CH 14 & 16 MACRO HW Questions
A bank borrows $100,000 from the Fed, leaving a $100,000 Treasury bond on deposit with the Fed to serve as collateral for the loan. The discount rate that applies to the loan is 4 percent, and the Fed is currently mandating a reserve ratio of 10 percent. How much of the $100,000 borrowed by the bank must it keep as required reserves? $4,000 $0 $10,000 $100,000
$0 This is true because the reserve ratio does not apply to money that commercial banks borrow from the Fed. Thus, in this case, the bank in question will see its lendable reserves rise by the full $100,000 that it borrows from the Fed because none of the $100,000 will have to be held as required reserves.
A bank currently has $100,000 in checkable deposits and $15,000 in actual reserves. If the reserve ratio is 20 percent, the bank has ________ in money-creating potential. If the reserve ratio is 14 percent, the bank has ________ in money-creating potential.
$5,000; $1,000 Given that it has $100,000 in checkable deposits, the reserve ratio of 20 percent implies that the bank must keep $20,000 (= 0.20 × $100,000) worth of reserves. But given that it has only $15,000 of actual reserves on hand, the bank is short $5,000 worth of reserves. In order to get that money, the bank will have to reduce the volume of its outstanding loans by $5,000. As it does so, the money supply will be reduced by $5,000 as there will be $5,000 less of checkable-deposit money circulating in the economy. Thus, the bank's current situation of being short $5,000 of reserves implies that its money-creating potential is −$5,000.
In 1980, the U.S. inflation rate was 13.5 percent and the unemployment rate reached 7.8 percent. Suppose that the target rate of inflation was 3 percent back then and the full-employment rate of unemployment was 6 percent at that time. What value does the Taylor Rule predict for the Fed's target interest rate?
18.95% The mathematical expression of the Taylor Rule is: Fed target interest rate = Real risk-free interest rate + Current actual inflation rate + [0.5 × (inflation gap)] − [1.0 × (unemployment gap)]. The inflation gap is the actual rate of inflation minus the target rate of inflation (in this case, 13.5 percent − 3 percent = 10.5 percent). The unemployment gap is the actual rate of unemployment minus the full-employment rate of unemployment (in this case, 7.8 percent − 6 percent = 1.8 percent). Fed target interest rate = 2 percent + 13.5 percent + (0.5 × 10.5 percent) − (1.0 × 1.8 percent) = 18.95 percent.
Suppose the Federal Reserve sets the reserve requirement at 14 percent, banks hold no excess reserves, and no additional currency is held. a. What is the money multiplier? b. By how much will the total potential money supply change if the Federal Reserve changes the amount of reserves by −$70 million? c. Suppose the Federal Reserve wants to decrease the total money supply by −$400 million. By how much should the Federal Reserve change reserves to achieve this goal?
7.14 (1/0.14) -$500 million (If the money multiplier is 7.14 and reserves decrease by −$70 million, then the total potential change in the money supply can be found by taking 7.14 × −$70 million = −$500 million) -$56 million (−$400 million and divide it by 7.14 such that −$400 million/7.14 = −$56 million.)
Which of the following is not a function of the Fed? Advising Congress on fiscal policy Regulating the supply of money Setting reserve requirements for banks Serving as a lender of last resort
Advising Congress on fiscal policy
a. What are the components of the M1 money supply? b. What is the largest component of M1? c. Which of the components of M1 is legal tender? d. Why is the face value of a coin greater than its intrinsic value? e. What near-monies are included in the M2 money supply?
Currency in circulation and checkable deposits Checkable deposits Currency People would sell it for its intrinsic value Noncheckable savings deposits, money market deposit accounts, small time deposits, and money market mutual fund balances
Which group votes on the open-market operations that are used to control the U.S. money supply and interest rates? Federal Reserve System Federal Open Market Committee (FOMC) Board of Governors of the Federal Reserve System The 12 Federal Reserve Banks
Federal Open Market Committee (FOMC)
Suppose that Lady Gaga goes to Las Vegas to play poker and at the last minute her record company says it will reimburse her for 50 percent of any gambling losses that she incurs. a. Will Lady Gaga probably wager more or less as a result of the reimbursement offer? b. What economic concept does your answer illustrate?
More Moral Hazard
a. What "backs" the money supply in the United States? b. What determines the value (domestic purchasing power) of money? c. How does the purchasing power of money relate to the price level? d. In the United States, who is responsible for maintaining money's purchasing power?
There is no concrete backing to the money supply in the United States. People's willingness to accept it in exchange for goods and services It is inversely related to the price level. Board of Governors of the Federal Reserve System
When bond prices go up, interest rates go __________. up down nowhere
down
If there is an increase in the nation's money supply, the interest rate will fall, investment spending will rise, aggregate demand will shift right, real GDP will rise, and the price level will fall. rise, investment spending will fall, aggregate demand will shift right, real GDP will fall, and the price level will rise. rise, investment spending will fall, aggregate demand will shift right, real GDP will rise, and the price level will fall. fall, investment spending will rise, aggregate demand will shift right, and real GDP and the price level will rise.
fall, investment spending will rise, aggregate demand will shift right, and real GDP and the price level will rise.
The Wall Street Reform and Consumer Protection Act of 2010 tried to address some of the problems that helped cause the financial crisis of 2007-2008 by giving the Federal Reserve broader authority to regulate all large financial institutions. preventing banks from merging. creating the Office of Thrift Supervision to increase the oversight of all financial institutions. capping the interest rate that banks could charge to consumers.
giving the Federal Reserve broader authority to regulate all large financial institutions.
e. When the price of everything goes up, it is not because everything is worth more but because the currency is worth less. This statement acknowledges that f. Any central bank can create money; the trick is to create enough, but not too much, of it. This statement acknowledges that
if the price of everything rises, it means the currency has less purchasing power. a central bank can create too much money, lowering its value and causing inflation.
A commercial bank sells a Treasury bond to the Federal Reserve for $100,000. The potential money supply: is unaffected by the transaction. decreases. increases.
increases
An important reason why members of the Federal Reserve's Board of Governors are each given extremely long, 14-year terms is to: insulate members from political pressures that could result in inflation. attract younger people with lots of time left in their careers. help older members avoid job searches before retiring. avoid the trouble of constantly having to deal with new members.
insulate members from political pressures that could result in inflation
Other than its main role of controlling the supply of money, functions of the Federal Reserve include issuing Federal Reserve Notes, overseeing government transactions, and performing economic projections. overseeing government transactions, providing for check collection, and supervising the operation of banks. performing economic projections, providing for check collection, and supervising the operation of banks. issuing Federal Reserve Notes, providing for check collection, and supervising the operation of banks.
issuing Federal Reserve Notes, providing for check collection, and supervising the operation of banks.
a. The three basic functions of money are b. Rapid inflation can undermine money's ability to perform its functions. During periods of runaway inflation,
medium of exchange, unit of account, and store of value. people often revert to barter because money fails as a medium of exchange.
City Bank is considering making a $50 million loan to a company named SheetOil that wants to commercialize a process for turning used blankets, pillowcases, and sheets into oil. This company's chances for success are dubious, but City Bank makes the loan anyway because it believes that the government will bail it out if SheetOil goes bankrupt and cannot repay the loan. City Bank's decision to make the loan has been affected by: securitization. token money. liquidity. moral hazard.
moral hazard.
The financial crisis of 2007-2008 was exacerbated by subprime mortgage loans. These loans were made to borrowers Subprime mortgage loans were one of the factors that exacerbated the financial crisis of 2007-2008. These loans resulted in Mortgage-backed securities were one of the factors that exacerbated the financial crisis of 2007-2008 because
more likely to default on their loans. an increase in demand for housing and a rapid, unsustainable increase in home prices. they reduced the risk exposure that banks faced after issuing subprime loans, and encouraged this type of lending
a. Each member of the Board of Governors of the Federal Reserve System is selected by b. The Board of Governors of the Federal Reserve System c. The Federal Open Market Committee (FOMC) includes d. The Federal Open Market Committee (FOMC)
the U.S. president and confirmed by the Senate. coordinates policies for the 12 Federal Reserve Banks. members of the Board of Governors and 5 of the 12 presidents of the Federal Reserve Banks, of which the president of the New York Fed has a permanent voting seat. votes on the Fed's monetary policy and directs the purchase or sale of government securities.
a. When economists say that the Federal Reserve Banks are central banks, it means that b. When economists say that the Federal Reserve Banks are quasi-public banks, it means that c. When economists say that the Federal Reserve Banks are bankers' banks, it means that
the banks' policies are coordinated by the Federal Reserve Board of Governors. Federal Reserve Banks are a blend of private ownership and public control. they perform the same functions for banks as banks perform for the public.
Economists nearly uniformly support an independent Fed rather than one beholden directly to either the president or Congress because economists don't trust the president or Congress. this independence will ensure lower interest rates. this independence allows the Fed to more effectively control the money supply and maintain price stability. Correct the desires of special-interest groups change too frequently.
this independence allows the Fed to more effectively control the money supply and maintain price stability.
a.) The invention of money is one of the great achievements of humanity, for without it the enrichment that comes from broadening trade would have been impossible. This statement acknowledges that b.) Money is whatever society says it is. This statement acknowledges that c. In the United States, the debts of government and commercial banks are used as money. This statement acknowledges that d. People often say they would like to have more money, but what they usually mean is that they would like to have more goods and services. This statement acknowledges that
without money, trade must occur through barter, which is inefficient and cumbersome. money must be an acceptable medium for exchange to occur. accounts in commercial banks are customer deposits and thus are debts of commercial banks. money can be used to purchase goods and services, but as an asset money provides little return.
