ECON102: Homework 8

Between 1929 and 1933, bank deposits fell:

as fears of bank failures compelled depositors to withdraw their deposits.

Which of the following items is a component of the monetary base but is NOT part of the money supply?

bank reserves.

When you deposit $100 cash in your checking account:

both M1 and M2 remain unchanged.

If the money multiplier is 2 and the Fed wants to increase the money supply by $900,000, it could

buy $450,000 worth of bonds.

The Fed increases the discount rate, but it wants to offset the effects on the money supply. Which of the following should it do?

buy bonds to increase reserves and the money supply.

The purpose of the bank holiday declared by Franklin Roosevelt in 1933 was to:

close all banks until regulators could determine how to solve the banking crisis.

Which list ranks assets from most to least liquid?

currency, stocks, Picasso paintings

Over the past several years, U.S. banks accumulated significant excess reserves. This action

decreased the money multiplier, so now the FED has to buy or sell more bonds to change the money supply by $1 trillion.

M1 includes those assets that are:

directly usable as a medium of exchange.

Currency in the United States today is _______ money.

fiat

At one time, people in a certain country had no access to banks; they relied exclusively on currency. Then, a fractional-reserve banking system was created. As a result, the money supply

increased. The central bank could have reduced the size of this increase by selling bonds.

When the Federal Reserve purchases Treasury bills on the open market, the monetary base:

increases, allowing the money supply to expand.

According to the Glass-Steagall Act of 1933:

investment banks could create and trade financial assets, such as stocks and bonds, but commercial banks could not trade stocks and bonds.

To change the money supply, the Federal Reserve most frequently uses:

open-market operations.

If it looks like a bank won't meet the Federal Reserve Bank's reserve requirement, normally it will first turn to:

other member banks and borrow at the federal funds rate

To decrease the money supply, the Fed can

sell government bonds or increase the discount rate.

When conducting an open-market sale, the Fed

sells government bonds, and in so doing decreases the money supply

Reserve requirements:

set the minimum amount of reserves bank must hold.

The monetary base is:

the sum of currency in circulation and bank reserves.

Suppose the economy contains 2,000 1-dollar bills, and banks can hold reserves as vault cash only. Further, suppose the reserve ratio is 10%, and people hold equal amounts of currency and deposits. What is the money supply?

$3,636.36

You take $100 that you had kept under your mattress and deposit it in your bank account. If the reserve ratio is 20%, what is the largest possible increase in the money supply?

$400

Suppose the economy contains 3,000 1-dollar bills, and banks can hold reserves as vault cash only. Further, suppose the reserve ratio is 20%, and people hold equal amounts of currency and deposits. What is the money supply?

$5,000.

If the reserve requirement is 20%, how much are required reserves in this economy? (see chart)

$50 billion

Refer to the information in the balance sheet. If the reserve ratio is 25%, deposits are:

$80,000.

Suppose that initially a bank has excess reserves of $800 and the reserve ratio is 30%. Then Andy deposits $1,000 of cash into his checking account and the bank lends $600 to Molly. That bank can lend an additional:

$900

You take $100 that you had kept under your mattress and deposit it in your bank account. If the reserve ratio is 10%, what is the largest possible increase in the money supply?

$900

Currency, checkable deposits, and traveler's checks are about _______ of M1.

100%.

The Monetary Policy of Tazi is controlled by the country's central bank known as the Central Bank of Tazi. The local unit of currency is the taz. Aggregate banking statistics show that collectively the banks of Tazi hold 300 million tazes of required reserves, 75 million tazes of excess reserves, have 7,500 million tazes of deposits, and hold 225 million tazes worth of Tazian Treasury bonds. Tazians use only demand deposits and don't use any cash. Suppose that the Central Bank of Tazi changes the reserve requirement to 3 percent. Assuming that the banks still want to hold the same percentage of excess reserves (that is, the same excess reserves to deposits ratio) as before the change, what is the value of the money supply after the change in the reserve requirement?

9,375 million tazes

The money supply decreases if

Households decide to hold relatively more currency and relatively fewer deposits and banks decide to hold relatively more excess reserves and make fewer loans

Namdian banks collectively hold $100 million of required reserves, $100 million of excess reserves, $250 million of Namdian Treasury Bonds, and their customers hold $1,000 million of deposits. The public does not hold any currency. Suppose the Central Bank of Namdia buys $10 million worth of government bonds from banks. Suppose also that the Namdian banks want to maintain the same reserve ratio as they had before this open market operation. As a result, the money supply of Namdia will

Increase by $50 million

Suppose the Fed wants to tighten its monetary policy. This means that the Fed will ____________ the reserve requirement and ____________ the interest it pays on reserve balances of banks and other financial institutions.

Increase; increase

The banking system currently has $200 billion of reserves, none of which are excess. People hold only deposits and no currency, and the reserve requirement is 4 percent. If the Fed raises the reserve requirement to 10 percent and at the same time buys $50 billion worth of bonds, then by how much does the money supply change?

It falls by $2,500 billion.

Which of the following is NOT commodity money?

NOT cigarettes

The Panic of 1907 was caused by:

NOT national banks issuing too much currency.

Suppose you find a $50 bill that you put in a coat pocket last winter, and you deposit it in your checking account. This transaction, by itself:

Neither M1 or M2 changes.

During natural disasters (such as hurricanes) the public tends to hold relatively more currency and relatively fewer deposits. Other things the same, this decision causes bank reserves

To decrease, and the money supply would also decrease.

Capital requirements for banks include all of the following EXCEPT:

an attempt to reduce deposits.

The manager of the bank where you work tells you that the bank has $400 million in deposits and $340 million dollars in loans. The Fed then raises the reserve requirement from 10 percent to 15 percent. The bank does not hold any assets other than reserves and loans, it does not have any liabilities other than deposits, and its capital is zero. Assuming everything else stays the same, how much is the bank holding in excess reserves after the increase in the reserve requirement?

$0

Suppose the money multiplier is 0.7. What happens to the money supply if the Fed buys $1 billion of bonds from banks?

$0.7b increase

Suppose the banking system currently has $300 billion in reserves (including $5 billion in excess reserves), $100 billion worth of Treasury bonds, and the reserve requirement is 10 percent. If banks hold no assets other than reserves, Treasury bonds, and loans, don't have any liabilities other than deposits, and bank capital (equity) is zero, then what is the level of loans?

$2,550 billion

Suppose your grandma sends you $100 for your birthday and you deposit that $100 in your checking account at the local bank. The reserve ratio is 10%. Based upon this deposit, the bank's excess reserves have increased by _____, and if the bank lends these new excess reserves, the money supply could eventually grow by as much as _____.

$90, $900

The Monetary Policy of Tazi is controlled by the country's central bank known as the Central Bank of Tazi. The local unit of currency is the taz. Aggregate banking statistics show that collectively the banks of Tazi hold 300 million tazes of required reserves, 75 million tazes of excess reserves, have 7,500 million tazes of deposits, and hold 225 million tazes worth of Tazian Treasury bonds. Tazians use only demand deposits and don't use any cash. Assume that banks desire to continue holding the same ratio of excess reserves to deposits. What are the reserve requirement and the reserve ratio for Tazian Banks?

4%, 5%.

Most financial assets other than money function as

a store of value, but not a unit of account nor a medium of exchange.

If the Federal Reserve conducts an open-market purchase:

bank reserves increase and the money supply increases.

The Federal Reserve System is the _______ for the United States.

central bank

In the United States, financial crises have often resulted in:

increased calls for legislation for greater financial regulation.

The banking system currently has $50 billion of reserves, none of which are excess. The reserve requirement is 5 percent. People hold only deposits and no currency, and banks want to keep only the required amount of reserves at all times. If the Fed increases the reserve requirement to 8 percent and at the same time buys $10 billion worth of bonds from banks, then by how much does the money supply change?

it falls by $250 billion

If a bank desires to hold no excess reserves, the reserve requirement is 5 percent, and it receives a new deposit of $1,000

its required reserves increase by $50.

Currency held in bank vaults and bank deposits held at the Federal Reserve are:

none.

Holding everything else constant, if the required reserve ratio falls, then:

the money multiplier increases.