chapter 17
Liabilities of commercial banks show up on the Fed's balance sheet as part of its: A. liabilities. B. securities. C. foreign exchange reserves. D. loans.
D
If the Fed sells euros valued at $100 million to commercial banks, will this change the size of the Fed's liabilities and assets? Explain.
The liabilities of the Fed will decrease by $100 million. The sale of euros to commercial banks will deplete the reserves of commercial banks as the Fed debits these reserve accounts. On the asset side, the Fed's assets are also decreased by $100 million as the asset category of foreign exchange reserves is now $100 million smaller.
The assets that appear on the central bank's balance sheet include the category of loans. Who are central banks lending to and are these loans associated with the central bank functioning as the government's bank? Explain.
The loans are usually made to commercial banks. Using the example of the Federal Reserve, these would be discount loans. This is not a central bank functioning as the government's bank; these loans are made as the central bank functions as the bankers' bank.
What happens to the monetary base if people, fearing a bank run, convert their checking deposits into currency holdings?
The monetary base itself does not change. The monetary base is made up of non-bank (public) currency and reserves. When people withdrawal funds from their checking accounts banking system reserves decrease but are immediately replaced by increases in currency so the amount in the monetary base is not changed.
A central bank's balance sheet will categorize the following as liabilities: A. currency. B. loans. C. securities. D. foreign exchange reserves.
A
A central bank's sale of securities from its portfolio will: A. decrease the size of its balance sheet. B. have no impact at all on the balance sheet. C. only change the composition of its liabilities. D. only change the composition of its assets.
A
A liability of the central bank in functioning as the bankers' bank is: A. accounts of commercial banks. B. securities. C. loans. D. currency.
A
An open market sale of U.S. Treasury securities by the Fed will cause the Fed's balance sheet to show: A. a decrease in the asset of securities and a decrease in the liability of reserves. B. an increase in the liability of reserves. C. no change in the size of the balance sheet, just the composition of assets will change from securities to cash. D. an increase in the asset category of securities and the liability category of reserves.
A
As a portion of total assets measured in billions of dollars, the least important asset on the Fed's balance sheet is: A. gold. B. securities. C. foreign exchange reserves. D. loans.
A
Assume that the required reserve rate is ten percent, banks want to hold excess reserves in an amount that equals three percent of deposits, and the public withdraws ten percent of every deposit in cash. An open market purchase of $1 million by the Fed will see banking system deposits increase by: A. more than $1 million but less than $10 million. B. exactly $1 million. C. less than $1 million. D. more than $10 million but less than $20 million.
A
During the 1990s, the money multipliers for M1 and M2: A. decreased. B. remained fairly constant even though the economy grew. C. the M1 multiplier decreased while the M2 multiplier increased dramatically. D. increased dramatically as the economy grew.
A
Harry gets $1000 in currency from his grandfather when he graduates from college. He deposits these funds into his checking account. What is the impact on the monetary base of Harry's deposit? A. The monetary base did not change B. The monetary base increased by $1000 C. The monetary base decreased by $1000 D. The monetary base increases by more than a $1000
A
If Bank A sells a $100,000 U.S. Treasury bond to the Fed, Bank A's required reserves will: A. not change. B. increase by $100,000. C. decrease. D. increase but by less than $100,000.
A
If Bank A sells a $100,000 U.S. Treasury bond to the Fed, Bank A's reserves will: A. increase by $100,000. B. increase by less than $100,000. C. not change. D. decrease.
A
If the Fed were to decrease the required reserve rate from ten percent to five percent, the simple deposit expansion multiplier would: A. double. B. decrease by 5 percent. C. increase by a factor of five. D. be half as large as it was before the reduction.
A
If the Federal Reserve is to be independent, then the quantity of securities it purchases is determined by: A. the Federal Reserve itself. B. Congress. C. the amount the public does not want to purchase at the going price. D. the Treasury.
A
If we assume a ten percent required reserve rate, and banks not holding any excess reserves and no change in currency holdings, an open market sale of $5 million of U.S. Treasury securities by the Fed, will result in deposits: A. decreasing by $50 million. B. increasing by $5 million. C. increasing by $50 million. D. not changing.
A
In the U.S., loans made by Federal Reserve to banks fall in the categories of: A. discount loans. B. reserves. C. discount loans and reserves. D. discount loans and foreign exchange reserves.
A
Over the two-year period during which the financial crisis occurred, the amount of assets in the Federal Reserve balance sheet increased by: A. 2.5 times. B. 3 times. C. 4.5 times. D. 6 times.
A
The monetary base is the sum of: A. reserves and currency in the hands of the public. B. reserves and M2. C. currency in the hands of the public and M2. D. currency in the hands of the public M1.
A
Tom decides to withdraw $300 out of his checking account. The impact of this transaction on the Fed's balance sheet will be: A. no change in total assets or total liabilities, but an increase in the liability of currency and a decrease in the liability of reserves by $300 respectively. B. no change in total assets but the liability of currency increases by $300. C. total assets decrease by $300 and the liability of currency increases by $300. D. no change in either total assets or total liabilities.
A
Vault cash is not included in the central bank's liability category of currency because: A. only non-bank currency is in the liability category of currency. B. vault cash really is only electronic funds. C. vault cash is in the asset category of reserves. D. it is the liability of the U.S. Treasury.
A
When an individual withdraws funds from a checking account the: A. bank's balance sheet shrinks but the size of the Fed's balance sheet is not affected. B. bank's balance sheet shrinks and so does the Fed's balance sheet. C. bank's balance sheet shrinks but the size of the Fed's balance sheet increases. D. size of the bank's balance sheet stays the same but the size of the Fed's balance sheet shrinks.
A
Which of the following best completes the statement? If people increase their currency holdings, all else the same, the monetary base: A. does not change but the quantity of M2 will decrease. B. increases as does the quantity of M2. C. decreases as does the quantity of M2. D. does not change and neither does M2.
A
Which of the following have the same impact on the Fed's balance sheet? A. An open market purchase and an increase in loans by the Fed to banks B. An open market sale and an increase in foreign exchange reserves C. An open market purchase and a decrease in foreign exchange reserves D. An increase in loans by the Fed to banks and a decrease in foreign exchange reserves
A
The Treasury usually requires most businesses to regularly deposit taxes withheld from employees into accounts at designated commercial banks. On a regular basis, the funds in these accounts are transferred to the Treasury's account at the Fed. Discuss what is happening to the balance sheet of the banking system as the businesses are making deposits and these tax accounts are increasing. What happens to the Banking system's balance sheet when the funds are transferred to the Fed?
As the deposits are made by businesses the liabilities of the banking system are increased since these deposits are assets for the Treasury and liabilities of the banks. The asset side of the balance sheet is also increasing as these funds are adding to reserves. Once the funds are transferred to the Fed the liabilities are decreased by the amount of the transfer but also assets are decreased as the reserve account of the appropriate banks will be debited by the Fed.
A central bank holds foreign exchange reserves for: A. diversification purposes. B. foreign exchange interventions. C. safekeeping. D. diversification and safekeeping.
B
A central bank's balance sheet would categorize each of the following as liabilities, except: A. currency. B. loans. C. the government's account. D. accounts of the commercial banks.
B
A customer of Bank A writes a $20,000 check for a new car, which the car dealer deposits in his bank, Bank B. Which of the following statements pertaining to this transaction is most true? A. Banks A's reserves will decrease by the required reserve rate times $20,000 and Banks B's reserves will increase by (1 - required reserve rate) times $20,000 B. Bank A's reserves decrease by $20,000 and Bank B's reserves increase by $20,000 C. Neither Bank A's nor B's reserves will change D. Bank B's reserves will decrease and Bank A's reserves will increase by $20,000
B
As a portion of total assets measured in billions of dollars, the most important asset on the Fed's balance sheet is: A. gold. B. securities. C. foreign exchange reserves. D. loans.
B
Bonds issued by the U.S. Treasury would: A. not be held by the Fed. B. be held by the Fed as part of its securities. C. be held by the Fed as part of its foreign exchange reserves. D. be held by the Fed as part of its loans.
B
During the Great Depression, the monetary base in the U.S.: A. decreased significantly. B. increased. C. remained constant. D. was highly erratic.
B
Harry gets $1000 in currency from his grandfather when he graduates from college. He deposits these funds into his checking account. Considering Harry's personal balance sheet, his assets: A. increased by $1000 when he deposited the $1000 into his checking account. B. Increased when he received the $1000 in currency from his grandfather. C. And liabilities increased by $1000 when he deposited the funds into his checking account. D. Increased by $1000 and his liabilities decreased by $1000 when he deposited the funds into his checking account.
B
If M = the quantity of money, m the money multiplier, MB the Monetary Base, C = Currency, D = Deposits, R = Reserves, RR = required reserves, and ER = excess reserves, then m would equal: A. R/ER. B. M/MB. C. C + D. D. D - C
B
If there were an increase in the number of bank failures, we should expect the amount of excess reserves in the banking system to: A. decrease. B. increase. C. not change. D. decrease since failing banks lost theirs.
B
One thing the Fed has learned over the past twenty-five years is: A. the money multiplier is fairly constant no matter what changes are made to the monetary base. B. the money multiplier is unstable over time. C. the money multiplier has a trend rate of growth that is fairly constant. D. it should focus its attention on targeting M2.
B
One trait a central bank has over other businesses including banks is that it: A. receives all of its funding from the government. B. can control the size of its balance sheet. C. doesn't have stockholders. D. doesn't have a board of directors.
B
Reserves are: A. assets of the central bank and liabilities of the commercial bank. B. assets of the commercial banks and liabilities of the central bank. C. liabilities of the commercial and central banks. D. assets and liabilities for the central bank.
B
The Fed purchases German bonds from commercial banks. Which of the following best describes the impact on the Fed's and the Banking System's balance sheets resulting from this transaction? A. The Fed's assets and liabilities increase, the banking systems assets and liabilities decrease. B. The Fed's assets increase and its liabilities increase, for the banking system, the value of assets and liabilities do not change, only the composition of assets changes. C. The Fed's assets and liabilities do not change, only the compositions of the assets change. For the banking system, assets and liabilities increase. D. The Fed's assets increase and its liabilities decrease, for the banking system, the value of assets and liabilities do not change, only the composition of assets changes.
B
The money multiplier is much lower today than it was twenty-five years ago because: A. people are holding less currency today. B. the currency-to-deposit ratio is much higher today. C. there is less currency available today. D. credit cards are more widely used.
B
The use of deposit sweeping allows banks to: A. pay higher rates of interest than are allowed by law. B. reduce the amount of required reserves they must hold. C. pay less for FDIC insurance. D. weed out less profitable deposits.
B
A central bank's purchase of securities made by writing checks on itself will: A. decrease the size of its balance sheet. B. have no impact at all on the balance sheet. C. increase the size of their balance sheet. D. only change the composition of its assets.
C
Bonds issued by a foreign government in its own currency would: A. not be held by the Fed. B. be held by the Fed as part of its securities. C. be held by the Fed as part of its foreign exchange reserves. D. be held by the Fed as part of its loans.
C
Consider a $2 billion open market purchase of U.S. Treasury securities by the Federal Reserve. The Banking System's balance sheet will specifically show: A. only an increase in liabilities of $2 billion. B. only a decrease in assets of $2 billion. C. no net change in assets or liabilities, only a change in the composition of assets with securities decreasing and reserves increasing by $2 billion respectively. D. no net change in assets or liabilities, only a change in the composition of assets with securities increasing and reserves decreasing by $2 billion respectively.
C
During the early years of the Great Depression, a study of the money aggregates reveals that the money multiplier: A. was at an all-time high. B. increased from 1929 right through 1936. C. decreased. D. was constant from 1929 through 1936.
C
Each of the following items would appear as assets on the central bank's balance sheet, except: A. loans. B. securities. C. currency. D. foreign exchange reserves.
C
Gold is: A. the most important asset on the Fed's balance sheet. B. extremely important as an asset for the Fed. C. a small portion of the Fed's assets. D. very important for monetary policy in the U.S.
C
If M = the quantity of money, m, the money multiplier, MB, the Monetary Base, C = Currency, D = Deposits, R = Reserves, RR = required reserves, and ER = Excess reserves, then C + R would equal: A. M. B. R. C. MB. D. ER.
C
If the required reserve rate is ten percent and banks do not hold any excess reserves and there are no changes in currency holdings, a $1 million open market purchase by the Fed will result in deposit creation of: A. $9 million. B. $90 million. C. $10 million. D. $900,000.
C
If the required reserve rate is ten percent and banks do not hold any excess reserves and there are no changes in currency holdings, a $1 million open market purchase by the Fed will result in what change in loans? A. No change B. A decrease of $1 million C. An increase of $10 million D. An increase of $1 million
C
If we focus on the banking system and assume no change in the public's currency holdings, a loss of reserves by any one bank must: A. equal the loss of reserves by the entire system. B. be equal to the net loss of reserves for the banking system. C. result in no change in reserves for the banking system. D. result in a multiple loss to the banking system.
C
Mary decides to withdraw $500 out of her checking account. The impact of this transaction on the Banking System's balance sheet will be to: A. only reduce checkable deposits by $500. B. increase reserves and reduce checkable deposits by $500 respectively. C. decrease reserves and checkable deposits by $500 respectively. D. only reduce reserves by the required reserve rate times $500.
C
Monetary policy operations for central banks are run through changes in the liability category of: A. government's accounts. B. currency. C. reserves. D. gold.
C
Most responsible central banks publish their balance sheet: A. at least once a year. B. quarterly. C. at least monthly. D. semi-annually.
C
The formula for required reserves is: A. (1/rD) D. B. 1/rD. C. rD. D. D/rD.
C
The main asset held by a central bank in its role as the Banker's Bank is: A. foreign exchange reserves. B. currency. C. loans. D. securities.
C
The monetary base is also known as: A. M1. B. M2. C. high-powered money. D. free reserves.
C
The most a bank could lend at any time without altering its assets is an amount equal to its: A. checkable deposits. B. reserves. C. excess reserves. D. net worth.
C
The quantity of securities held by the Federal Reserve is controlled through: A. the U.S. Treasury. B. the Fed's annual budget. C. open market operations. D. the purchases made by the regional Reserve banks.
C
The simple deposit expansion multiplier is really too simple for understanding the link between changes in a central bank's balance sheet and the quantity of money in the economy because it: A. ignores how central banks could change their balance sheet. B. assumes banks hold excess reserves. C. ignores the fact people might change their currency holdings. D. ignores changes in vault cash.
C
To obtain a discount loan from the Fed, a commercial bank must: A. prove that it will fail if it does not obtain the loan. B. prove that the loan will be used to make loans. C. provide collateral. D. agree to more frequent examinations.
C
Vault cash is: A. equal to the total amount of reserves and is an asset of the central bank. B. not reserves but is a liability of the central bank. C. a part of reserves and an asset of commercial banks. D. not reserves but is an asset of central banks.
C
When a business purchases a $50,000 computer system by writing a check, the business's balance sheet will: A. only show an increase in liabilities of $50,000. B. show an increase in assets and liabilities for $50,000. C. not reflect any increase in assets or liabilities, only a change in the composition of assets. D. only show an increase in assets of $50,000.
C
When the Fed makes a discount loan, the impact on the Fed's balance sheet will reflect: A. no change in liabilities but an increase in assets. B. a decrease in assets and liabilities. C. an increase in assets and liabilities. D. an increase in assets and a decrease in liabilities.
C
If the central banks of most countries do not set the exchange rates, why do they hold foreign exchange as one of their assets?
Central banks hold foreign exchange reserves for those rare instances when the central bank intervenes in the foreign exchange market. The instances of intervention are rare, especially for the Federal Reserve.
In terms of foreign exchange reserve holdings, how does the Fed's balance sheet compare to that of the European Central Bank (ECB)?
Compared to the Fed, the ECB has much higher foreign exchange reserves as well as larger gold holdings. This is a legacy of the fact that the Eurosystem is made up of 18 national central banks, who each had holdings of foreign exchange reserves and gold.
An open market sale of U.S. Treasury securities by the Fed will cause the Banking System's balance sheet to show: A. only an increase in liabilities. B. only a decrease in assets. C. no net change in assets or liabilities, only a change in the composition of assets with securities decreasing and reserves increasing. D. no net change in assets or liabilities, only a change in the composition of assets with securities increasing and reserves decreasing.
D
Bank A has checkable deposits of $100 million, vault cash equaling $1 million and deposits at the Fed equaling $14 million. If the required reserve rate is ten percent what is the maximum amount Bank A could lend? A. $85 million B. $15 million C. $14 million D. $5 million
D
Bank A has checkable deposits of $140 million, vault cash equaling $1 million and deposits at the Fed equaling $14 million. If the required reserve rate is ten percent what is the amount of excess reserves Bank A is holding? A. It does not have any excess reserves B. $15 million C. $2 million D. $1 million
D
Consider a $2 billion open market purchase of U.S. Treasury securities by the Federal Reserve. The Fed's balance sheet will show: A. only an increase in the asset of securities of $2 billion. B. only show an increase in the liability of reserves of $2 billion. C. no change in the size of the balance sheet, just the composition of assets will change from cash to securities. D. an increase in the asset category of securities and the liability category of reserves by $2 billion.
D
During the 2007-2009 financial crisis which of the following became the largest component of assets on the Fed's balance sheet: A. foreign exchange reserves. B. loans. C. U.S. Treasury securities. D. mortgage backed securities.
D
During the early years of the Great Depression, the monetary base and M2: A. both increased significantly. B. both decreased significantly. C. moved in opposite directions; M2 increased while the monetary base decreased. D. moved in opposite directions; the monetary base increased but M2 decreased.
D
For the Federal Reserve's balance sheet, the asset listed Securities would include: A. private and public debt. B. mainly U.S. Treasury and municipal bonds. C. bonds issued by commercial banks. D. U.S. Treasury securities.
D
If Bank A sells a $100,000 U.S. Treasury bond to the Fed, Bank A's excess reserves will: A. increase by less than $100,000. B. not change. C. decrease by less than $100,000. D. increase by $100,000.
D
If M = the quantity of money, m the money multiplier, MB the Monetary Base, C = Currency, D = Deposits, R = Reserves, RR = required reserves, and ER = Excess reserves, then RR would equal: A. MB. B. D - C. C. M/MB. D. R - ER.
D
If required reserves are expressed by RR; the required reserve rate by rD and deposits by D, the simple deposit expansion multiplier is expressed as: A. RDD. B. (1/rD) D. C. RD. D. 1/rD.
D
If the Fed were to increase the required reserve rate from ten percent to twenty percent, the simple deposit expansion multiplier would: A. double. B. increase by 10 percent. C. decrease by a factor of ten. D. be half as large as it was before the increase.
D
In dollar amounts: A. the monetary base is larger than M2 and M1 is less than M2. B. M1 is smaller than the monetary base and M2 is larger than both. C. the monetary base is larger than M1 and M2. D. the monetary base is smaller than M1 and M2 is larger than M1.
D
The Fed sells German bonds to commercial banks. Which of the following best describes the impact on the Fed's and the Banking System's balance sheets resulting from this transaction? A. The Fed's assets and liabilities increase, the banking systems assets and liabilities decrease. B. The Fed's assets increase and its liabilities both increase. For the banking system, the value of assets and liabilities do not change, only the composition of assets changes. C. The Fed's assets and liabilities do not change, only the compositions of the assets change. For the banking system, assets and liabilities increase. D. The Fed's assets and liabilities both decrease. For the banking system, the value of assets and liabilities do not change, only the composition of assets changes.
D
The collapse of the Thai currency, the baht, was partially due to: A. inaction by the Federal Reserve. B. the European Central Bank. C. information provided by the central bank of Thailand. D. information not provided by the central bank of Thailand.
D
The experience of the Marcos Presidency in the Philippines in 1986 showed: A. the importance of keeping the central bank independent from political pressure. B. published central bank balance sheets do not always reflect reality. C. transparency is critical if people are going to trust a central bank. D. all of the answers given are correct.
D
The monetary base is the sum of: A. reserves and M2. B. M1 and reserves. C. currency in the hands of the public, reserves and M1. D. currency in the hands of the public and reserves in the banking system.
D
When a business purchases a $25,000 computer system by writing a check, the business's balance sheet will: A. show an increase in assets and liabilities of $25,000. B. only show an increase in assets of $25,000. C. only show an increase in liabilities of $25,000. D. still show the same total amount of assets as before the purchase.
D
When the Fed makes a discount loan, the impact on the Banking System's balance sheet is: A. an increase in liabilities with no change in assets. B. an increase in assets and a decrease in liabilities. C. a decrease in assets and an increase in liabilities. D. the same as that of an open market purchase.
D
When the Fed makes a discount loan, the impact on the Banking System's balance sheet will reflect: A. an increase in liabilities with no change in assets. B. an increase in assets and a decrease in liabilities. C. a decrease in assets and an increase in liabilities. D. an increase in assets and liabilities.
D
When the Federal Reserve purchases a U.S. Treasury bond for $1 million by writing a check, when the check returns, the Fed's balance sheet will show: A. an increase in assets and a decrease in liabilities of $1 million. B. only an increase in assets of $1 million. C. only an increase in liabilities of $1 million. D. an increase in assets and liabilities of $1 million.
D
Which of the following statements is most correct? A. Discount loans are initiated by the Federal Reserve. B. Discount loans are made when banks need relatively small amounts of cash for the long term. C. Discount loans are made when banks need relatively large amounts of cash for the long term. D. Discount loans are made when banks need relatively small amounts of cash for the short term.
D
Which of the following statements is most correct? A. Reserves are assets of the central bank and liabilities of the U.S. Treasury. B. Reserves are assets of the central bank and liabilities of the commercial banks. C. Reserves are liabilities of the commercial banks and assets of the U.S. Treasury. D. Reserves are assets of the commercial banks and liabilities of the central bank.
D
Suppose a student writes a check in the amount of $300 to the college bookstore for textbooks. Discuss briefly the impact on the student's balance sheet, his/her bank's balance sheet and the balance sheet of the Fed.
For the check writer, the balance sheet does not change in size and liabilities do not change at all. All that changes is the composition of assets. The student has an increase in the asset called textbooks for $300 and an equal decrease in the asset of bank deposits. For the student's bank, its liabilities customer deposits decrease by $300 but so will the asset of reserves decrease by the same amount. For the Fed, the transaction will not impact the size of its balance sheet since the reduction in the reserves of one bank will be offset by an increase in reserves of another once the check is processed.
You receive a $1,000 gift from your grandmother when you graduate from college. Your grandmother withdrew the $1,000 from her checking account and gave you ten $100 bills. You deposit the ten bills into your checking account. Discuss the impact of these transactions on your grandmother's balance sheet, your balance sheet, and the Fed's balance sheet.
Let's start with the grandmother. The only change for her is on the asset side of her balance sheet; when she converted bank deposits to currency her assets didn't change, just the composition, with deposits decreasing by $1,000 and currency increasing by $1,000. Once she presents the gift to you, her assets (currency) will decrease by $1,000, but your asset of currency increases by $1,000. With your deposit of the $1,000 of currency into the bank, the composition of your assets changes from currency to deposits. Now for the Fed, when grandmother converts the $1,000 deposit into currency, the Fed's balance sheet changed only in terms of composition. The reserves decreased by $1,000 and the currency increased by $1,000. With your deposit of the $1000 of currency into the bank, the liability of currency decreased by $1,000 and the liability of reserves increased by $1,000.
Why is it more correct to say that the Fed (the central bank) controls the monetary base than to say it controls the amount of reserves?
The Fed, or any central bank, can create and destroy the monetary base by changing the size of its balance sheet. What it can't control is the currency holdings of the public. If people decide to hold more currency than the banking system will be depleted of reserves, but the monetary base does not change since it is the sum of reserves and public currency holdings.
Follow a $1 billion purchase of U.S. Treasury bonds by the Fed from commercial banks. Discuss the changes that occur to the balance sheet of the banking system and the balance sheet of the Fed.
The balance sheet of the banking system doesn't change in size. The liabilities of the banking system do not change, and the total assets don't change, the composition of assets changes, with the asset of securities decreasing by $1 billion and the asset of reserves increasing by $1 billion. For the Fed the balance sheet increases by $1 billion on both sides. The asset of securities increases by $1 billion and the liability of reserves increases by $1 billion.
The Federal Reserve's Balance sheet would include an item labeled Currency. Is this an asset or a liability of the Fed, and does it include all currency that is printed? Explain.
The currency is a liability since it is an asset of whoever is holding it. As a result, the currency in this category only includes non-bank currency, or the currency that is in the hands of the public, and does not include vault cash, which is part of the banking system's reserves.
Traveler's checks have no reserve requirements and are included in M1. When people travel during the summer and convert some of their checking account deposits into traveler's checks, explain what happens to the monetary base.
The monetary base is the sum of reserves and currency in the hands of the public. So to answer the question we need to consider what happens to public currency and what happens to reserves. Since traveler's checks do not alter public currency nor do they deplete the banking system of reserves, the conversion of checkable deposits to traveler's checks does not alter the monetary base
The authors open Chapter 17 with a contrast between the Fed's actions in response to the terrorist attacks of September, 2001 and its response to the financial crisis of the Great Depression. Why was the Fed successful at dealing with the crisis in 2001, and not as successful with the crisis of the early 1930s?
The primary difference is that in the early 1930s Fed officials didn't fully understand how their actions affected the supply of credit in the economy. The Fed failed to recognize the link between changes in its balance sheet and the growth rate of money. It believed that as long as the account balances of commercial banks at the Federal Reserve Banks were growing that credit and money were easily available. It was wrong. The financial system collapsed in the 1930s because Fed officials had failed to provide the liquidity that sound banks needed to stay in business. This is exactly what it did right in 2001, announcing that the discount window was available to meet liquidity needs.
Explain the impact on the Fed's balance sheet from a $10 million open market purchase of U.S. Treasury Securities. Be sure to identify which categories of assets and liabilities change and by what amounts.
The purchase of the Treasury securities will increase the asset category called Securities by the amount of $10 million, which is usually the largest asset category for most central banks. The liability category of Reserves will also increase by $10 million. This is done as the Fed will credit the appropriate bank(s) reserve account(s) to pay for the securities. This reflects the Fed's ability to pay for assets by simply creating liabilities.
The required reserve rate set by the Fed is ten percent of all checkable deposits. A bank sells $1 million of U.S. Treasury securities it owns to the Fed. Describe what this transaction does to the bank's total reserves, its required reserves and its excess reserves.
The sale of the securities will immediately increase the bank's reserves by the value of the sale, which in this case is $1 million. Since the bank's liabilities have not changed, the required reserves for the bank have not changed. As a result, the $1 million increase in reserves is all excess reserves.
Given the prevalence of electronic payment mechanisms like credit cards and debit cards and the safety of checks, why is the amount of currency in the hands of the public increasing?
There are a couple of reasons, for one, a lot of illegal transactions are carried out using currency, however, if this were the only reason currency would probably be banned. Most people have transactions they carry out where they prefer to be anonymous. While checks and electronic payments are relatively safe, they do transfer a lot of information to the receiver, account numbers, names, addresses, etc. Also in some cases currency transactions are faster, for example picking up a meal at a drive thru restaurant, or paying for a newspaper, can usually be accomplished quickly with currency.
If reserves pay interest below the market federal funds rate, why would a bank hold any excess reserves
There can be an opportunity cost to not having them. For example, if customer liquidity (cash) demands are higher than expected a bank would face the cost of having to quickly become liquid. That could mean selling securities or other assets or borrowing to meet those needs. Another possibility involves uncertainty regarding interest rates. If a banker believes interest rates may rise in the near future, it may be profitable to hold reserves rather than to purchase assets at a lower interest rate than what could have been obtained by waiting.
Why do most central banks publish their balance sheets so frequently?
This is part of a central bank's disclosure and transparency. Because central banks can control the size of their balance sheets it is important to reveal to the public what the central bank is doing. This is the main tool people can use to find out if central banks are doing their job properly. Delays in publishing the balance sheet can also delay the discovery of a potential problem.
