Ch14 - Money, Banks, and the Federal Reserve System

Suppose the reserve requirement is 5​%. What is the effect on total checkable deposits in the economy if bank reserves increase by ​$50 ​billion?

$1,000 billion increase (inc x 1/RR)

In a fractional reserve banking system​, what is the difference between a​ "bank run" and a​ "bank panic?"

A bank run involves one​ bank; a bank panic involves many banks. Bank run: A situation where many depositors simultaneously decide to withdrawal money from a bank. Bank panic: A situation in which many banks experience bank runs at the same time.

The U.S. dollar can best be described as

fiat money

Credit cards are

included in neither the M1 definition of the money supply nor in the M2 definition.

In addition to the Federal Reserve​ Bank, what other economic actors influence the money​ supply?

​Households, firms, and banks.

The M2 definition of the money supply includes

​M1, savings​ accounts, small time​ deposits, and money markets.

The United States is divided into ________ Federal Reserve Districts. The Federal Reserve​ Bank's Board of Governors consists of _______ members appointed by the president of the U.S. to​ 14-year, ​ non-renewable terms. One of the board members is appointed to a ________ year, renewable term as the chairman.

12, 7, 4

Which of the following is true with respect to ​hyperinflation?

It is caused by central banks increasing the money supply at a rate much greater than the growth rate of real GDP. It can be hundreds—even thousands—of percentage points per year. In the presence of​ hyperinflation, firms and households avoid holding money.

Which of the following is NOT a function of​ money?

Acceptability

The figure to the right shows a breakdown of the M1 definition of the money supply in 2017. Which area corresponds to the amount of checking account​ deposits?

C - the largest section of the pie chart

Which of the following is a monetary policy tool used by the Federal Reserve​ Bank?

Decreasing the rate at which banks can borrow money from the Federal Reserve. Buying​ $500 million worth of government​ securities, such as Treasury bills. Increasing the reserve requirement from 10 percent to 12.5 percent.

Evaluate the following​ statement: Banks use deposits to make consumer loans to households and commercial loans to businesses. Banks will loan out every penny of their deposits in order to make a profit.

False. Banks must hold a fraction of their deposits as vault cash or with the Federal Reserve.

In​ 2008, the required reserve ratio for a​ bank's first​ $9.3 million in checking account deposits was zero. It was 3 percent on deposits between​ $9.3 million and​ $43.9 million, and 10 percent on deposits above​ $43.9 million. In most​ cases, and for​ simplicity, we assume that the required reserve ratio is 10 percent on all deposits.​ Therefore, the simple deposit multiplier is 10. Is the​ real-world deposit multiplier greater​ than, less​ than, or equal to the simple deposit​ multiplier?

Less. The simple deposit multiplier is a model with assumptions that keep it higher than the​ real-world multiplier.

Which of the following is true with respect to Irving​ Fisher's quantity​ equation, M×V=P×Y​?

P​ = the GDP deflator M​ = M1 definition of the money supply velocity equation V​ = Average number of times a dollar is spent on goods and services

According to the quantity theory of money, inflation results from which of the​ following?

The money supply grows faster than real GDP.

The use of money

allows for greater specialization. eliminates the double coincidence of wants. reduces the transaction costs of exchange.

An initial increase in a​ bank's reserves will increase checkable deposits

by an amount greater than the increase in reserves.