CHAPTER 21 ECONOMICS
If the reserve ratio is 25 percent, the value of the money multiplier is
4
required reserves of banks are a fixed percentage of their
deposits
commodity money
has intrinsic value
an example of fiat money is
paper dollars
To insulate the Federal Reserve from political pressure,
the Board of Governors are appointed to 14 year terms
If banks increase their holdings of excess reserves,
the money multiplier and the money supply decrease.
A decrease in the reserve requirement causes
the money multiplier to rise
Suppose Joe changes his $1,000 demand deposit from Bank A to Bank B. If the reserve requirement is 10 percent, what is the potential change in demand deposits as a result of Joe's action?
$0
If the Fed buys $1,000 of government bonds from you and you hold all of the payment as currency at home, by how much does the money supply rise?
$1,000
If the Fed buys $1,000 of government bonds from you, you deposit the entire $1,000 in a demand deposit at your bank, and banks observe a 10 percent reserve requirement, by how much could the money supply increase?
$1,000 X (1/.10) = $10,000
Suppose the Fed purchases a $1,000 government bond from you. If you deposit the entire $1,000 in your bank, what is the total potential change in the money supply as a result of the Fed's action if reserve requirements are 20 percent?
$5000
what are the two basic kinds of money?
- commodity - fiat
the M1 money supply is composed of
- currency - demand deposits - traveler's checks - other checkable accounts.
What two main assets are clearly money in the United States, and how do they differ from all other assets? (i.e., define money)
- currency and demand deposits. - they are the assets that are directly spendable and are commonly accepted in trade
The Fed's tools of monetary control are
- open-market operations - lending to banks - reserve requirements - paying interest on reserves.
Which of the following statements about a bank's balance sheet is true? A) An increase in a bank's capital increases its leverage ratio. B) Assets minus liabilities equals owner's equity or capital. C) The largest liability on the bank's balance sheet is its loans. D) Because a bank is highly leveraged, a large change in the value of its assets has little impact on its capital. E) None of the above is correct.
B) Assets minus liabilities equals owner's equity or capital.
what is barter and why does it limit trade?
Barter is trading goods and services directly for other goods and services. It requires a double coincidence of wants.
If the Fed wished to expand the money supply, how should they adjust each of their policy instruments that underlie the tools described in question 6 above?
Buy U.S. government bonds, loan more reserves to banks by lowering the discount rate and/ or increasing loans available at the Term Action Facility, lower the reserve requirement, and decrease interest paid on reserves.
Which of the following statements is true? A) The FOMC meets once per year to discuss monetary policy. B) The Federal Reserve was created in 1871 in response to the Civil War. C) When the Fed sells government bonds, the money supply decreases. D) The primary tool of monetary policy is the reserve requirement.
C) When the Fed sells government bonds, the money supply decreases.
Which of the following is not a function of money? A) unit of account B) store of value C) protection against inflation D) medium of exchange
C- protection against inflation
Which of the following policy combinations would consistently work to increase the money supply? A) sell government bonds, decrease reserve requirements, decrease the discount rate B) sell government bonds, increase reserve requirements, increase the discount rate C) buy government bonds, increase reserve requirements, decrease the discount rate D) buy government bonds, decrease reserve requirements, decrease the discount rate E) none of the above
D) buy government bonds, decrease reserve requirements, decrease the discount rate
Suppose there is no deposit insurance. Suppose rumors circulate that banks have made many bad loans and may be unable to repay their depositors. What would you expect depositors and banks to do, and what would their behavior do to the money supply?
Depositors will withdraw their deposits reducing bank reserves. Banks will try to hold excess reserves to prepare for the deposit withdrawal. Both will reduce bank lending and the money supply.
What must the Fed do with open-market operations and the money supply if it wishes to reduce the federal funds rate?
It must buy bonds, which injects reserves into the banking system and increases the money supply.
what are the monetary policy tools of the Fed?
Open-market operations, Fed lending to banks, reserve requirements, and the Fed paying interest on bank reserves.
what are the two main jobs of the Federal Reserve?
Regulate banks to ensure the health of the banking system, and control the quantity of money in the economy.
the discount rate is
interest rate the Fed charges on loans to banks
what are the three functions of money?
medium of exchange, unit of account, store of value.
Which of the following policy actions by the Fed is likely to increase the money supply?
reducing reserve requirements
The Board of Governors of the Federal Reserve System consists of
seven members appointed by the president
Suppose all banks maintain a 100 percent reserve ratio. If an individual deposits $1,000 of currency in a bank,
the money supply is unaffected
Suppose the reserve ratio is 20 percent. If you write a check on your account at Bank 1 to buy a $1,000 government bond from your roommate, and your roommate deposits the $1,000 in her account at Bank 2, by how much will the money supply change?
the money supply will not change at all. in this case, reserves are only moved from one bank to another.
If the Fed engages in an open-market purchase, and at the same time, it raises reserve requirements,
we cannot be certain what will happen to the money supply
