Week 7
If the reserve ratio is 8 percent, then an additional $850 of reserves can increase the money supply by as much as?
$10,625.
A bank loans Greg's Ice Cream $50,000 to remodel a building near campus to use as a new store. Is this a liability or asset for the bank? For Greg's Ice Cream? Why?
An asset for the bank and a liability for Greg's Ice Cream. The loan increases the money supply.
The Fed can increase the money supply by doing what?
Conducting open-market purchases or lowering the discount rate.
List assets from most to least liquid
Currency, stocks, fine art
Examples of Store of Value
Dollar bills, rare paintings, and emerald necklaces
A bank has a 20 percent reserve requirement, $7,000 in loans, and has loaned out all it can give the reserve requirement, how much does the bank have in deposits?
It has $8,750 in deposits
In a 100-percent-reserve banking system, if people decided to decrease the amount of currency, they held by increasing the amount they held in checkable deposits, what would happen to M1?
M1 would not change.
If the federal funds rate were below the level the Federal Reserve had targeted, the Fed could move the rate back towards its target by doing what?
Selling bonds to reduce reserves.
Federal Reserves
The agency responsible for regulating the U.S. monetary system.
why is the Fed's control of the money supply is not precise?
The amount of money in the economy depends in part on the behavior of depositors and bankers.
If the reserve requirement is 12 percent and banks desire to hold no excess reserves, when a bank receives a new deposit of $1,100, what is the amount loaned?
The bank will be able to make new loans up to a maximum of $968.
As the reserve ratio decreases, what happens to the money multiplier?
The money multiplier increases.
What is an example of a Unit of Account?
When in France you notice that prices are posted in euros.
Suppose banks decide to hold more excess reserves relative to deposits. Other things the same, this action will do what to the money supply?
money supply to fall. To reduce the impact of this the Fed could lower the discount rate.