ECON-Chpt 12

(Table) SCENARIO: Assume that the Empathy State Bank begins with the balance sheet below and is fully loaned up. This bank's reserve ratio is:

.10

The table shows the balance sheet of First Purity Bank. Assume that First Purity Bank begins with the balance sheet given and is fully loaned-up. Based on the table, what is the value of the money multiplier?

2.86

The table shows the balance sheet of First Purity Bank. Assume that First Purity Bank begins with the balance sheet given and is fully loaned-up. Based on the table, what is the reserve requirement?

35%

Which of these is true?

Checking accounts are considered liabilities to the bank.

The main policymaking arm of the Fed is the:

Federal Open Market Committee

Which of these is false?

Monetary policy lags are longer than fiscal policy lags.

What role do required reserves play in determining how much money the banking system creates?

Required reserves represent the amount of money a commercial bank must hold in its vault.

Which statement concerning the structure of the Federal Reserve System is correct?

The Chair and Vice Chair of the Board of Governors are appointed by the president and confirmed by the Senate for terms of 4 years.

If Abigail withdraws $300 cash from her checking account, her bank's assets then:

fall by $300 and liabilities fall by $300.

For what type of borrowing does the federal funds rate apply?

from commercial banks to other commercial banks

Open market operations involve the purchase and sale of:

government securities.

When the Fed buys bonds, its demand _____ the price of bonds, _____ nominal interest rates.

increases; decreasing

Monetary policy, like fiscal policy, is subject to _____ lags.

information, implementation, and decision

The main tool of monetary policy is:

open market operations

Which of these is the MOST common tool used by the Federal Reserve to conduct monetary policy?

open market operations

Which list represents monetary policy actions that are consistent with one another?

sell government bonds, raise reserve requirements, raise the discount rate

The discount rate is:

the rate regional Federal Reserve banks charge depository institutions to borrow reserves.

Sumit deposits $1,500 cash into his checking account. The reserve requirement is 25%. What is the change in his bank's required reserves?

$375

If the reserve requirement is 10%, a withdrawal of $500 leads to a potential decrease in the money supply of:

$5,000

Sumit deposits $1,500 cash into his checking account. The reserve requirement is 25%. How much money can the banking system create?

$6,000

The reserve requirement sets the required percentage of vault cash plus deposits with the regional Federal Reserve Banks that banks must keep for their deposits. Many banks have widespread branches and ATMs. How would the existence of branches and ATMs affect the level of excess reserves (above those required) that banks are able to hold?

ATMs require a lot of vault cash, thus increasing excess reserves.

Many central banks in the world are independent in the sense that they are partially isolated from short-run political considerations and pressures. Based on the given information, which of these is true?

The relatively long terms served by members of the Federal Reserve Board of Governors give the Federal Reserve its independence, which is very important to policymaking.

the actual multiplier will fall.

full employment

A lower reserve requirement:

increases the ability of banks to make loans

The Fed announced in September 2013 that it would postpone winding down its monetary stimulus until the economic recovery was stronger. When the Fed does finally begin to reduce bond purchases:

interest rates will rise.

If banks increase excess reserves to increase their ability to absorb a higher rate of defaults:

the actual multiplier will fall.

If the reserve requirement is 25% and a new deposit leads to a potential increase in the money supply of $4,000, the amount of the new deposit must equal:

$1,000.

Following the March 16, 2016, FOMC meeting, Chairman Janet Yellen announced that the federal funds rate would remain steady (around 0.5%) through the end of the year, essentially delaying the goal of raising interest rates to the long-run target of 2% to 3% for another two years. How might this announcement affect the lives of ordinary individuals, and what impact might this have on the economy?

Individuals and businesses will continue to finance purchases and investments at low rates, which promotes economic growth.

Which of these statements about the money multiplier is true?

Leakages decrease the amount of loans made, which reduces the money multiplier.

During an economic boom, banks tend to increase their willingness to lend. How does this trend influence the actual money multiplier?

Lending more decreases the amount in required reserves, which decreases the reserve ratio.

Eric Keetch offered an interesting anecdote in the Financial Times, published on August 12, 2009:In a sleepy European holiday resort town in a depressed economy and therefore no visitors, there is great excitement when a wealthy Russian guest appears in the local hotel reception, announces that he intends to stay for an extended period and places a €100 note on the counter as surety while he demands to be shown the available rooms. While he is being shown the room, the hotelier takes the €100 note round to his butcher, who is pressing for payment. The butcher in turn pays his wholesaler who, in turn, pays his farmer supplier. The farmer takes the note round to his favorite "good time girl" to whom he owes €100 for services rendered. She, in turn, rushes round to the hotel to settle her bill for rooms provided on credit. In the meantime, the Russian returns to the lobby, announces that no rooms are satisfactory, takes back his €100 note and leaves, never to be seen again. No new money has been introduced into the local economy, but everyone's debts have been settled.In the end, no new money was introduced into the town, but all debts were paid. Did local GDP increase as a result of all debts being paid?

No; local GDP rose when the original goods and services were performed on credit; there was no further change.

The Federal Deposit Insurance Corporation (FDIC) insures individual bank accounts up to $250,000 per account. Which of these statements is true of the existence of such insurance?

Reserve requirements are still needed, but the existence of the FDIC has prevented runs on banks by depositors.

The U.S. government produces billions of dollars in banknotes and coins for use in everyday transactions. Based on the given information, which of these is false?

The more currency that is in circulation, the higher will be the interest rate in the economy.

Alan Greenspan, the former chairman of the Fed, noted that "the Federal Reserve has to be independent in its actions and as an institution, because if Federal Reserve independence is in any way compromised, it undercuts our capability of protecting the value of the currency in society." What does Alan Greenspan mean when he states "protecting the value of the currency"?

controlling inflation