InQuizitive Chapter 17: Money and the Federal Reserve

Suppose the M2 money supply is $13 trillion, including: $1 trillion in currency $3 trillion in checking accounts $7 trillion in savings accounts $1 trillion in money market mutual funds $1 trillion in certificates of deposit What is the M1 money supply?

4 trillion dollars

A bank has $320 million in deposits, of which it is holding $39 million in reserves. If the required reserve ratio is 10%, what is the maximum amount the bank could still lend out, as new loans?

7 million

If the Federal Reserve Bank wanted to set the money multiplier at mm = 12.5, what reserve ratio should it require? (Use the simple money multiplier for this calculation.)

8%

Consider this hypothetical balance sheet for Yoo-hoo Bank, in the fictional country of Hellond. Calculate Yoo-hoo Bank's required reserve ratio, as a percentage. Round to the nearest percent if necessary.

8% The required reserve ratio is required reserves/total deposits = $800/$10000 = 0.08 = 8% Hellond's reserve requirement is different from the 10% requirement in the United States.

If a country's required reserve ratio is 8%, when the central bank puts $1,000 of new currency into circulation, by how much can the money supply grow assuming all currency is deposited in a bank and no banks hold excess reserves? Use the simple money multiplier.

$12,500

Which of the following are responsibilities of the Federal Reserve?

-Apply a countercyclical economic policy to the money supply. -Set the required reserve ratio for banks. -Act as a bank for banks, both accepting deposits and extending loans.

The Federal - Corporation makes sure - get their money back if an insured bank fails. This agency was implemented during the - in response to the high number of bank failures. The peace of mind the FDIC provided depositors resulted in a decreased frequency of -. However, since banks and their customers are no longer fully exposed to risk, there is increased potential for -.

-Deposit Insurance; -depositors; -Great Depression; -bank runs; -moral hazard;

Around the time of the -, the Fed stopped actively using the - to administer monetary policy. When it did use this tool, an increase would - borrowing by banks, and a decrease would - bank borrowing. Today, banks are generally discouraged from borrowing from the Fed, unless the banks are -.

-Great Depression -discount rate -discourage -encourage -struggling

Which of the following are functions of money?

-It can be traded for goods and services. -It provides a standard measure for prices to be quoted in. -It has value, so owning money allows people to hold wealth.

Place the events in order to describe how a bank with a temporary reserve shortfall uses a short-term loan to bring its reserves up to the required level.

-Lending activity depletes American Bank's reserves below the required search level. -American Bank takes out a short-term loan with TrueBlue Bank. The Fed facilitates the transaction. -The loan to American Bank begins earning interest for TrueBlue Bank at the federal funds rate. -With some of its own borrowers paying off loans and new deposits coming in, American Bank no longer needs the money borrowed from TrueBlue Bank. -American Bank pays off the loan and is able to maintain the required reserves.

Which of the following actions qualify as open market operations?

-The Fed sells U.S. Treasury bonds to a private bank. -The Fed buys U.S. Treasury bonds from a financial institution.

The main function of - banks is to accept deposits and then to lend the same money (minus -) back out. Banks make a profit by charging a higher interest rate on - than the interest rate they pay on -. Through the loan process, banks are actually able to - money.

-commercial -required reserves -loans -deposits -create

commodity-backed money

-money that can be exchanged for a commodity at a fixed rate -a type of money used in the United States prior to 1971 -U.S. silver certificates are a historical example.

fiat money

-money that has no value except as a medium of exchange -A government can expand the supply deliberately and quickly. -not tied to anything with intrinsic, stable value -not tied to a good for which the demand can change -type of money used in most modern economies

Place the components of the M2 money supply in order, from smallest to largest.

-small time deposits -money market mutual funds -currency -checkable deposits -savings deposits

In barter economies, goods and services are - without the use of money. Therefore, in order for a trade to occur, a - is required. With the introduction of -, trade becomes much easier: there is now a - between buyers and sellers.

-traded -double -money -medium of exchange

Because money creates a standard - , it is possible to compare the prices of two goods, which allows people to communicate the - of the goods in a way that is easily understood. This characteristic of money also enables it to serve as a - device, or a way to measure accounts and transactions in a consistent manner.

-unit of account -value -recording

Anna has a yard full of chickens but needs milk for her baby. Josiah, who is allergic to eggs, has a cow that produces milk. Put the events in order to describe how Anna obtains milk by the barter method.

Anna takes eggs from her chickens to Josiah to trade for milk. Josiah tells Anna he does not eat eggs, but will accept apples in exchange for milk. Anna finds someone who has apples and is willing to trade them for eggs. Anna gives apples to Josiah and gets milk in return.

Which scenarios are examples of a double coincidence of wants?

Devon has a pumpkin that Ella wants, and Ella has a hat that Devon wants. Chad has a desk that Aiden wants, and Aiden has money that Chad wants.

The ability to regulate commercial banks and monitor bank balance sheets is outside the Fed's authority. It is the duty of commercial banks to privately monitor their own activities.

False

Which statement best explains why there was a coin shortage during the COVID-19 pandemic?

Shutdowns limited access to bank lobbies.

In the wake of the Great Recession, how did the amount of reserves held by banks change?

The Fed began paying interest on reserves, so the amount of excess reserves held by banks increased significantly.

Place the events in order to describe how money the Fed adds to the economy starts to be multiplied. The reserve requirement in this example is 10%.

The Fed buys a security from a bank for $1,000. The bank sets $100 aside as required reserves. The bank lends $900 to a customer needing a loan. The customer spends the $900 at a store. The store owner deposits the $900 in another bank.

Identify each action by the Fed as expanding the money supply, shrinking it, or neither.

The Fed regulates banks to ensure stability: Correct label: neither expands nor shrinks The Fed buys mortgage-backed securities: Correct label: expands the money supply The Fed sells Treasury bonds to investors: Correct label: shrinks the money supply The Fed lends money to struggling banks: Correct label: expands the money supply

Which of the following is true if you deposit $1,000 in a bank checking or savings account? Assume a 10% bank reserve requirement.

The bank's reserves will increase by at least $100. The bank has $900 it can lend to someone else. You have $1,000 available to spend if you choose.

Abinav was excited to get his $1,200 tax rebate check so he could buy a motorcycle because he was uncomfortable taking the city bus during the pandemic. His friend sold him a used motorcycle for $800. He also purchased a new helmet from an online store for $50 and put the remaining $350 in the bank to help him cover his tuition bill for the summer. Thinking about how Abinav allocated his tax rebate check, identify the role money played in the statements below. Not all labels will be used.

The cost of the motorcycle was $800, and the helmet was $50. unit of account Abinav purchased a helmet online. medium of exchange Abinav deposited the remaining funds into his bank. store of value

Money's role as a store of value is less important today than it once was.

True

The simple money multiplier, mm=1rr, is greater than the real-world money multiplier.

True

owner's equity

a bank's assets minus the bank's liabilities

commodity money

an exchangeable good of intrinsic value, such as silver or tobacco

What accounts for the difference between the two curves shown in the figure?

banks' need to cover expenses and make a profit

Arrange the systems of economic exchange according to the order in which they historically appeared, from ancient times to the present.

barter system commodity money commodity-backed money fiat money

liabilities

financial obligations a bank owes to others

When stores closed due to COVID-19 lockdowns, people had fewer opportunities to spend, and were able to deposit more money into their checking accounts. This led to an increase in M1, and a(n) - in M2.

increase

assets

items a bank owns

Match each term to the corresponding definition.

money lent by the Fed to private banks Correct label: discount loans rate of interest paid by private banks to the Fed Correct label: discount rate rate of interest paid on interbank loans Correct label: federal funds rate money deposited with the Fed by private banks Correct label: federal funds

currency

paper bills and coins used as money

central bank

the Federal Reserve

reserves

the portion of bank deposits that is set aside and not lent out

commercial bank

the type of bank citizens use to open a checking account or take out an auto loan

investment bank

the type of bank that typically serves to help firms raise money to invest

What is the primary objective of open market operations by the Federal Reserve Bank?

to grow or shrink the money supply

Which items are parts of the M1 money supply?

traveler's checks money in checking accounts currency