need to control inflation. B. World War I. C. Some severe banking crises at the end of the 19th century and early 20th century. D. The American people's loss of confidence in the nation's currency.
Some severe banking crises at the end of the 19th century and early 20th century.
What institution has formal responsibility for setting U.S. monetary policy?
The FOMC (Federal Open Market Committee)
Which of these facts is true about the creation of the Federal Reserve System (the Fed)?
The Fed was created in 1913.
Which body of the Federal Reserve System sets the majority of U.S. monetary policy?
The Federal Open Market Committee
Suppose a bank has the following basic balance sheet and that the required reserve ratio is 10 percent. Assets Liabilities Reserves 100 600 Deposits Loans 500 Given this information, which of the following statements is true?
The bank is holding $40 in excess reserves.
If the head of the Central Bank of Brazil wanted to increase the supply of money in Brazil in 2015, which of the following would do it? this action will ____________.
lower the discount rate increase credit availability and raise the money supply
The name given to the fraction of deposits that a bank is legally required to hold in its vault, or as deposits at the Fed, is __________.
required reserves
As the interest rate rises, the opportunity cost of holding money as cash ___________ This results in a money demand curve that is
rises, downward sloping
When a bank's excess reserves are zero, it can no longer make loans.
true
Items used as money that also have intrinsic value in some other use are called
commodity money.
Contractionary monetary policy causes the
interest rate to increase.
Currency in circulation is the largest liability of the Fed.
False
The U.S. dollar is backed by gold.
False
The opportunity cost of holding money
is the forgone interest from holding bonds.
Which of these will shift the money demand curve to the right?
An increase in real GDP
What is inflation targeting?
Committing the central bank to achieve an announced level of inflation.
Which of the following statements are true regarding the structure of the Federal Reserve System?
Each Federal Reserve bank across the country has nine directors. The chair of the Board of Governors is appointed by the president and serves a 4-year term.
After suffering two years of staggering hyperinflation, the African nation of Zimbabwe officially abandoned its currency, the Zimbabwean dollar, in April 2009 and made the U.S. dollar its official currency. Someone in Zimbabwe would have been willing to accept U.S. dollars in exchange for goods and services because
U.S. dollars were a good store of value.
If the Fed wants to decrease the money supply, it could
sell treasury securities.
In general, when we analyze the many different interest rates in the economy, we observe that they __________.
tend to move up and down together
The United States is divided into _______ Federal Reserve Districts. The Federal Reserve Bank's Board of Governors consists of _______ members appointed by the president of the U.S. to 14-year, non-renewable terms. One of the board members is ________ year, renewable term as the chairman.
12 7 4
Which of the following is a true statement? A. The direct effect of an expansionary monetary policy is to increase consumption spending and the indirect effect is to increase interest rates. B. The direct effect of an expansionary monetary policy is to increase aggregate supply and the indirect effect is to increase aggregate demand. C. The direct effect of an expansionary monetary policy is to increase aggregate demand and the indirect effect is to increase aggregate supply. D. Both the direct and the indirect effects of an expansionary monetary policy are to increase aggregate demand.
Both the direct and the indirect effects of an expansionary monetary policy are to increase aggregate demand.
When the interest rate is very low—well below what would be considered normal—households and firms will expect the rate to rise in the long run. How does this affect the demand for holding money in the present?
The money demand curve will be nearly flat but downward sloping on the expectation that bond prices are going to fall.
Which of the following is not a viable monetary policy target for the Fed?
The money demand.
What is the basic structure of the Federal Reserve Bank?
There are 12 district banks, a Board of Governors and a Federal Open Market Committee.
The Fed can influence long-term interest rates by influencing the short-term interest rate.
True
For each of the following, determine whether it is an asset or a liability on the accounting books of a bank and indicate why for each case. Savings deposits are ____________ because it is something the bank _______ Reserves are ______________ because it is something the bank ____________. Loans are _____________ because it is something the bank___________
a liability, owes an asset, owns an asset, owns
The (FOMC) Federal Open Market Committee A. includes the Board of Governors and the presidents of the 12 Federal Reserve regional banks (though not all are voting members). B. determines the target federal funds rate and the direction of open market operation policies. C. makes decisions that are voted on by all 7 members of the Board of Governors but only 5 of the 12 regional bank presidents. D. All of the above. E. A and B only.
all of the above
Using money as a medium of exchange is more efficient than barter because
barter requires a double coincidence of wants.
To increase the money supply, the FOMC directs the trading desk located at the Federal Reserve Bank of New York to:
buy U.S. Treasury securities from the public.
If the FOMC decides to increase the money supply, it orders the trading desk at the Federal Reserve Bank of New York to:
buy U.S. Treasury securities.
Which of the following best describe the functions of the Federal Reserve?
clearing interbank payments, regulating the banking system, and managing the nation's foreign exchange reserves
[Related to the Economics in PracticeLOADING... in this section] The Economics in Practice states that the capital value of Professor Serebryakov's estate is not the value for which he could sell the estate if the interest rate on "suitable" securities is higher than the average yield from the estate. If the interest rate on "suitable" securities rose, the value of the estate would ___________-. If investment in the estate was suddenly viewed as being more risky than investment in the securities, the value of the estate would ____________. If the securities were suddenly viewed as being less risky than was previously thought, the yield on the securities would ______________
fall fall decrease
Assume that banks are always fully loaned and people hold no cash. Given a required reserve ratio of 10%, an infusion of $100 billion in reserves will result in a maximum of:
$1,000 billion in deposits.
How many Federal Reserve districts are there?
12
The FOMC (Federal Open Market Committee) consists of ___________voting members. Seven of the members are ___________ __________ of the 12 presidents of the Federal Reserve district banks vote on a rotating basis. The president of the NY Federal Reserve Bank ______________ gets a vote.
12 the board of governors 4 always
U.S. Money Supply (in billions of dollars) currency held outside banks $440 savings accounts $2,100 other near monies $1000 traveler's checks/ other checkable deposits $60 money market accounts $1,100 demand deposits $700 The table on the right contains an approximate breakdown of the U.S. money supply in September 2001. Use this data to calculate M1 and M2. M1 was _____________ M2 was _____________ The main advantage of looking at M2 instead of M1 is that M2 is generally more stable. To illustrate, suppose banks raised the interest rate paid on checking accounts, while the rate paid on savings accounts remained unchanged, resulting in consumers transferring $100 billion from savings into their checking accounts. How would the money supply be affected?
1200 5400 M1 would increase by $100 billion, but M2 would remain unchanged.
Jane wins $200,000 playing the lottery, and instead of spending it, she deposits it into her checking account at the First Bank of Anywhere. Her bank makes a loan (equal to its excess reserves) to Mary, who uses the money to remodel her home. The remodeling company deposits the money into the Second Bank of Anywhere. The required reserve ratio is 6 percent and each bank initially has no excess reserves. The amount of the loan made by the First Bank equals _______________ The amount of the remodeling company's deposit that Second Bank is required to keep as reserves equals
188000 11280
If the required reserve ratio is 5 percent, the money multiplier is
20
A bank has deposits of $25,000 and the required reserve ratio is 20 percent. This bank can make loans up to
20,000
The U.S. money supply (M1) at the beginning of 2015 was $2,683.3 billion broken down as follows: $1,165.7 billion in currency, $3.5 billion in traveler's checks, and $1,514.1 billion in checking deposits. Suppose the Fed decided to increase the money supply by decreasing the reserve requirement from 8 percent to 7 percent. Assume all banks were initially loaned up (had no excess reserves) and the quantity of currency and traveler's checks held outside of banks did not change. How large a change in the money supply would have resulted from the change in the reserve requirement? The money supply would change by
216.35 billion
In the Republic of Doppelganger, the currency is the ditto. During 2015, the Treasury of Doppelganger sold bonds to finance the Doppelganger budget deficit. In all, the Treasury sold 50,000 ten-year bonds with a face value of 100 dittos each. The total deficit was 5 million dittos. The Doppelganger Central Bank reserve requirement was 20 percent and in the same year, the bank bought 500,000 dittos' worth of outstanding bonds on the open market. All of the Doppelganger debt is held by either the private sector (the public) or the Doppelganger Central Bank. The combined effect of the Treasury sale and the Doppelganger Central Bank purchase on the total Doppelganger debt outstanding is a change in overall debt of_________________ dittos and, in particular, the debt held by the private sector increases by ____________ dittos. The Treasury sale will change the money supply in Doppelganger by ________ dittos. Assuming no leakage of reserves out of the banking system, the effect of the Doppelganger Central Bank purchase of bonds on the money supply is a change of _________________ dittos.
5000000 4500000 0 2500000
You are given this account for a bank: Assets Liabilities Reserves $ 750 $5,000 Deposits Loans $4,250 The required reserve ratio is 12 percent. Given its deposits of $5,000, the bank is required to hold ____________ The bank holds excess reserves of ___________ The bank can increase its loans by __________________ Suppose a depositor comes to the bank and withdraws $200 in cash. Show the bank's new balance sheet, assuming the bank obtains the cash by drawing down its reserves. Assets Liabilities Reserves ____________ ___________ Deposits Loans $4,250 the bank ______________________
600 250 1250 550 4800 must borrow reserves
Which of the following is a function of the Federal Reserve System?
Acting as a lender of last resort to commercial banks.
As president of Econivalia, you are constantly strained for funds to pay your troops. Your chief economist suggests the following plan: "When you collect your tax payments from your residents, insist on being paid in gold coins. Take those gold coins, melt them down, and remint them with an extra 15 percent of copper thrown in. You will then have 15 percent more money than you started with." Which of the following is a potential problem with the plan? A. If troops are aware of the plan, they will demand 15 percent more coins for their wages, which will increase inflation immediately. B. Even if troops are unaware of the scheme, the plan will work only temporarily until the increase in money creates inflation. C. This will increase the money supply and cause inflation to increase over time. D. All of the above are problems with the plan.
All of the above are problems with the plan.
The following table gives three key U.S. interest rates in 1980 and again in April 1993: 1980 1993 Three-month U.S. government bills 11.39 % 2.92 % Long-term U.S. government bonds 10.81 % 6.85 % Prime rate 15.26 % 6.00 % Study the table on the right. Which of the following could explain why the long-term rate was higher than the short-term rate in 1993 but lower in 1980. A. In 1980, most debt holders believed that the inflation rate would decrease in the future. In contrast, in 1993, inflation was unusually low and debt holders were wary of higher inflation in the future. B. 1980 was an anomaly referred to as an inverted yield curve. It was an anomaly because long-term rates are always higher than short-term rates. Many economists believe it was the cause of the rather severe 1981 recession. C. Expected future short-term rates were falling in 1980 so that the average of the current and expected future short-term rates was lower. In 1993, the current short-term rate was low and expected future short-term rates were rising so that the average of these rates was higher. D. Both A and C are correct
Both A and C are correct
Market-determined prices of existing bonds and interest rates are directly related.
False
The sum of all currency in the hands of the public plus demand deposits and other checkable deposits plus traveler's checks is the official definition of:
M1
Money in demand deposit accounts, such as checking accounts, is included in the measure of
M1 and M2.
When we say that money serves as a unit of account, we mean that:
Prices are quoted in terms of money.
The Federal Reserve has multiple economic goals for monetary policy to achieve, However, it can be difficult to manage all of the goals at once. Which of the following is not true regarding the multiple goals of the Fed?
The goal of financial market stability means that the Fed tries to ensure that asset prices, such as stock prices, increase at a very high rate so investors can make more money.
Suppose the Treasury of the United States issues bonds and sells them to the public to finance the deficit. What happens to the money supply and why?
The money supply remains unchanged because every dollar taken in by the Treasury goes right back into circulation through government spending.
The total value of M2 is always larger than the value of M1.
True
Sub-prime mortgages are mortgages issued to households with poor credit ratings.
True
When is the opportunity cost of holding money higher?
When interest rates are high
When many depositors decide simultaneously to withdraw their money from a bank, there is __________.
a bank run
A decline in the value of money due to a rapid increase in supply is known as;
currency debasement.
The net export effect of contractionary monetary policy predicts that a country's
exports decrease as the money supply contracts.
Barter refers to the direct exchange of goods and services for money.
false
Banks borrow not only from the Fed but also from each other. What is the interest rate in this market called?
federal funds rate
The Fed buys and sells bonds as a part of its policy to reach all of the following objectives except:
high unemployment
Suppose in the Republic of Sasquatch that the regulation of banking rested with the Sasquatchian Congress, including the determination of the reserve ratio. The Central Bank of Sasquatch is charged with regulating the money supply by using open market operations. In September 2015, the money supply was estimated to be 50 million yetis. At the same time, bank reserves were 6.0 million yetis and the reserve requirement was 12 percent. The banking industry, being "loaned up," lobbied the Congress to cut the reserve ratio. The Congress yielded and cut the reserve requirement to 10 percent. The potential impact of this action could ____________the money supply by __________ Suppose the central bank decided that the money supply should not be increased. What countermeasure could it take to prevent the Congress from expanding the money supply?
increase, 10 sell gov securities to prevent the expansion of the money supply.
The Federal Reserve Bank of New York is always a voting member of the FOMC because
it carries out the policy directives of the FOMC.
Determine whether the following items are listed under "Assets" or "Liabilities" on a bank's T-account. Deposits Reserves Loans Net worth
l, a, a, l
On the balance sheet of a bank:
loans are the most important asset.
Credit cards are:
not part of the money supply.
When we say that one of the functions of the Fed is to be a lender of last resort, we mean that the Fed:
provides funds to troubled banks that cannot find any other source of funds.
The economy is beginning to slip into a recession. Further, data indicate that inflation is low. The Fed will most likely respond to this state of the economy by
purchasing government securities to lower the interest rate.
When the Fed provides funds to troubled banks that cannot find any other sources of funds, it is acting as
the lender of last resort.
If the FOMC orders the open market desk to sell government securities,
the money supply will decrease, and the interest rate will increase.
One of the goals of the Federal Reserve is price stability. For the Fed to achieve this goal,
the rate of inflation should be low, such as 1% to 3%, and should be fairly consistent.
Once goldsmiths started making loans,
their outstanding receipts were greater than the amount of gold they had in their vaults.
When the interest rate decreases, __________.
there is movement down a stationary money demand curve
The demand for money depends ________ on the size of total transactions in a period and ________ on the interest rate.
positively; negatively