FINAL ECON EXAM Chapter 14/15/16 study guide

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The Fed sells ​$25 billion of foreign assets and sells ​$25 billion of Treasury securities.

Monetary base decreases by $50 billion

The Fed conducts a sterilized foreign exchange intervention.

Monetary base does not change

The Fed sells ​$25 billion of foreign assets and purchases ​$25 billion of Treasury securities.

Monetary base does not change

The Fed purchases ​$25 billion of foreign assets.

Monetary base increases by $25 billion

Currency ​$760 billion Checkable deposits ​$560 billion Bank reserves ​$560 billion M1 multiplier =

rrd/ reserves/ checkable er/d is excess to checkable 0 in this case M1 = cd/+1/ cd+rrd+0

How can the FOMC use open market operations to lower its target for the federal funds​ rate? To lower its target for the federal funds​ rate, the Fed can conduct an open market ____ of securities. supply shifts

purchase, left

Reducing​ Egypt's current account deficit would _____ strain on its balance of payments by _____ ​Egypt's balance of payments deficit.

reduce, reducing

GOLD STANDARD: During the Great​ Depression, the gold standard

required some countries to pursue a contractionary monetary policy to maintain the gold​ standard, thereby making the reduction of unemployment difficult to achieve.

Currency ​$760 billion Checkable deposits ​$560 billion Bank reserves ​$560 billion Ratio of total reserves to deposits is

reserves / checkable

In a currency intervention, the central bank either buys foreign assets, which ___ its balance sheet, or sells foreign assets which ____ its foreign assets

Increase, descreases

If currency in circulation is ​$500 ​billion, total reserves of the banking system are ​$700 ​billion, and total checkable deposits are ​$2 comma 500 ​billion, what is the maximum increase in the money supply that can result from the transaction in part​ (a)? (That​ is, the maximum increase after all actions resulting from the transaction in part​ (a) have​ occurred.) The increase in the money supply is ______

($500+$2500)/ ($500 +$700) then times 100 for the increase

GOLD STANDARD: Was it a fixed exchange rate system or a flexible exchange rate​ system?

A fixed exchange rate system

2 billion Fed market sale, Reserves, a ___,___. by $2 billion

A liability, decreases

How does a sterilized central bank intervention affect the SUPPLY curve for a​ country's currency

A sterilized central bank intervention does not affect the A supply curve for a​ country's currency.

The Fed buys ​$1.8 billion in Japanese government​ bonds, denominated in yen​, ​and, at the same​ time, conducts an open market sale of ​$1.8 billion of U.S. Treasury securities. What happens to the monetary​ base? Is this a sterilized or an unsterilized foreign exchange​ intervention? T account

Assets: Foreign: 1.8 bil Treasury securities: -1.8 bil Liabilities: Monetary base: 0 bil

Suppose that the bank sells​ $5 million in securities to get new cash. Show the​ bank's balance sheet after this transaction. The reserves of the balance sheet increase by​ $5 million, the securities of the balance sheet fall by​ $5 million, and everything else is the same.

Assets: Add 5 million to prior Loans: stay same Securities: Subtract 5 million from prior Checkable: stay same Net Worth: stay same

`Suppose that Bank of America lends ​$297,000 to​ Jill's Jerseys. Using​ T-accounts, show how this transaction is recorded on the​ bank's balance sheet.

BOA: Loans:297K Liabilities:297K Reserves:-297K Checkable Desposits:-297K

Currency ​$150 billion Bank reserves ​$400 billion Checkable deposits ​$1 200 billion Time deposits ​$1 800 billion Excess reserves ​$80 billion The ratio of total reserves to deposits is

Bank Reserves / Checkable Deposits

Why might a country impose capital​ controls?

Because currency crises are fueled in part by sharp inflows and outflows of financial investments

Why must the current account balance plus the financial account balance equal​ zero?

Because each international transaction is​ two-sided, representing an exchange of​ goods, services, or assets among​ households, businesses, or governments.

What would be the value of the M1 money multiplier if banks hold no excess​ reserves, the​ currency-to-deposit ratio is 0.56​, and the required reserve ratio for checkable deposits is 68​%? The value of the M1 money multiplier =

C/D= .56 rrD=.68 Er/D = 0 M1 = Cd +1/Cd +rrd + erD = (.56+1)/(.56+.68+0)

Currency ​$760 billion Checkable deposits ​$560 billion Bank reserves ​$560 billion . Suppose that the ratio of total reserves to deposits changes from the value you calculated in part​ (a) to 2. Money multiplier is

Cd +1/ cd+2+0

Suppose that before selling the Treasury​ bills, JPMorgan Chase had no excess reserves. Suppose that the required reserve ratio is 10​%. Suppose that JPMorgan Chase makes the maximum loan it can from the funds acquired by selling the Treasury bills. Assume that the loan was made to a JP Morgan Chase customer and deposited into his or her account.

Chase: Loans: 100 mil Checkable Deposits: 100 mil

Now suppose that whoever took out the loan in part​ (b) writes a check for this amount and that the person receiving the check deposits it in Wells Fargo Bank. Show the effect of these transactions on the balance sheets of JPMorgan Chase and Wells Fargo after the check has been cleared

Chase: Reserves: -100 mil Checkable Deposits: -100 mil Wells: Reserves: 100 mil Checkable Deposits: 100 mil

Suppose that JPMorgan Chase sells ​$100 million in Treasury bills to the Fed. T account for Chase/Fed

Chase: Securities: -100 mil Reserves 100 mil FED: Securities:100 mil Reserves:100 mil

Currency ​$150 billion Bank reserves ​$400 billion Checkable deposits ​$1 200 billion Time deposits ​$1 800 billion Excess reserves ​$80 billion Monetary Base=

Currency + Bank Reserves

Currency ​$760 billion Checkable deposits ​$560 billion Bank reserves ​$560 billion Monetary base =

Currency + Reserves

Currency ​$150 billion Bank reserves ​$400 billion Checkable deposits ​$1 200 billion Time deposits ​$1 800 billion Excess reserves ​$80 billion the M1 money supply is

Currency + checkable deposits

Currency ​$150 billion Bank reserves ​$400 billion Checkable deposits ​$1 200 billion Time deposits ​$1 800 billion Excess reserves ​$80 billion What is Currency to deposit Ratio:

Currency / Checkable Deposits

C/d

Currency / checkable

Using the Taylor​ rule, calculate the target for the federal funds rate for July 2010 using the following​ information Fed Funds rate target =

Current inflation rate + Equilibrium FED funds rate+ (.5 times current inflation - target inflation rate) + (.5 times the output gap)

Currency ​$150 billion Bank reserves ​$400 billion Checkable deposits ​$1 200 billion Time deposits ​$1 800 billion Excess reserves ​$80 billion M1 Money multiplier

Er/D= excess reserves / checkable Cd/ = from above rrd= M1 = Cd+ 1/ Cd+rrd+Er/d

The Fed sells ​$6.5 billion in Chinese government​ bonds, denominated in yuan. What happens to the​ Fed's international reserves and the monetary​ base? Is this a sterilized or an unsterilized foreign exchange​ intervention? Use t account?

Foreign Assets : -6.5 bil Bank Reserves (liabilities) : -6.5 bil

GOLD STANDARD: Did countries that ran trade deficits experience gold inflows or gold​ outflows?

Gold outflows

GOLD STANDARD: How would a gold inflow affect a​ country's inflation​ rate?

Increase

GOLD STANDARD: How would a gold inflow affect a​ country's monetary​ base?

Increase

What are the disadvantages of imposing capital​ controls? ​

Increased government corruption with bribes to government officials. Impetus is given to the formation of a black market for the currency so entities can evade the capital controls. A heightened reluctance of multinational firms to expand operations in countries with capital controls.

A open "currency intervention" is a deliberate action by a central bank​ to:

Influence the country's exchange rate

How does the Danish central​ bank's selling kroner weaken the​ kroner? S/d?

It increases the supply of kroner in exchange for euros Supply right, demand left, new E point

Why would it be important for the Danish central bank to keep the exchange rate between the kroner and the euro within a target​ range?

It is beneficial for trade in ​ goods, services and financial securities.

Why would a reduction in value of the Egyptian pound help reduce​ Egypt's current account​ deficit?

It would increase net exports

After weakening, would it take ___ Danish kroner to buy a Euro

More

Suppose that the bank sells​ $5 million in securities to get new cash. Show the​ bank's balance sheet after this transaction. The reserves of the balance sheet increase by​ $5 million, the securities of the balance sheet fall by​ $5 million, and everything else is the same. what is the new excess reserves

New total reserves - same required reserves = new excess

GOLD STANDARD: Were countries able to pursue active monetary​ policies?

No

Suppose that PNC Bank sells ​$7 million in Treasury bills to the Fed and then makes a ​$7 million loan to​ David's Donut Emporium and Boat Repair. Use a​ T-account

PNC Bank Securities: -7 million Loans : 7 million

Suppose the Bank of Japan sells ​$10 billion of U.S. Treasury securities. The sale of ​$10 billion of U.S. Treasury securities by the Bank of Japan will ____ interest rates in Japan. The ____ Japanese interest rates will ____ the demand for yen and ____ the supply of​ yen, pushing ____ the exchange value of the yen. Supply shifts ____, new equilibrium point is?

Raise, higher, increase, decrease, up Shift left, and new is up

In the following bank balance​ sheet, amounts are in millions of dollars. The required reserve ratio is 3​% on the first ​$30 million of checkable deposits and 14​% on any checkable deposits over ​$30 million. Calculate Banks Excess Reserves:

Required Reserves: 3% of 30 million + 14% of 150 million Take Reserves in Assets - Answer from above

What are the​ Fed's traditional monetary policy​ tools?

Reserve Requirement discount Policy Open Market Operations

Suppose that the business spends the proceeds of the loan by writing a check. Revise the​ bank's balance sheet and calculate its excess reserves after the check has cleared. The reserves of the balance sheet fall down by ​$13.5 ​million, checkable deposits of the balance sheet fall by ​$13.5 million and everything else is the same as in part​ Required reserves == Excess =

Reserves in loan sheet from part d excess = 0

Suppose that the bank loans its excess reserves in part​ (b) to a local business. Show the​ bank's balance sheet after the loan has been made but before the business has spent the proceeds of the loan. Loans of the balance sheet increase by ​$13.5 ​million, checkable deposits of the balance sheet also increase by ​$13.5 ​million, and everything else is the same as in part​

Reserves: Same from part B Loans: Add 13.5 to old Securities: same from part b Checkable: add 13.5 to old Net worth: same from part b

Suppose that the business spends the proceeds of the loan by writing a check. Revise the​ bank's balance sheet and calculate its excess reserves after the check has cleared. The reserves of the balance sheet fall down by ​$13.5 ​million, checkable deposits of the balance sheet fall by ​$13.5 million and everything else is the same as in part​

Reserves: subtract 13.5 from part c Loans: same as part c Securities:same as part c Checkable: subtract 13.5 from c Net:same as part c

What does discount policy imply?

Setting the discount rate and the terms of discount lending

Discount rate before the policy action of December​ 13, 2005, when the federal funds rate was​ 4% and the discount rate​ 5%. Then, use your graph to explain how the Fed would raise the federal funds rate by 25 basis points​ (1/4%) What policy action would the Fed use to bring about this increase in the target federal funds​ rate? Supply

The Fed would sell Treasury Securities supply is up and left

What is pegging?

The decision by a country to keep the exchange rate fixed between its currency and another​ country's currency.

What impact did these changes have on the size of the money​ multiplier?

The increase in​ ER/D was significantly larger than the decrease in​ C/D, causing the value of the money multiplier to decline.

What was the trend in the levels of the monetary base from 1959 through the most recent month​ available?

The monetary base had been increasing steadily from 1959 up until the 2007dash2009 ​recession, during which it increased to unprecendented levels.

Which of the following are disadvantages of​ pegging?

The pegged currency can become undervalued The pegged currency can become overvalued

In your​ calculations, the inflation gap is negative if the current inflation rate is below the target inflation rate. How does the targeted federal funds rate calculated using the Taylor rule compare to the actual federal funds rate of​ 0% to​ 0.25%?

This Taylor rule federal funds rate target is lower than the​ Fed's actual target range

Explain the effect on the demand for reserves of the supply of reserves of the action an increase in the required reserve ratio:

This would increase the demand for reserves

R/d

Total Reserves / checkable deposits

If the Fed uses the federal funds rate as a policy​ instrument, then decreases in the demand for reserves will lead to _____ in the level of reserves.

a decrease

Reserves, a __, ___ by $2 billion

a liability, increases

The Fed buys a new information technology system for the Federal Reserve Bank of Atlanta from​ DeShawn's Computer Services for​ $1 million REserves, ___<___ by #1 million

a liability, increases

The Fed carries out a $2 billion open market sale Discount Loans, ___,____, by $2 billion

an asset, decreases

The Fed buys a new information technology system for the Federal Reserve Bank of Atlanta from​ DeShawn's Computer Services for​ $1 million Discount loans, ___,,____by $1 million

an asset, increases

The Fed increases discount loans by​ $2 billion: Discount Loans, ___, ____ by $2 Billion

an asset, increases

If the Fed uses the level of reserves as a policy​ instrument, then increases in the demand for reserves will lead to _____ in the federal funds rate.

an increase

Use a​ T-account for Bank of America and a​ T-account for the Fed to show the result of the Fed selling ​$12 million in Treasury bills to Bank of America.

boa: Securities: 12 mil Reserves: -12 mil FED securities:-12 mil liabilities: -12 mil

Suppose banks increase demand for reserves: to offset the effect on federal funds rate on an increase in the demand for reserves the Fed, could __securities

buy supply curve shift left

The January​ 22, 2008, press release of the Federal Open Market Committee​ (FOMC) states that the FOMC​ "decided to lower its target for the federal funds rate by 75 basis points to​ 3½ percent." The press release goes on to say that​ "In a related action the Board of Governors approved a​ 75-basis point decrease in the discount rate to 4​ percent. What policy action would the Fed use to lower the federal funds rate by 75 basis​ points? The Fed would ____ Treasury securities.

buy, supply shifts up to 4.75 and left

m1 money multiplier

cd+1/rrd+cd+0

Currency ​$760 billion Checkable deposits ​$560 billion Bank reserves ​$560 billion money supply is

currency + checkable

Currency ​$760 billion Checkable deposits ​$560 billion Bank reserves ​$560 billion the Cd is

currency / checkable

monetary base

currency in circulation + reserves

Suppose that a U.S. firm buys 12 BMW autos for ​$38,000 each. How is this transaction recorded in the​ balance-of-payments accounts for the United​ States? The purchase of the 12 BMW autos would be recorded in the ____ account as a ​$____payment to ______ ​, which is recorded as a _____ number. ​

current, BMW times price, foreigners, negative

The Federal Reserve seeks to reduce

cyclical unemployment

To weaken a currency means to ___ the foreign exchange rate of a currency

decrease

The Fed sells ​$6.5 billion in Chinese government​ bonds, denominated in yuan. What happens to the​ Fed's international reserves and the monetary​ base? Is this a sterilized or an unsterilized foreign exchange​ intervention? The Fed's International reserves ____ and the monetary base _____ This is ____ intervention

decrease by 6.5 mil decreases by 6.5 mil An unsterilized

How does an open market sale of Treasury securities by the Fed affect the price of Treasury​ securities, the yield on Treasury​ securities, the monetary​ base, and the money​ supply? An open market sale of Treasury Securities ___ the price of Treasury securities therby ___ the yield of Treasury securities The sale of Treasury Securites ___ the monetary base and ___ the money supply

decrease, increasing decreases, decreases

Suppose that in​ equilibrium, the federal funds rate is equal to the interest rate the Fed is paying on reserves. Analyze the effect of an open market sale of Treasury securities on the equilibrium federal funds rate. An open market sale of Treasury securities by the Fed _____ ​, causing the federal funds rate to _____ .

decreases the supply of reserves, rise or remain unchanged

A "strain" on Egypt balance of payments means a balance of payments ___ with ___ in international reserves

deficit, reduction

If the U.S. current account SURPLUS is ​$272 ​billion, and if the statistical discrepancy is​ zero, what is the financial account​ balance? The financial account balance would be a ____ of ​$272 billion. ]Does this financial account balance represent a net capital outflow or a net capital​ inflow? The financial account balance would represent a net capital ____

deficit,outflow

The Fed buys ​$1.8 billion in Japanese government​ bonds, denominated in yen​, ​and, at the same​ time, conducts an open market sale of ​$1.8 billion of U.S. Treasury securities. What happens to the monetary​ base? Is this a sterilized or an unsterilized foreign exchange​ intervention? The monetary base ____, This is ____ invervention

does not change, a sterilized

In an unsterilized currency​ intervention, the central bank ___ offset the effect of the intervention on the monetary​ base, whereas with a sterilized currency intervention it ____ offset the effect of the intervention on the monetary base.

does not, does

Suppose that the bank loans its excess reserves in part​ (b) to a local business. Show the​ bank's balance sheet after the loan has been made but before the business has spent the proceeds of the loan. Loans of the balance sheet increase by ​$13.5 ​million, checkable deposits of the balance sheet also increase by ​$13.5 ​million, and everything else is the same as in part​ Required reserves rises to___excess equals __ double check this one (7 on chp 14)

excess equals = reserves in t account - new required

A​ country's balance of payments might not equal to zero when the official settlements balance is

excluded

Briefly explain what happened to the​ currency-to-deposit ratio​ (C/D) and the excess​ reserves-to-deposit ratio​ (ER/D) during the financial crisis of 2007-2009. The Currency to deposti ratio ___, and the excess reserves to deposit ratio __ during the financial crisis

fell, rose

​Later, the German company uses the money to buy a ​$456,000 U.S. Treasury bond at a Treasury auction. How is this transaction recorded in the​ balance-of-payments accounts for the United​ States The purchase of the US treasury bond would be recorded in the ___ account as a $____ receipt from ____ which is recorded as a ____number

financial, 456K, foreigners, positive

The Fed​ doesn't seek to reduce the unemployment rate to zero because the tools of monetary policy are

in effective in reducing the level of frictional unemployment

All of the following are reasons why a central bank might undertake a currency​ intervention, except:

increase investor confidence

Consider the following data​ (all values are in billions of​ dollars): June 1930 June 1931 June 1932 Currency ​$3.681 ​$3.995 ​$4.959 Checkable deposits ​$21.612 ​$19.888 ​$15.49 Bank reserves ​$3.227 ​$3.307 ​$2.829 currency and reserves ___ relative to deposits becasue depositors were___account in response to the crisis

increased, liquidating

If the required reserve ratio is 20​%, the value of the simple deposit multiplier

is 5 (1/.2_)

money supply =

m1 money multipier times monetary base (answers form earlier)

Which of the Fed's traditioanl monetary policy tools is the most important

open market operations

Fed decides to increase target for FED funds rat from 2 to 2,4 and discount from 2.5 to 2.75 to achieve desired increase in FED funds rate, Fed reserve could seek to ___ securites supply shift

sell supply moved up and left

To RAISE the foreign exchange value of its​ currency, would a central bank buy or sell foreign​ assets? What would be the effect on the monetary​ base? What would be the effect on domestic interest​ rates? To raise the foreign exchange rate, the central bank would ___ foreign assets, which would ___ the monetary base, and ___domestic interest rates

sell, reduce, raise

What is the simple deposit​ multiplier? The simple deposit multiplier is

the ratio of the amount of deposits created by banks to the amount of new reserves.

What is the controversy over​ China's pegging the value of the​ yuan? The value of the yuan is ___ making Chinese exports ___ and imports to China _____

undervalued, cheaper, more expensive

What are capital​ controls?

​​Government-imposed restrictions on foreign investors buying domestic assets. ​Government-imposed restrictions on domestic investors buying foreign assets.

What is the total change in Bank of​ America's assets and​ liabilities? The total change in Bank of​ America's assets equals

​​zero, with an additional ​$297 000 in loans and a loss of ​$297000 of reserves. The total change in liabilities equals​ zero, with the ​$297000 checking account being spent.


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