Macro Chapter 15

If banks want to maintain a reserve ratio of 1/5 and the Fed increases reserves by $10,000, by how much must the money supply increase?

$50,000 The money multiplier is 1/RR, or 5. So, $10,000 × 5 = $50,000.

What effect does a decrease in reserves have on the money supply?

A decrease in reserves decreases both M1 and M2. A decrease in reserves decreases the money supply through a multiplier process.

What is NOT one of the reasons that banks keep their accounts at the Federal Reserve?

Interest paid by the Federal Reserve exceeds the returns from any other type of investment. Most of the time, the Federal Reserve does not pay interest on deposits.

If the Fed wants to decrease interest rates, it should:

buy bonds in open market operations. Buying bonds would cause the monetary base to increase, thereby reducing interest rates.

The Federal Reserve creates money:

primarily by electronically adding reserves to bank accounts held at the Fed. The power to create money out of thin air is an awesome power

The Federal Reserve does all of these activities EXCEPT:

print money to finance government spending. The Federal Reserve does not print money for specific expenditures. set marginal tax rates. Congress sets tax rates. print money to pay federal employee salaries. The Federal Reserve does not print money for specific expenditures. calculate labor market statistics, such as the unemployment rate. Statistics like these are calculated by the Bureau of Labor Statistics. measure GDP. GDP is measured by the Bureau of Economic Analysis oversee the Internal Revenue Service. The IRS is responsible to Congress.Which statement is TRUE?

The ratio of reserves to deposits is called the:

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

What does (1 ÷ RR) equal?

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

delta reserves * MM equals

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

What is the formula for the money multiplier?

1 ÷ RR The money multiplier is the amount the money supply expands with each dollar increase in reserves.

Buying bonds in an open market operation would:

increase aggregate demand. More borrowing and investing mean greater aggregate demand

Banks use reserves held at the Fed for:

trading with other major banks. Reserves can also be used in dealing with the Fed itself.

Currency is part of:

M1, M2, and MB. Currency is the most liquid asset.

Which statement is TRUE?

Quantitative tightening occurs when the Fed sells longer-term government bonds or other securities. The change in money supply equals the change in reserves × the money multiplier. The money multiplier is the amount the money supply expands with each dollar increase in reserves. The Fed has direct control only over the monetary base. Systemic risk is the risk that the failure of one financial institution can bring down other institutions as well. This is the definition of systemic risk. The money multiplier is the ratio of deposits to reserves.What does (1 ÷ RR) equal?

What is also known as a Federal Reserve note?

a U.S. dollar U.S. dollars are liabilities for the Federal Reserve.

An asset that can be quickly converted so that it can be used for payments is:

a liquid asset. Currency is the most liquid asset.

The discount rate sets the _____ of the reserves that the Fed will lend. The term auction facility sets the _____ of the reserves that the Fed will lend.

interest rate; quantity The term auction facility is a more recent innovation.

What is something that the Federal Reserve does?

issue money The Federal Reserve issues U.S. currency. lend money to banks The Federal Reserve is known as the "lender of last resort" for private banks—and other financial institutions—that can't get funds elsewhere regulate banks The Federal Reserve regulates many aspects of banking. manage the nation's check payment system The Federal Reserve makes paying by check possible.

Which is typically the largest means of payment in the United States?

savings deposits As shown in Figure 34.1, savings deposits are by far the largest means of payment.

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

sell bonds in an open market operation. Selling bonds in open market operations would decrease the money supply, causing less borrowing and investing.

The Fed has the most influence over:

short-term real interest rates. The Fed has the most influence over the Federal Funds rate.

Systemic risk is risk that:

the failure of one financial institution can bring down other institutions. This is the idea behind the Fed's actions to prevent Bear Sterns from failing.

The size of the money multiplier is:

not fixed but depends on how much of their assets banks want to hold as reserves. Even though the Fed controls the monetary base, the Fed may not know how much or how quickly changes in the base will change the money supply.

If the Fed sells bonds in an open market operation, the Solow growth curve will:

not shift. Monetary policy affects the aggregate demand curve, not the Solow growth curve.

Money is a widely accepted:

means of payment. Anything that is widely accepted as a means of payment can be considered money

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?

$3,000 $900 billion ÷ 300 million = $3,000.

If the reserve ratio is 100 percent and the change in reserves is $5 billion, then the money multiplier is _______ and the change in the money supply is _________.

1; $5 billion With a reserve ratio of 100 percent, the money multiplier is 1 ÷ 1 = 1 and the change in the money supply is thus 1 × $5 billion or $5 billion.

If the Fed wants to increase interest rates, it should:

sell bonds in open market operations. Selling bonds would cause the monetary base to decrease, thereby raising interest rates.

The bank that issues the money we use in the United States today is known as:

the Federal Reserve. The power to create money out of thin air is an awesome power.

When banks only hold a fraction of their deposits in reserve and lend the rest, this is:

fractional reserve banking. When you open a bank account, the teller doesn't take your money and put it into a box labeled with your name.

As a result of the financial crisis of 2007-2008, the Fed:

has become much more active and has assumed greater powers. It is widely recognized that a more comprehensive redefinition of the Fed's responsibilities is needed.

The U.S. Treasury is the world's largest bank customer because it:

has more income and borrows more than any other bank customer. The Federal Reserve is the bank for the world's largest bank customer.

The Federal Reserve acquires its unique powers through its ability to:

issue money. The power to create money out of thin air is an awesome power.

In the past _____ issued notes that are used as money. Today _____ issue(s) notes that are used as money.

many banks; just one bank That one bank is the Federal Reserve

The Fed wants to use its tools to influence:

aggregate demand. In order to stimulate the economy, the Fed would want to take action to increase aggregate demand.

A solvent, illiquid bank is one whose short-term liabilities are:

greater than its short-term assets, but whose overall assets are greater than its liabilities. When many banks become illiquid, it is called a liquidity crisis.

One problem with discount window lending that does not apply to the term auction facility is banks may:

not borrow for fear of admitting to the market that they are in a weak position. The Fed made it clear to banks that there would be no stigma associated with using the term auction facility.

What effect does an increase in reserves have on the money supply?

An increase in reserves increases both M1 and M2. An increase in reserves increases the money supply through a multiplier process.

Which is FALSE?

Banks hold reserves only to meet ordinary depositor demands for currency and payment services. The banks must hold reserves according to the law and the Federal Reserve.

_____ is paper bills and coins held by people and nonbank firms.

Currency This is the meaning of currency as it is used in the textbook.

Which help(s) to reduce the probability of a liquidity crisis? I. the existence of the FDIC II. the Fed's role as lender of last resort III. the existence of the Federal Open Market Committee

I and II A liquidity crisis occurs when banks are illiquid, meaning that their short-term liabilities are greater than their short-term assets.

_____ bonds in an open market operation would decrease _____.

Selling; aggregate demand Less borrowing and investing mean weaker aggregate demand.

What is one of the reasons that banks keep their accounts at the Federal Reserve?

Some banks are required by law to hold accounts with the Federal Reserve. It is also safe and convenient for private banks to hold their money at the Federal Reserve.

Which statement 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. People would be less likely to invest their savings in bank alternatives if the reserve ratio is 100 percent. They would be more willing to invest in those activities that banks used to invest in prior to the 100 percent ratio. A liquid asset can't be used for payments or can quickly and without loss of value be made usable for payments. A liquid asset can be used for payments or can quickly and without loss of value be made usable for payments. Quantitative easing occurs when the Fed sells longer-term government bonds or other securities. This is the definition of quantitative tightening If banks kept a 100 percent reserve ratio, the money multiplier would equal 10. The money multiplier equals deposits divided by reserves, but at a 100 percent reserve ratio, they are equal, so the ratio equals 1.

The term auction facility sets _____, and then the Fed _____.

a certain quantity of reserves; reduces the interest rate until banks borrow the money The Fed stresses that there is no stigma associated with borrowing from the term auction facility.

When banks find themselves with short-term liabilities greater than their short-term assets, there is:

a liquidity crisis. Even if their overall assets exceed their liabilities, this short-run discrepancy can cause problems.

Money is:

a widely accepted means of payment. Anything that is widely accepted as a means of payment can be considered money.

Discount window lending sets _____, and then the Fed _____.

an interest rate; waits to see how many banks want to borrow The term auction facility, on the other hand, sets the quantity of reserves, and then an auction determines the price.

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.

The Federal Funds rate is the:

overnight lending rate from one major bank to another. Since the Fed can easily change the reserves of major banks through open market operations, it can exercise especially tight control over the Federal Funds rate.

Of these assets, which is the MOST liquid?

reserves held by banks at the Fed According to Figure 34.1, currency is the most liquid asset, and reserves held by banks at the Fed are the second most liquid.

When the Federal Reserve changes the money supply by changing reserves, which formula can be used to calculate the change in the money supply?

ΔMS = ΔReserves × MM. The change in the money supply caused by a change in reserves equals the amount of the change in reserves times the money multiplier.