Money and Banking in the economy Exam 1

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A bank has excess reserves of $6,000 and demand deposit liabilities of $100,000 when the required reserve ratio is 20 percent. If the reserve ratio is raised to 25 percent, the bank's excess reserves will be

$1,000

In the simple deposit expansion model, if the Fed purchases $100 worth of bonds from a bank that previously had no excess reserves, the bank can now increase its loans by

$100 times the reciprocal of the required reserve ratio

In the simple deposit expansion model, if the banking system has excess reserves of $75, and the required reserve ratio is 20%, the potential expansion of checkable deposits is

$375 ( times by 5)

A bank has excess reserves of $1,000 and demand deposit liabilities of $80,000 when the reserve requirement is 20 percent. If the reserve requirement is lowered to 10 percent, the bank's excess reserves will be

$9,000

If reserves in the banking system increase by $100, then checkable deposits will increase by $1,000 in the simple model of deposit creation when the required reserve ratio is

.10

If the required reserve ratio is 15%, the simple deposit multiplier is

6.67

If the required reserve ratio is one-third, currency in circulation is $300 billion, checkable deposits are $900 billion, and there is no excess reserve, then the monetary base is

600 billion

The three players in the money supply process include

Banks, depositors, and the central bank

Ms-Money supply =

Currency in circulation(c) + Deposits (D)

An increase in monetary base goes into ______ is not multiplied, while an increase that goes into ______ is multiplied

Currency; Deposits

Decisions by depositors to increase their holdings of ________, or of banks to hold ________ will result in a smaller expansion of deposits than the simple model predicts.

currency; excess reserves

when the federal reserve sells a government bond to a primary dealer, reserves in the banking system _______ and the monetary base ______, everything else held constant

decrease; decrease

If the required reserve ratio is equal to 10 percent, a single bank can increase its loans up to a maximum amount equal to

its excess reserves

The purpose of the commitment by the Fed to keep the federal funds rate at zero for a long period of time is to

lower the long term interest rates

M1

most liquid assets

excess reserves are equal to

vault cash plus deposits with Federal Reserve banks minus required reserves.

x

x

If reserves in the banking system increase by $100, then checkable deposits will increase by $400 in the simple model of deposit creation when the required reserve ratio is

.25

If the required reserve ratio is 10 percent, currency in circulation is $400 billion, checkable deposits are $800 billion, and excess reserves total $0.8 billion, then the currency-deposit ratio is

.5

If reserves in the banking system increase by $100, then checkable deposits will increase by $100 in the simple model of deposit creation when the required reserve ratio is

1

If the required reserve ratio is 10 percent, currency in circulation is $400 billion, checkable deposits are $800 billion, and excess reserves total $0.8 billion, then the money supply is ________ billion.

1,200 billion

Money multiplier =

1/reserve ratio

if the required reserve ratio is 10%, the simple deposit multiplier is

10

If the required reserve ratio is 10 percent, currency in circulation is $400 billion, checkable deposits are $800 billion, and excess reserves total $0.8 billion, then the M1 money multiplier is

2.5

If a bank has excess reserves of $10,000 and demand deposit liabilities of $80,000, and if the reserve requirement is 20 percent, then the bank has actual reserves of

26,000

If the required reserve ration is 10 percent, currency in circulation is $400 billion, checkable deposits are 800 Billions, and excess reserves total .8 billion, then the monetary base is

480.8 billion

Everything else held constant, a decrease in holdings of excess reserves will mean

An increase in money supply

Everything else held constant, a decrease in the required reserve ratio on checkable deposits will mean

An increase in money supply

The monetary liabilities of the Federal Reserve include

Currency in circulation and reserves

If the banking system has a large amount of reserves, many banks will have excess reserves to lend and the federal funds rate will probably ________; if the level of reserves is low, few banks will have excess reserves to lend and the federal funds rate will probably ________.

Fall; rise

an assumption in the model of the money supply process is that the desired levels of currency and excess reserves

Grow proportionally with the checkable deposits

When the FED supplies the banking system with an extra dollar of reserves, deposits ______ by _______ than one dollar -- a process called multiple deposit creation.

Increase;more

M2 =

M1 + savings accounts + money market accounts + other near monies

Monetary Base (MB) =

MB=currency in circulation (C) + bank reserves (R)

________ are the most important monetary policy tool because they are the primary determinant of changes in the ________, the main source of fluctuations in the money supply.

Open market operations, monetary base

The most important advantage of discount policy is that the Fed can use it to

Perform its role as lender of last resort

There are two ways in which the Fed can provide additional reserves to the system: it can ______ government bonds or it can ________ discount loans to commercial banks

Purchase; Extend

If the Fed expects currency holdings to rise, it conducts open market ________ to offset the expected ________ in reserves.

Purchase; decrease

In the simple deposit expansion model, an expansion in checkable deposits of $1,000 when the required reserve ratio is equal to 20 percent implies that the Fed

Purchased $200 in government bonds

required reserve =

RRR • D

A _____ in market interest rates relative to the discount rate will cause discount borrowing to _______

Rise; Decrease

Both ________ and ________ are Federal Reserve assets.

Securities; loans to financial institutions

In the model of the money supply process, the depositor's role in influencing the money supply is represented by

The currency of holdings

Everything else held constant, an increase in currency holdings cause ____

The money supply to fall

The discount rate is kept ________ the federal funds rate because the Fed prefers that ________.

above; banks can monitor each other for credit risk

Funds held in ________ are subject to reserve requirements.

all checkable deposits

Discount policy affects the money supply by affecting the volume of ________ and the ________.

borrowed reserves; monetary base

the interest rate the fed charges banks borrowing from the fed is the

discount rate

If the Fed injects reserves into the banking system and they are held in excess reserves, then the money supply

does not change

Total reserves are the sum of ________ and ________.

excess reserves; required reserves

when the fed extends a $100 discount loan to the first national bank, reserves in the banking system

increase by $100

Assuming initially that the required reserve ratio = 15%, the currency-deposit ratio = 40%, and the excess reserve ratio = 5%, a decrease in the excess reserve ratio to 0% causes the M1 money multiplier to ________, everything else held constant.

increase from 2.33 to 2.55 1+CR/rrr+cr+err

When the Fed wants to raise interest rates after banks have accumulated large amounts of excess reserves, it would

increase the interest rate paid on excess reserves

Everything else held constant, if the sum of the required reserve ratio and the excess reserve ratio is less than one, an increase in the currency-deposit ratio causes the M1 money multiplier to ________ and the money supply to ________.

increase; decrease

when the primary dealer sells a government bond to the federal reserved, reserves in the banking system ________ and the monetary base ______, everything else is held constant

increase; decrease

To lower interest rates on residential mortgages to stimulate the housing market, the Fed extended its open market operations to purchase

mortgage backed securities

The Fed's open market operations normally involve only the purchase of government securities, particularly those that are short-term. However, during the crisis, the Fed started new programs to purchase

mortgage backed securities and long term treasuries

Suppose that from a new checkable deposit, First National Bank holds two million dollars in vault cash, eight million dollars on deposit with the Federal Reserve, and one million dollars in required reserves. Given this information, we can say First National Bank has ________ million dollars in excess reserves.

nine million

the policy tool of changing reserve requirements is

no longer used

purchase and sales of government securities by the federal reserve are called

open market operations

The percentage of deposits that banks must hold in reserve is the

required reserve ratio

Total reserves =

required reserves + excess reserves

The quantity of reserves demanded equals

required reserves plus excess reserves

Open market sales shrink ________ thereby lowering ________.

reserves and the monetary base; the money supply

In the simple deposit expansion model, a decline in checkable deposits of $1,000 when the required reserve ratio is equal to 20 percent implies that the Fed

sold $200 in government bonds

The purpose for a central bank to set negative interest rates on bank's deposit is to

stimulate the economy by encouraging banks to lend out the deposits they were keeping at the central bank.

Suppose that from a new checkable deposit, First National Bank holds two million dollars in vault cash, eight million dollars on deposit with the Federal Reserve, and nine million dollars in excess reserves. Given this information, we can say First National Bank faces a required reserve ratio of ________ percent.

ten percent

The interest rate charged on overnight loans of reserves between banks is the

the federal funds rate

The sum of the Fed's monetary liabilities is called

the monetary base


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