LC16

If the reserve ratio is 20% and the change in reserves is $8 billion, then the money multiplier is _____ and the change in the money supply is _____.

5; $40 billion With a reserve ratio of 20%, the money multiplier is 1 ÷ 0.2 = 5 and the change in the money supply is thus 5 × $8 billion = $40 billion.

-- Which of the following statements is TRUE?

Banks hold reserves according to the law and the Federal Reserve as well as to meet ordinary depositor demands for currency and payment services.

ΔReserves × MM equals the:

change in the money supply. The change in the money supply caused by a change in reserves equals the amount of the change in reserves times the money multiplier.

What does MM stand for?

money multiplier The money multiplier is the amount by which the money supply expands with each dollar increase in reserves.

The amount of U.S. currency held by people and nonbank firms is enough for every man, woman, and child in the United States to have approximately how much currency? - $9,000,000 - $9,000 - $5,200 - $300

$5,200 $1.7 trillion ÷ 329 million = $5,200.

Which of the following statements is TRUE? - If the Fed buys bonds in an open market operation, the Solow growth curve will shift to the right. - The Fed has the most influence over short-term rates, while most investment spending depends on longer-term rates. - The responses to monetary policy take little time, and the lags from action to response are not fixed but may vary. - One question the Fed must ask to estimate its impact is, "Will banks lend out all or none of the new reserves?"

The Fed has the most influence over short-term rates, while most investment spending depends on longer-term rates.

Which of the following statements is TRUE?

The Federal Funds rate is the overnight lending rate from one major bank to another.

Which of the following statements is FALSE?

The U.S. Federal Reserve no longer uses interest payments on reserves to control the money supply. This method is still in use.

Of the events that might occur as a part of the Fed's use of monetary policy, which would probably NOT occur if the Fed's goal was to increase aggregate demand?

The monetary base decreases. Buying bonds in open market operations causes the monetary base to increase.

Of the following events that would occur as a part of the Fed using monetary policy to decrease aggregate demand, which would occur second?

The monetary base decreases. Selling bonds in open market operations would decrease the money supply, which would then raise short-term interest rates, causing less borrowing and investing.

- Which of the following statements is TRUE?

The money supply will increase by more than the initial change in reserves.

Which of the following statements statement are TRUE? - If banks want a reserve ratio of 1/10, then when the Federal Reserve increases reserves by $1,000, deposits must ultimately increase by $100. - The money multiplier is the ratio of reserves to deposits. - The reserve ratio is determined primarily by how liquid banks wish to be. - When banks are worried that depositors might want to withdraw their cash or when loans don't seem profitable, they want a reserve ratio that is relatively low.

The reserve ratio is determined primarily by how liquid banks wish to be.

If the Fed wants to increase aggregate demand, it should:

buy bonds in an open market operation. Buying bonds in open market operations would increase the money supply, causing more borrowing and investing.

Money is a widely accepted:

means of payment.

Which of the following is NOT one of the services that the Federal Reserve performs for the U.S. government?

printing money to finance government spending

Of the following assets, which is the MOST liquid?

reserves held by banks at the Fed

Of the following assets, which is the LEAST liquid?

savings deposits

Savings deposits, money market mutual funds, and small-time deposits are like checkable deposits in that _____, but unlike checkable deposits in that _____.

they may be used to pay for goods and services; to do so typically requires a little bit of extra work

Which of the following is NOT something that the Fed will try to predict and monitor to estimate the effect of its actions on aggregate demand? - whether businesses that borrow will hold the money as a precaution against bad times - whether businesses that borrow will promptly buy capital and hire labor - whether banks will lend out all the new reserves or only a portion - whether households expect inflation to rise or to fall

whether households expect inflation to rise or to fall Inflation expectations affect aggregate supply, not aggregate demand.

A significant reduction in the rate of inflation is called:

disinflation. When Fed chairman Paul Volcker reduced the inflation rate from 13.5% to 3% in the 1980s, the result was high unemployment.

The size of the money multiplier is:

not fixed but depends on how much of their assets banks want to hold as reserves.

The Federal Reserve does all of the following activities EXCEPT:

measure GDP. GDP is measured by the Bureau of Economic Analysis.

Which of the following statements is TRUE? - The Federal Funds rate is the long-term lending rate from one major bank to another. - The Fed acts as a lender of first resort because banks always borrow from the Fed before borrowing from other banks. - Quantitative easing occurs when the Fed sells longer-term government bonds or other securities. - Open market operations occur when the Fed buys and sells government bonds.

Open market operations occur when the Fed buys and sells government bonds.

A solvency crisis occurs when:

banks begin to have liabilities in excess of the value of their assets. A solvency crisis occurs when multiple banks become insolvent.