Macroeconomic Chapter 4: The Monetary System, What it is and How it Works

From 2007 to 2014, the U.S. monetary base increased by about 400 percent, but M1 increased by only about 100 percent. This means that the money multiplier _____ during this period.

decreased

The "fractional" in "fractional-reserve banking" refers to banks keeping as reserves a fraction of customer:

deposits in the banks' vaults or at the Federal Reserve.

The Federal Reserve:

did not pay interest on reserves in the past but recently began to do so.

A leverage ratio of 15 means that for every dollar of capital that bank owners have contributed, the bank has 15:

dollars of assets.

The Thirty-third National Bank operates in a 100-percent-reserve banking system. If a customer withdraws $1,000 from his checking account, the money supply in the economy will:

remain the same

In a fractional-reserve banking system, the fraction of deposits that a bank keeps as reserves is called the:

reserve-deposit ratio.

_____ is/are NOT included in M1. Currency Reserves Demand deposits Traveler's checks

reserves

A bank "creates" money by:

taking deposits and making loans.

All these are financial intermediaries in the U.S. economy EXCEPT: insurance companies banks the U.S. Federal Reserve Board pension funds.

the U.S. Federal Reserve Board

Assuming that banks hold no excess reserves, suppose that banks hold a reserve-deposit ratio of 25 percent. If a customer deposits $4,000, the bank will keep _____ as reserves and lend out _____.

$1,000; $3,000

Assuming that banks hold no excess reserves, suppose that banks have a reserve-deposit ratio of 10 percent. If a customer deposits $1,000, a bank will keep as reserves _____ and lend out _____.

$100; $900

Suppose that the monetary base is $50,000 and that the reserve-deposit ratio and the currency-deposit ratio are 0.2 and 0.2, respectively. In this scenario, the money supply will equal:

$150,000.

Assuming that banks hold no excess reserves, suppose that banks have a reserve-deposit ratio of 25 percent. If people deposit all their currency in banks, so that the currency-deposit ratio is zero, then $50 million in deposits would generate a total money supply of _____ million.

200

Suppose that a $100 purchase of government bonds by the U.S. Federal Reserve causes a $200 increase in the money supply of an economy in which the public holds 50 percent of deposits as currency. What percentage of bank deposits is held as reserves?

25 percent

_____ banks in the world operate under a 100-percent-reserve banking system.

Almost no

Under the Term Auction Facility (TAF), the _____ determines the quantity of money that banks can borrow.

Federal Reserve

_____ = Reserves + Currency.

High-Powered Money

Which equation is used to calculate the money supply M?

M = Currency + Deposits

The _____ is a new mechanism through which banks can borrow from the Federal Reserve.

Term Auction Facility

Which of these BEST describes a central bank's open-market operations? - The U.S. Treasury sells Treasury bills to the public - The central bank buys foreign currency in the exchange market - The central bank sells Treasury bills to the public - The U.S. Treasury prints money and uses it to make Social Security payments.

The central bank sells Treasury bills to the public

To increase the money supply, the U.S. Federal Reserve could: decrease the funds available in the Term Auction Facility. conduct an open-market purchase of bonds. increase the discount rate. increase the reserve requirements.

conduct an open-market purchase of bonds.

The money multiplier is affected by the:

currency-deposit ratio.

Raising the reserve requirement would MOST likely cause the money supply to:

decrease

If the monetary base doubles, but the money supply stays the same, the money multiplier will:

decrease by half

If the Federal Reserve wanted to use the Term Auction Facility (TAF) to _____ the money supply, it would _____ the funds available in the TAF.

decrease; decrease

The process of transferring funds from savers to borrowers is called:

financial intermediation

In a fractional-reserve banking system, the leverage ratio must always be:

greater than 1

When the economy faces bank failures on a scale such as that which occurred during the Great Depression of the 1930s, the magnitude of the money multiplier:

greatly decreases

From 2007 to 2014, the U.S. monetary base increased about 400 percent but M1 increased by only about 100 percent. This occurred because banks wanted to:

hold more reserves during the financial crisis and economic downturn of this period.

A lower reserve requirement will MOST likely cause the money multiplier to increase and the money supply to:

increase

An increase in the number of bank failures will MOST likely cause the currency-deposit ratio to:

increase

If a bank holds 10 percent of its deposits as reserves, then a deposit of $100 will cause the bank's reserves to:

increase by $10 and its loans to increase by $90.

The nation of Mu requires its banks to hold 10 percent of deposits as reserves. If a customer deposits $100 into his checking account, a bank's reserve holdings will:

increase by less than $100 if the bank chooses to lend out excess reserves.

As the economy recovered following the economic downturn of 2007-2008, some observers were concerned that banks would reduce their holdings of excess reserves by making loans. In response to this problem, the Federal Reserve decided to _____ the interest paid on reserves in order to _____ bank lending.

increase; discourage

Deposit insurance promotes a financial system's stability because it prevents large:

increases or decreases in the currency-deposit ratio.

If a bank determines that it wants to borrow more from the Federal Reserve through the Term Auction Facility (TAF), it must offer to pay a higher:

interest rate

A bank that chooses to lend some of the deposits that it receives from customers: - holds all deposits as reserves. - cannot let those customers make withdrawals without affecting the stability of the bank. - is no longer in a 100-percent-reserve banking system. - can still operate within a 100-percent-reserve banking system.

is no longer in a 100-percent-reserve banking system.

If banks hold 100 percent of deposits in reserve, all these are true EXCEPT that:

it is impossible for a customer to deposit funds into a bank and have no effect on the money supply.

In a 100-percent-reserve banking system, banks: keep all deposits as reserves loan out 100 percent of their deposits serve no purpose can create currency by drawing on deposits

keep all deposits as reserves

Bank regulators prefer banks to have a:

low leverage ratio

One may expect that barter will be most common in a society in which:

there is no government