Money & Banking Test 2

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

A bank has excess reserves of $6000 and demand deposits liabilities of $100,000 when the required reserve ratio is 20%. If the reserve ratio is raised to 25%, the bank's excess reserves will be

$1000

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

$1200

If the required reserve ratio is 10 percent, currency in circulation is $400 billion, checkable deposits are $1000 billion, and excess reserves total $1 billion, then the money supply is _______ billion

$1400

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

$36,000

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

If the reserves in the banking system increase by $100, then the checkable deposits will increase by $1000 in the simple model of deposit creation when the required reserve ratio is

0.10

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

0.25

If the required reserve ratio is one-third, currency in circulation is $300 billion, and checkable deposits are $900 billion, then the currency ratio is

0.33

The three largest Federal Reserve banks (New York, Chicago, and San Francisco) combined hold more than ______ percent of the assets of the Federal Reserve System

50%

The Federal Open Market consists of the

7 members of the Board of Governors and 5 presidents of the regional Fed banks

The relationship between borrowed reserves, the non borrowed monetary base, and the money base is

BR = MB -MBn

The Federal Reserve entity that makes decisions regarding the conduct of open market operations is the

Federal Open Market Committee

The equation that shows the amount of the monetary base needed to support existing levels of checkable deposits, excess reserves, and currency is

MB = (rr X D) - ER - C

The Federal Open Market Committee makes the Fed's decisions on the purchase or sale of government securities, but these purchases or sales are executed by the Federal Reserve Bank of

New York

The Federal Reserve Bank of _____ plays a special role in the Federal Reserve System because it houses the open market desk.

New York

The president from which Federal Reserve Bank always has a vote in the Federal Open Market Committee?

New York

________ are the most important monetary policy tool b/c they are the primary determinant of changes in the ______, the main source of fluctuations in the money supply

Open market operations, monetary base

At its inception, the Federal Reserve was intended to be

a lender-of-last-resort

A nominal variable, such as the inflation rate or the money supply, which ties down the price level to achieve price stability is called _____ anchor

a nominal

The discount rate is kept _______ the FFR b/c the Fed prefers that ________

above, banks borrow reserves from each other

Lessons that economists and policy makers have learned from the recent global financial crisis include

all of the above

The "Greenspan doctrine" -central banks should not try to prick bubbles - was based on which of the following arguments

all of the above

A credit-driving bubble arises when _______ in lending causes _____ in asset prices which can cause _______ in lending

an increase; an increase; a further increase

_______ bubble is driven entirely by unrealistic optimistic expectiations

an irrational exuberance

Members of the Board of Governors are

appointed by the president of the US and confirmed by the Senate

When asset prices increase above their fundamental values it is called an

asset-price bubble

When a member of the nonbank public withdraws currency from her bank account

bank reserves fall, but the monetary base remains unchanged

When a member of the nonbank public deposits currency into her bank account

bank reserves rise, but the monetary base remains unchanged

The Fed prefers that _________ so that ______

banks borrow reserves from each other; banks can monitor each other for credit risk

The three players in the money supply process include

banks, depositors, and the central bank

If the central bank pursues a monetary policy that is more expansionary than what firms and people expect, then the central bank must be trying to

boost output in the short run

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

borrowed reserves; monetary base

The formula for the simple deposit multipliers can be expressed as

change in D = 1/rr X change in R

The Fed's lender-of-last-resort function

creates a moral hazard problem

Both ______ and ______ are monetary liabilities of the Fed.

currency in circulation; reserves

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

currency; deposits

The effect of an open market purchase on reserves differs depending on how the seller of the bonds keeps the proceeds. If the proceeds are kept in _____, the open market purchase has no effect on reserves; if the proceeds are kept as ____, reserves increase by the amount of the open market purchase

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 predict

currency; excess reserves

In the market for reserves, if the FFR is b/w the discount rate and the interest rate paid on excess reserves, a _______ in the reserve requirement decreases the demand for reserves, _______ the federal funds interest rate

decline; lowering

All else the same, when the Fed calls in a $100 discount loan previously extended to the First National Bank, reserves in the banking system

decrease by $100

Assuming initatilly that rr=10%, c=40%, and e=0, an increase in rr to 15% causes the M1 money multiplier to _____, everything else constant

decrease from 2.8 to 2.55

Everything else constant, an increase in the required reserve ratio on checkable deposits causes the M1 money multiplier to ______ and the money supply to _______

decrease; decrease

When the Federal Reserve sells a government bond to a bank, reserves in the banking system ____ and the monetary base ______, everything else constant

decrease; decreases

Suppose a person cashes his payroll check and holds all the funds in the form of currency. Everything else held constant, total reserves in the banking system _____ and the monetary base _____.

decrease; remains unchanged

The Federal Reserve will engage in a matched sale-purchase transaction when it wants to ________ reserves ________ in the banking system

decrease; temporarily

In the market for reserves, a lower interest rate paid on excess reserves

decreases the effective floor for the federal funds rate

Open market operations intended to offset movements in non controllable factors (such as float) that affect reserves and the monetary base are called

defensive open market operations

If float is predicted to decrease b/c of unseasonably good weather, the manager of the trading desk at the Federal Reserve Bank of New York will likely conduct a _____ open market ______ of securities

defensive; purchase

The interest rate the Fed charges banks borrowing from the Fed is the

discount rate

Everything else constant, the vertical section of the supply curve of reserves is shortened when the

discount rate decreases

The mandate for the monetary policy goals that has been given to the Federal Reserve System is an example of a ______ mandate

dual

There are two types of open market operations; _______ open market operations are intended to change the level of reserves and the monetary base, and the ______ open market operations are intended to offset movements in the other factors that affect the monetary base

dynamic; defensive

Total reserves are the sum ______ and ______

excess reserves; required reserves

The political business cycle refers to the phenomenon that just before elections, politicians enact _______ policies. After the elections, the bad effect of these policies (for example, ______) have to be counteracted with ______ policies.

expansionary; a higher inflation rate; contractionary

IF the banking system has a large amount of reserves, many banks will have excess reserves to lend and the FFR will probably _______; if the level of reserves is low, few banks will have excess reserves to lend and the FFR will probably ________

fall; rise

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

federal funds rate

Everything else constant, when the supply for federal funds intersects the reserve demand curve on the downward sloping section, decreasing the interest rate paid on excess reserves

has no effect on the FFR

Everything else constant, in the market for reserves, when the federal funds rate is 3%, increasing the interest paid on excess reserves from 1% to 2%

has no effect on the federal funds rate

Everything else constant, in the market for reserves, when the federal funds rate is 3%, lowering the discount rate from 5% to 4%

has no effect on the federal funds rate

Which set of goals can, at times, conflict in the short run?

high employment and price level stability

When an individual sells a $100 bond to the Fed, she may either deposit the check she receives or cash it for currency. In both cases

high-powered money increases (monetary base)

Assuming initially that rr=15%, c=40%, and e=5%, a decrease in e to 0% causes the M1 money multiplier to ______, everything else constant

increase from 2.33 to 2.55

If the Treasury deposits at the Fed are predicted to _____, the manager of the trading desk at the New York Fed bank will likely conduct _____ open market operations to ______ reserves

increase; defensive; inject

When bad storms slow the check-clearing process, float tends to ____ causing the Fed to initiate _____ open market ____

increase; defensive; sales

When the Federal Reserve purchases a government bond from a bank, reserves in the banking system _____ and the monetary base _____, everything else constant

increase; increase

Foreign exchange rate stability is important b/c a decline in the value of the domestic currency will ______ the inflation rate, and an increase in the value of the domestic currency makes domestic industries ______ competitive with competing foreign industries

increase; less

The Federal Reserve will engage in a repurchase agreement when it wants to ________ reserves ________ in the banking system

increase; temporarily

Everything else constant, when the FFR equals the interest rate paid on excess reserves, raising the interest rate paid on excess reserves

increases the FFR

In the market for reserves, if the FFR is b/w the discount rate and the interest rate paid on reserves, an increase in the reserve requirement ______ the demand for reserves, _______ the FFR, everything else constant

increases; raising

If the Fed injects reserves into the banking system and they are held as excess reserves, then the monetary base ________ and the money supply _______

increases; remains unchanged

In the market for reserves, if the federal funds rate is above the interest rate paid on excess reserves, an open market purchase _________ the ________ of reserves which causes the federal funds rate to fall, everything else held constant

increases; supply

The most common definition that monetary policymakers use for price stability is

low and stable inflation

Everything else constant, in the market for reserves, when the FFR is 5%, lowering the discount rate from 5% to 4%

lowers the FFR

Everything else constant, when the FFR equals the discount rate, the discount rate

lowers the FFR

Everything else constant, when the supply for federal funds intersects the reserve demand curve along the horizontal section of the demand curve, lowering the interest rate paid on excess reserves

lowers the FFR

The opportunity cost of holding excess reserves is the federal funds rate

minus the interest rate paid on excess reserves

From before the financial crisis began in Septemeber of 2007 to when the crisis was over at the end of 2009, the huge expansion in the Fed's balance sheet and the monetary base did not result in a large increase in monetary supply because

most of it just flowed into holdings of excess reserve

Suppose that from a new checkable deposit, FNB holds two million dollars in vault cash, eight million on deposit with the Federal Reserve, and one million dollars in required reserves. Given this, FNB has ______ million dollars in excess reserves

nine

The policy tool of changing reserve requirements is

no longer used

The quantity of reserves supplied equals

non borrowed reserves plus borrowed reserves

Monetary policy is considered time-inconsistent because

policymakers are tempted to pursue discretionary policy that is more expansionary in the short run

Members of Congress are able to influence monetary policy, albeit indirectly, through their ability to

propose legislation that would force the Fed to submit budget requests to Congress, as must other government agencies

There are two ways in which the Fed can provide additional reserves to the banking system: it can _______ government bonds or it can ____ discount loans to commercial banks.

purchase; extend

Suppose, at a given FFR, there is an excess demand for reserves in the federal funds market. If the Fed wants the FFR to stay at that level, then it should undertake an open market ______ of bonds. If the Fed does nothing the FFR will

purchase; increase

If the Fed expects currency holdings to rise; it conducts open market ______ to offset the expected ______ in reserves

purchases; decrease

Open market purchases _____ reserves and the monetary base thereby ______ the money supply

raise; raising

Everything else constant, in the market for reserves, when the FFR is 1%, increasing the interest rate paid on reserves from 1% to 2%

raises the FFR

The monetary base minus currency in circulation equals

reserves

Open market sales shrink _______ thereby lowering ________

reserves and the monetary base; the money supply

In the market for reserves, a lower discount rate

shortens the vertical section of the supply curve of reserves

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 is required in reserves. Given this, FNB faces a required reserve ratio of ____ percent.

ten

The government agency that oversees the banking system and is responsible for the conduct of monetary policy in the United States is

the Federal Reserve System

Goal independence is the ability of _____ to set monetary policy _______

the central bank; goals

Instrument independence is the ability of ______ to set monetary policy ______

the central bank; instruments

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

the currency holdings

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

the excess reserves

The primary indicator of the Fed's stance on monetary policy is

the federal funds rate

The discount rate is

the interest rate the Fed charges on loans to banks

Total reserves minus bank deposits with the Fed equals

vault cash