3311 Ch 14 Practice Questions

The First National Bank receives an extra​ $100 of reserves but decides not to lend any of these reserves. How much deposit creation takes place for the entire banking​ system?

$0

If the required reserve ratio is​ 0.03, currency in circulation is $700 ​billion, deposits are $1000 ​billion, and excess reserves is​ $1 billion, then the money multiplier is equal to

(1+(700/1000))/(0.3+(1/1000)+(700/1000))

An open market sale of a​ $100 government security to a bank results to the​ T-account entries for the Federal Reserve of

-$100 in securities and -$100 in reserves

Reserves​ are

-Deposits at the Fed plus vault cash -assets for banks -liabilities for the Fed All of the above are correct.

Under​ 100% reserve​ banking, the money multiplier will​ be:

1

The monetary base is affected​ by:

All of the above are correct.

By​ definition, when the Fed conducts an open market​ purchase, it​ is:

Both B and C are correct. -buying bonds -increasing the quantity of reserves

If a bank sells​ $10 million of bonds to the Fed to pay back​ $10 million on the loan it​ owes, what will be the effect on the level of checkable​ deposits? Assume that the required reserve ratio on checkable deposits is​ 10%, banks do not hold any excess​ reserves, and the​ public's holdings of currency do not change.

Checkable deposits do not change.

If you decide to hold​ $100 less cash than usual and therefore deposit​ $100 more cash in the​ bank, what effect will this have on checkable deposits in the banking system if the rest of the public keeps its holdings of currency​ constant? Assume the required reserve ratio is​ 10% and banks do not hold any excess reserves.

Checkable deposits increase by​ $1,000.

Suppose that the Fed buys​ $1 million of bonds from the First National Bank. If the First National Bank and all other banks use the resulting increase in reserves to purchase securities only and not to make​ loans, what will happen to checkable​ deposits? Assume the required reserve ratio is 10 percent.

Checkable deposits increase by​ $10 million.

Which of the following players can affect the money supply by its holdings of currency versus currency versus deposits?

Depositors

The currency that is physically held by banks is known as vault cash. The interest rate charged for borrowed interest rate charged for borrowed reserves is known as the

Discount rate

When a bank pays off its borrowings from the​ Fed, the amount of reserves in the banking system

Drops

Reserves that the banks choose to hold in addition to the amount required is known as

Excess reserves

​"The Fed can perfectly control the amount of reserves in the​ system." Is this statement​ true, false, or​ uncertain? Explain your answer.

False. A shift from deposits to currency will affect the amount of​ reserves, and since other players are involved in this​ process, the Fed ultimately cannot control the level of reserves in the system.

​"The Fed can perfectly control the amount of the monetary​ base, but has less control over the composition of the monetary​ base." Is this statement​ true, false, or​ uncertain? Explain your answer.

False. Since the Fed cannot control the amount of discount lending to financial​ institutions, it does not have perfect control over the amount of reserves in the banking system and hence the monetary base.

In the United​ States, the central bank is known as the ____. Of the three​ players, the _______ is the most important.

Fed Central bank

If there is a sharp rise in the currency​ ratio, then people begin to hold _____ deposits relative to currency and the level of multiple deposit expansion _____. This causes the money multiplier to _____,which in turn causes the money supply to ________.

Fewer; decreases fall; decrease

In October​ 2008, the Federal Reserve began paying interest on the amount of excess reserves held by banks.​ How, if at​ all, might this affect the multiplier process and the money​ supply?

Holding the monetary base​ constant, paying interest on reserves should raise the excess reserves​ ratio, which reduces the money multiplier and reduces the money supply.

Following the financial crisis in​ 2008, the Federal Reserve began injecting the banking system with massive amounts of​ liquidity, and at the same​ time, very little lending occurred. As a​ result, the M1 money multiplier was below 1 for most of the time from October 2008 through 2011. How does this relate to your answer to the previous​ step?

If large amounts of reserves enter the banking system but are held as excess​ reserves, it is possible for the money multiplier to fall below one.

what effect might a financial panic have on the money multiplier and the money​ supply? Why?

In a financial​ panic, you would expect the money multiplier to decrease and the money supply to decrease, which would cause the excess reserves ratio to increase. Thus depositors are likely to increase their holdings of currency.

If Jane Brown closes her account at the First National Bank and uses the money instead to open a money market mutual fund​ account, what happens to​ M1? Why?

M1 does not change because the funds that go to the money market mutual fund are first deposited into the mutual​ fund's bank account

r​ = required reserve ratio​ = 0.10 c ​= ​{C/D}​ = currency ratio​ = 0.45 e​ = ​{ER/D}​ = excess reserve ratio​ = 0.05 MB​ = the monetary base​ = ​$1,000 billion Given that the formula for the money multiplier is (1+c/r+e+c), find the value for M​, the money supply.

Money supply is $2,417 billion Use the money multiplier to find the new value for the money supply if open market operations increase the monetary base by ​$300 billion. The money supply is now ​$3,142 billion.

Suppose that the Federal Reserve System set the required reserve ratio equal to 0.1 and that the banking system holds $60 billion in excess reserves. If the amount of deposits is $1000 billion and the amount of currency holdings is $55 billion, then the currency ratio is 0.06.

Referring to part​ a, the excess reserve ratio is 0.06.

If a bank depositor withdraws​ $1,000 of currency from an​ account, what happens to​ reserves, checkable​ deposits, and the monetary​ base? Assume that the required reserve ratio on checkable deposits is​ 10% and banks do not hold any excess reserves.

Reserves fall by​ $1,000, checkable deposits fall by​ $10,000, and the monetary base remains unchanged.

__________ lists the changes that occur in balance sheet​ items, starting from the initial balance sheet position.

T-account

r​ = required reserve ratio​ = 0.10 c ​= ​{C/D}​ = currency ratio​ = 0.25 e​ = ​{ER/D}​ = excess reserves ratio​ = 0.05 t​ = {T/D}​ = time deposit ratio​ = 1 mm​ = {MM/D}​ = money market fund ratio​ = 0.50 MB​ = the monetary base​ = ​$3,000 billion Given that the formula for the M2 money multiplier is m2= 1+c+t+mm/r+e+c, find the value for the M2 money supply

The M2 money supply is ​$20,625 billion. Use the M2 money multiplier to find the new value for the money supply if open market operations increase the monetary base by ​$100 billion. The M2 money supply is now ​$21,313 billion.

Which of the following players can affect the money supply through open market operations through open market operations​?

The central bank

Suppose the Fed increases the interest rate it pays on excess reserves held at the Fed. What would happen to the level of e ​(the excess​ reserve/deposit ​ratio)​?

The level of e would rise.

Predict what will happen to the money supply if there is a sharp rise in the currency ratio.

The money supply falls

If the economy starts to boom and loan demand picks​ up, what do you predict will happen to the money​ supply?

The money supply will increase

What do you predict would happen to the money supply if expected inflation suddenly​ increased?

The money supply will increase

The​ "cast of​ characters" in the money supply story include the following except the

U.S. Treasury.

When the nonbank public decides to hold more currency, then we expect

a fall in the money supply

An open market sale of ​$300300 of government security to the nonbank public results to ________ in checkable deposits in the Nonbank​ Public's T-account. An open market sale of government securities to the nonbank public _______ the monetary base.

a reduction; lowers

As financial​ intermediaries, banks:

accept deposits and make loans

The Federal​ Reserve's act of controlling the monetary base through its purchases or sales of securities is known as

an open market operation.

When the Federal Reserve buy a government security on the open​ market, it is called

an open market purchase

The Federal Reserve System is the​ ___________ for the United​ States, which is defined as the government agency responsible for​ __________.

central​ bank; the conduct of monetary policy

The operation of the Fed and its monetary policy involve actions that affects its record of holdings known as the​ Fed's balance sheet. Which of the following are found on the liability side of the​ Fed's balance​ sheet?

currency in circulation

The monetary base is comprised​ of:

currency in circulation and reserves.

The interest rate charged to banks that borrow funds from the Fed is known as​ the:

discount rate

An open market purchase increases the monetary base if the proceeds are kept in _______. If the seller of securities keep the proceeds in deposits after an open market purchase by the​ Fed, then the effect on monetary base is ________ if the proceeds are kept as currency instead.

either currency or deposit; the same

The money supply is expected to rise when a decrease in ________ is observed.

excess reserves

The monetary base is known as

high-powered money

A purchase of government bonds from the public by the Federal Reserve​ Bank:

increases the monetary base directly and may increase reserves.

monetary base

is comprised of currency in circulation plus total reserves

An open market purchase has ___________ when the proceeds from the sale are kept in currency.

no effect

The amount of lending in the economy is __________ controlled by the Fed.

not completely

When the Fed wants to reduce reserves in the banking​ system, it will

sell government bonds

The money multiplier when people hold currency and when banks hold excess reserves is the simple multiplier ​(the multiplier found when currency held and excess reserves are both​ zero).

smaller than

A shift from currency to deposits will increase the reserves in the banking system. If Steffi withdraws​ $400 in cash from her checking​ account, then

the amount of reserves decline

A bank has a required reserve ratio of​ 10%. If the bank has deposits of​ $100,000 and is holding​ $12,000 in​ reserves:

the bank is holding​ $2,000 in excess reserves.

When the Fed gives a discount loan of $100 to a bank,

the monetary base increases by $100

The ratio of the money supply to the monetary base is​ called:

the money multiplier

​Traveler's checks have no reserve requirements and are included in the M1 measure of the money supply. When people travel during the summer and convert some of their checking account deposits into​ traveler's checks, what happens to the money​ supply? Why?

the money supply increases due to a shift from one component of the money supply​ (checkable deposits) with less multiple expansion to another​ (traveler's checks) with more.

The Fed buys​ $100 million of bonds from the public and also lowers the reserve requirement r. What will happen to the money​ supply?

the money supply will increase.

The monetary base less borrowed reserves is called

the nonborrowed monetary base.

Suppose the required reserve ratio is​ 0.12, the currency ratio is​ 0.6, and the excess reserves ratio is 0.03. If the Fed decreases the monetary base by​ $5 billion, the money supply will fall by

​$10.67 billion

If the required reserve ratio on checkable deposits increases to​ 20%, how much multiple deposit creation will take place when reserves are increased by​ $100? Assume that banks do not hold any excess reserves and the​ public's holdings of currency do not change.

​$500.

An open market sale of a​ $100 to a bank results to the​ T-account entries for the Banking System of

​+$100 in securities and​ -$100 in reserves

Loans that the Fed makes to banks appear on the balance sheet as part of its​ __________, and deposits made by banks appear on the​ Fed's balance sheet as part of its​ ____________.

​assets; liabilities