macro final (ch 14)

Suppose that the public holds 50% of the money supply in currency, that the reserve requirement is 20%, and that banks hold no excess reserves. If a customer deposits $6,000 in her checking account, required reserves will increase by:

$1,200

(Deposits: 100) If the minimum reserve ratio for ABC Bank is 10%, then the bank is required to maintain minimum reserves of:

$10 million.

money

the stock of assets that can be readily used to make transactions/ purchase goods and services (cash, checkable back deposits, travelers checks)

monetary base

the sum of currency in circulation and bank reserves

fed asstes

treasury bills (gov debt)

Fed's main policy tools

1. required reserve ratios 2. discount rate 3. open market operations

money multiplier

1/reserve ratio

If a bank has deposits of $10,000 and reserves of $5,000, and the reserve requirement is 20%, its excess reserves are $_____.

3,000

increase spread between discount and fed funds rate

cost of being short on reserves rises, decrease lending, money supply decreases

Which of the following is a component of both the monetary base and the money supply?

currency in circulation

Which combination of assets is considered to be money?

currency in circulation, checkable bank deposits, and traveler's checks

Which entity acts to protect depositors from a bank run by insuring all deposits up to $250,000?

FDIC

currency in circulation

actual cash held by the public

savings and loan

deposit-taking banks, usually specialized in issuing home loans.

If the reserve ratio is 8%, and the banking system does NOT want to hold excess reserves, how much more can be added to the money supply? Loans: 900,000 Deposits: 1,000,000 Reserves: 100,000

$250,000

The reserve requirement is 10%, and Olga withdraws $3,000 for travel money from her checking account. Assume that banks do not hold excess reserves and that the public holds only checkable bank deposits, that is, no currency. By how much will the money supply contract as a result of the withdrawal?

$27,000

The reserve requirement is 20%. Oleg receives $1,000 as a graduation present and deposits the money in his checking account. The bank does NOT want to hold excess reserves. How much of the $1,000 deposit can the bank lend out?

$800

The reserve requirement is 20%. Oleg receives $1,000 as a graduation present and deposits the money in his checking account. The bank does NOT want to hold excess reserves. What is the maximum possible expansion in the money supply as a result of this initial deposit?

4,000

Reserves are 20,000 and rr is 20% so loans are

80,000

M2

M1 plus near moneys

____ is the most liquid asset in the economy.

Money

The Federal Reserve's main assets are:

U.S. Treasury bills.

decrease spread between discount and fed funds rate

cost of being short on reserves falls, increase lending, money supply increases

excess reserves

a bank's reserves over and above its required reserves

commodity money

a good used as a medium of exchange that has intrinsic value in other uses

store of value

a means of holding purchasing power over time

unit of account

a measure used to set prices and make economic calculations

commodity-backed money

a medium of exchange that has no intrinsic value whose ultimate value is guaranteed by a promise that it can be converted into valuable goods

fiat money

a medium of exchange whose value derives entirely from its official status as a means of payment

bank run

a phenomenon in which many of a bank's depositors try to withdraw their funds due to fears of a bank failure

T account

a tool for analyzing a business's financial position by showing, in a single table, the business's assets (on the left) and liabilities (on the right)

commercial bank

accepts demand deposits and makes loans and provides other services for the public and covered by deposit insurance

federal funds market

allows banks that fall short of the reserve requirement to borrow funds from banks with excess reserves

discount window

an arrangement in which the Federal Reserve stands ready to lend money to banks in trouble

medium of​ exchange

an asset that individuals acquire for the purpose of trading goods and services

central bank

an institution designed to oversee the banking system and regulate the quantity of money in the economy

monetary aggregate

an overall measure of the money supply

checkable bank deposits

bank accounts that can be accessed by using checks, debit cards, and digital payments.

shadow banking

bank-like activities undertaken by nondepository financial firms such as investment banks and hedge funds, but without regulatory oversight and protection.

A bank run can break a bank because:

banks cannot quickly convert illiquid loans into liquid assets without facing a large financial loss.

Lucia withdraws $6,000 from her checking account to pay tuition this semester. Assume that the reserve requirement is 20% and that banks do not hold excess reserves. Immediately after the withdrawal, reserves _____, and checkable deposits _____.

decrease by $6,000; decrease by $6,000

increase reserve requirement

decrease the money supply

The reserve requirement is 10%, and Olga withdraws $3,000 for travel money from her checking account. Assume that banks do not hold excess reserves and that the public holds only checkable bank deposits, i.e., no currency. As a result of the withdrawal, required reserves _____ by _____.

decrease; $300

If the Fed conducts an open-market sale, bank reserves _____, and the money supply is likely to _____.

decrease; decrease

features to protect against bank runs

deposit insurance, capital requirements, reserve requirements, and a discount window

Which of the following is NOT designed to help prevent bank runs? deposit insurance reserve requirements the federal funds rate capital requirements

federal funds rate

Paper money in the United States, which has no intrinsic value but can be converted into a valuable good on demand and is used as a medium of exchange, is an example of:

fiat money.

near moneys

financial assets that can't be directly used as a medium of exchange but can be readily converted into cash or checkable bank deposits

The reserve ratio is the:

fraction of deposits that banks hold in their vaults plus their deposits at the Federal Reserve.

Suppose that the required reserve ratio is 25%, and a customer deposits $300 in her checkable deposit. The money supply will _____ if the banking system does NOT hold any excess reserves.

increase by an additional $900

decrease reserve requirement

increase the money supply

Suppose that the Federal Reserve buys $100 million of U.S. Treasury bills. The money supply:

increases by more than $100 million.

The use of counterfeit money leads to:

lost revenue to pay for operations of the economy's government.

If the Federal Reserve wants to increase the money supply, it could:

lower the reserve requirement.

What are money's three functions?

medium of exchange, unit of account, store of value

fed liabilities

monetary base (currency in circulation and reserves)

When a bank deposit is withdrawn and held as currency, bank reserves decrease, and the:

monetary base does not change.

One function of the Fed is to use _____ policy, which involves changes in _____ to affect aggregate spending, to lessen the impact of economic fluctuations on the economy.

monetary; the money supply

Which of the following is a tool of monetary policy used by the Federal Reserve? I. tax rates II. government purchases of goods and services

neither I nor II

discount rate compared to fed funds rate

normally discount rate set above fed funds rate to discourage banks from turning to the fed when they're short on reserves

discount rate

rate the Federal Reserve charges for loans to commercial banks

equation for checkable bank deposits

reserves divided by reserve ratio

Money is anything that:

serves as a medium of exchange for goods and services.

When we keep part of our wealth in a savings account, money plays the role of a(n):

store of value.

bank reserves

the currency banks hold in their vaults plus their deposits at the Federal Reserve

reserve ratio

the fraction of deposits that banks hold as reserves

federal funds rate

the interest rate at which banks make overnight loans to one another

When the Federal Reserve decreases banks' reserves through open-market operations:

the monetary base decreases, loans decrease, and the money supply decreases.

Suppose that there are no excess reserves in the banking system and that demand deposits are $200,000. If the monetary authorities lower the required reserve ratio from 10% to 5%:

the money-creating potential of the banking system will rise.

open market operations

the purchase and sale of U.S. government bonds by the Fed

money supply

the total value of financial assets in the economy that are considered money (currency plus deposits)

Suppose you find a $50 bill that you put in a coat pocket last winter. If you deposit it in your checking account:

there is no change in M1 or M2.

Banks don't lend out all funds that are deposited because:

they have to satisfy any depositor who wants to withdraw funds.

investment bank

trades in financial assets and is not covered by deposit insurance because doesn't accept deposits

When a person makes price comparisons among goods and services, money is being used mainly as a(n):

unit of account.