study for econ exam
A commercial bank has $100 million in checkable-deposit liabilities and $12 million in actual reserves. The required reserve ratio is 10 percent. How big are the bank's excess reserves?
2 million
What are the components of the M1 money supply?
Currency in circulation and checkable deposits
Short-run aggregate supply curves reflect an inverse relationship between the price level and the level of real output?
False
Identify three functions of the Federal Reserve of your choice, other than its main role of controlling the supply of money.
The Fed issues Federal Reserve Notes, the paper currency used in the U.S. monetary system. The Fed sets reserve requirements and holds the mandated reserves that are not held as vault cash. The Fed lends money to banks and thrifts. The Fed provides for check collection. The Fed acts as fiscal agent for the Federal government. The Fed supervises the operation of banks.
What is the monetary multiplier, and how does it relate to the reserve ratio ?
The money multiplier is the inverse of the reserve ratio. This can be understood intuitively; if more money is held in reserves in banks, then less is available to be lent out - if less money is available to be lent out, then the less money will be created. Thus, the higher the reserve ratio, the lower the money multiplier and the less the money supply.
Explain the links between changes in the nation's money supply, the interest rate, investment spending, aggregate demand, real GDP, and the price level
The more money a country has in circulation, the less valuable it becomes. The less money the economy prints and circulates the more valuable each one becomes and the buying power increases which will temporarily cause people to be willing to spend more
Explain why a single commercial bank can safely lend only an amount equal to its excess reserves, but the commercial banking system as a whole can lend by a multiple of its excess reserves.
When a bank grants a loan, it can expect that the borrower will not leave the proceeds of the loan sitting idle in his or her account. Most people borrow to spend. Therefore the lending bank can expect that checks will be written against the loan and that the bank will shortly lose reserves to other banks, as the checks are presented for payment, to the full extent of the loan. In short, when a bank grants loans to the full extent of its excess reserves, it can shortly expect to lose these excess reserves to other banks. From this it can be seen why a bank cannot safely lend more than its excess reserves. If it did, it would soon find its cash reserves below its legal reserve requirement.
Assume that the following asset values (in millions of dollars) exist in Ironmania: Federal Reserve Notes in circulation = $700; Money market mutual funds (MMMFs) held by individuals = $400; Corporate bonds = $300; Iron ore deposits = $50; Currency in commercial banks = $100; Savings deposits, including money market deposit accounts (MMDAs) = $140; Checkable deposits = $1500 ; Small-denominated (less than $100,000) time deposits = $100; Coins in circulation = $40. LO1 a. What is M1 in Ironmania? b. What is M2 in Ironmania?
a. 2,240 million b. 2880 million
The exchange rate between the U.S. dollar and the British pound starts at $1 = £0.5. It then changes to $1 = £0.75. Given this change, we would say that the U.S. dollar has _______ while the British pound has________________
appreciated, depreciated
What is the basic objective of monetary policy? What are the major strengths of monetary policy? Why is monetary policy easier to conduct than fiscal policy ?
assist the economy in achieving a full employment, non inflationary level of output. its speed and flexibility monetary policy has a much shorter administrative lag than fiscal policy
The long-run aggregate supply curve assumes that nominal wages are fixed?
false
Suppose that you are a member of the Board of Governors of the Federal Reserve System. The post-2008 economy is experiencing a sharp rise in the inflation rate. What change in the federal funds rate would you recommend?
increase it
How would a decrease in the reserve requirement affect the (a) size of the monetary multiplier, (b) amount of excess reserves in the banking system, and (c) extent to which the system could expand the money supply through the creation of checkable deposits via loans
increase, rise, increase
In the long run, an increase in the price level will result in an increase in nominal wages? T/F
true
Why does the Federal Reserve require commercial banks to have reserves? Explain why reserves are an asset to commercial banks but a liability to the Federal Reserve Banks. What are excess reserves? How do you calculate the amount of excess reserves held by a bank? What is the significance of excess reserves?
Reserves provide the Fed a means of controlling the money supply. It is through increasing and decreasing excess reserves that the Fed is able to achieve a money supply of the size it thinks best for the economy
Explain why the U.S. demand for Mexican pesos is downsloping and the supply of pesos to Americans is upsloping
The U.S. demand for pesos is downward-sloping: When the peso depreciates in value (relative to the dollar) the United States finds that Mexican goods and services are less expensive in dollar terms and purchases more of them, demanding a greater quantity of pesos in the process. The supply of pesos to the United States is upward-sloping: As the peso appreciates in value (relative to the dollar), US. goods and services become cheaper to Mexicans in peso terms. Mexicans buy more dollars to obtain more U.S. goods, supplying a larger quantity of pesos.
Use commercial bank and Federal Reserve Bank balance sheets to demonstrate the impact of each of the following transactions on commercial bank reserves: a. Federal Reserve Banks purchase securities from private businesses and consumers. b. Commercial banks borrow from the Federal Reserve Banks. c. The Board of Governors reduces the reserve ratio.
(a) It is assumed the Fed buys $2 billion worth of securities. This should increase checkable deposits and commercial bank reserves by $2 billion. With demand deposits of $202 billion, required reserves are $40.4 billion, (= 20 percent of $202 billion). Therefore, excess reserves are $1.6 billion (= $42 billion $40.4 billion) and the banking system can increase the money supply (by making loans) by $8 billion more (= $1.6 billion x 5). (b) It is assumed the commercial banks borrow $1 billion from the Fed. The commercial banks may now increase the money supply (through making loans) by $5 billion (= $1 billion x 5). (c) Changing the reserve ratio in and of itself does not change the balance sheets. However, if we assume the reserve ratio has been decreased from 20 percent to 19 percent, required reserves are now $38 billion (= 19 percent of $200 billion) and the commercial banks can now increase the money supply (through making loans) by $10.53 billion [= $2 billion x (1/0.19)]. Proof: 19 percent of $210.53 billion is $40 billion.
Suppose that the banking system in Canada has a required reserve ratio of 10 percent while the banking system in the United States has a required reserve ratio of 20 percent. In which country would $100 of initial excess reserves be able to cause a larger total amount of money creation?
Canada
Which two of the following financial institutions offer checkable deposits included within the M1 money supply?
Commercial banks and thrift institutions offer checkable deposits.
Distinguish between the Federal funds rate and the prime interest rate. Why is one higher than the other? Why do changes in the two rates closely track one another?
Federal funds rate is the interest rate at which banks lend to one another. Prime interest rate is the interest rate at which banks lend to customers. The prime rate is higher than the federal funds rate because if you're a bank and you borrow money from another bank, you'd want to profit from that money when lending to customers. So you charge a higher interest rate to customers (prime interest rate) than the rate you were charged by the bank you borrowed from (federal funds rate). This is why the changes in the rates track one another because the prime interest rate is influenced by the federal funds rate and changes in that rate.
What do the distinctions between short-run aggregate supply and long-run aggregate supply have in common with the distinction between the short-run Phillips Curve and the long-run Phillips Curve?
In the short-run, economists assume that production costs don't change so the aggregate supply curve is fixed. In the long-run, wages and input prices adjust to price changes causing a rise (or fall) in production costs and aggregate supply decreases (or increases). This means the long-run relationship between price-level and output is vertical at the full-employment level of output.
Evaluate the use of artificial trade barriers, such as tariffs and import quotas, as a means of achieving and maintaining full employment.
Trade barriers may be defended as being necessary to protect domestic firms from foreign dumping, to protect so-called infant industries, and to ensure adequate production levels in sectors deemed to be essential in the event of war.
Which of the following Fed actions will increase bank lending? a. The Fed raises the discount rate from 5 percent to 6 percent. b. The Fed raises the reserve ratio from 10 percent to 11 percent. c. The Fed initiates reverse repos involving $10 billion worth of Treasury bonds with nonbank financial firms. d. The Fed lowers the discount rate from 4 percent to 2 percent.
c,d
If the Federal Reserve wants to increase the federal funds rate using open-market operations, it should _____________ bonds to nonbank financial firms. LO16.4 Initiate repos of. Initiate reverse repos of.
initiate repos of
