Macroeconomics Chapter 15

$100000 The money multiplier is 1/RR, or 10. So $10,000 × 10 = $100,000.

If banks want to maintain a reserve ratio of 1/10, and the Fed increases reserves by $10,000, by how much must the money supply increase? - $1000 - $10000 - $100000 - $100

6 to 18 months

If the Fed acted to reduce interest rates today, how long would it take for economic growth to respond significantly?

1. Mandate a new required reserve ratio 2. Change the interest on reserves held by banks at the Fed

If the Fed wants to change the Reserve Ratio what two options do they have?

Checkable Deposits (Deposits we use most often in making daily transactions, also known as demand deposits)

What are deposits that you can write checks on or can access with a debit card?

Savings Accounts, Money Market Mutual Funds, and Small Time Deposits (also called certificates of deposit)

What are the largest means of payment?

1. The Monetary Base (MB) 2. M1 3. M2

What are the three most important definitions of the money supply? 1. ______________ ______________ ________________: currency and total reserves held at the Fed. 2. ____________: Currency plus checkable deposits 3. ____________: M1 plus savings deposits, money market mutual funds, and small time deposits.

Preventing Systemic Risk Minimizing the Moral Hazard

What are two of the Fed's most important jobs?

Federal Open Market Committee

When the Fed wants to change the monetary base, it uses the ____________ ___________ ___________ ___________.

Sell

When the Fed wants to decrease the monetary base, it must __________ bonds.

Buy

When the Fed wants to increase the monetary base, it must ___________ bonds.

Be Higher Monetary policy cannot permanently change the rate of real growth, but it can change the inflation rate.

All else equal, if the Fed uses monetary policy to increase aggregate demand, in the long run, the inflation rate will: - be higher. - be lower. - increase at an increasing rate. - return to its natural rate.

Several different measures of the supply of money

Economists have: - no systematic way of measuring the supply of money. - defined money broadly but still only measure currency in circulation. - one specific measure of the supply of money. - several different measures of the supply of money.

Sometimes it adjusts before the Fed even takes any action.

How long does it take for the rate to adjust when the Fed announces a change to its target for the federal funds rate? - The rate usually adjusts immediately after the Fed takes action to change the rate. - Sometimes it adjusts before the Fed even takes any action. - It can take several days or weeks for rates to fully adjust to announced changes from the Fed. - The rate never fully adjusts because the Fed announces planned changes so frequently.

10

If the reserve ratio is 1/10, what percent of deposits is kept as reserves? - 0 - 10 - 20 -90

Savings deposits

Of these assets, which is the LEAST liquid? - currency - savings deposits - checkable deposits - reserves held by banks at the Fed

Money

The more liquid the asset, the more easily it can serve as ___________.

1. Currency 2. Total Reserves 3. Checkable Deposits 4. Savings Deposits, Money Market Mutual Funds, and Small-Time Deposits

The most important assets that serve as means of payment in the United States today are: 1. _______________ - paper bills and coins. 2. ____________ _____________ held by banks at the Fed. 3. _____________ _____________ - your checking or debit account. 4. _____________ _____________, ___________ __________ ____________ _________, and ________________ _____________________.

Money

___________ is a widely accepted means of payment.

Liquid

_____________ assets can be used for payments, or, quickly and without loss of value, be converted into an asset that can be used for payments.

ΔMS.

ΔReserves × MM equals: - ΔMS. - MS. - ΔRR. - RR.

Liabilities that exceed its assets.

An insolvent institution has: - assets that exceed its equity. - liabilities that exceed its assets. - equity that exceeds its liabilities. - Assets that exceed its liabilities

U.S. Treasury

As the government's bank, the Fed maintains the bank account of the?

Depositors will get their deposits back, even if the bank is insolvent.

Deposit insurance guarantees that: - depositors will not get their deposits back, unless the bank is solvent and liquid. - depositors will get their deposits back, unless the bank becomes insolvent. - depositors will get their deposits back, even if the bank is insolvent. - depositors will get their deposits back, unless the bank's assets are illiquid.

Buy bonds in open market operations.

If the Fed wants to decrease interest rates, it should: - sell bonds in open market operations. - buy bonds in open market operations. - issue bonds in open market operations. - recall bonds in open market operations.

12.5; $187.5 billion With a reserve ratio of 8 percent, the money multiplier is 1 ÷ .08 = 12.5 and the change in the money supply is thus 12.5 × $15 billion or $187.5 billion.

If the reserve ratio is 8 percent and the change in reserves is $15 billion, then the money multiplier is _______ and the change in the money supply is _________. - 12.5; $187.5 billion - 1; $5 billion - 5; $40 billion - 20; $200 billion

M1 and M2

In order to impact aggregate demand and the economy, the Fed needs to be able to influence: - M1 and M2 - every measure of the money supply - MB and M1 - MB only

Liquid Asset (Houses are illiquid and money is the most liquid)

One of the Federal Reserve's most powerful tools is its influence over expectations, not its influence over the money supply, this is known as?

Monetary Base

The Fed has direct control only over the _____________ ____________.

Short Run

The Fed has influence on real interest rates only in the __________ __________.

Reserve Ratio

The ____________ ____________ is the ratio of reserves to deposits at the bank.

Monetary

The _____________ base includes currency and total reserves held at the Fed.

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

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 - $3,000 - $300 - $9,000,000

Money Multiplier (MM)

The amount the money supply expands with each dollar increase in reserves is known as?

Solvent but illiquid banks.

Traditionally, the Fed lends to: - solvent but illiquid banks. - insolvent and illiquid banks. - insolvent and solvent banks. - solvent, liquid banks.

1. Open Market Operations 2. Paying Interest on Reserves Held By Banks at the Fed

What are the two major tools the Fed uses to control the money supply?

Quantitative Easing

What describes a series of monetary base expansions conducted after the Financial Crisis of 2008?

The money multiplier

What does (1 ÷ RR) equal? - the GDP multiplier - the reserve ratio - the money multiplier - the change in the money supply

Use its tools to influence aggregate demand

What does the Fed ultimately want to do?

The Federal Reserve lending directly to banks and other financial institutions

Which is one of the three major tools of monetary policy covered in the textbook? - the use of funds to aid banks through the Troubled Asset Relief Program (TARP) - auctioning government bonds to the public - the Federal Reserve lending directly to banks and other financial institutions - assuming majority ownership stakes at investment banks

Governors

Who in the Federal Reserve are appointed for 14-year terms and cannot be reappointed?

Primarily by electronically adding reserves to bank accounts held at the Fed.

The Federal Reserve creates money: - by computer, when it pays households dividends on their savings accounts. - only when it prints new currency. - only with the permission of Congress. - primarily by electronically adding reserves to bank accounts held at the Fed.

Federal Reserve

The ____________ ____________ is the national bank of the United States.

Multiplier

The size of the ________________ is not fixed but depends on how much of their assets the banks want to hold as reserves.

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.

The term auction facility sets _____, and then the Fed _____. - an interest rate; waits to see how many banks want to borrow - a certain quantity of reserves; reduces the interest rate until banks borrow the money - an interest rate; reduces the interest rate until banks borrow the money - a certain quantity of reserves; waits to see how many banks want to borrow

Interest paid by the Federal Reserve exceeds the returns from any other type of investment.

What is NOT one of the reasons that banks keep their accounts at the Federal Reserve? - They want a convenient place to hold their money. - They want a safe place to hold their money. - Some banks are required by law to hold accounts with the Federal Reserve. - Interest paid by the Federal Reserve exceeds the returns from any other type of investment.

Liquidity Trap

What is a situation in which interest rates are close to the zero lower bound, so pushing them lower is not possible or not effective at increasing aggregate demand?

Worth a lot in the future; can only be sold today at a low price

An illiquid asset is one that is _______ but _______. - worth a lot right now; not worth that much in the future, when it can be sold. - worth a lot in the future; can be sold today at its expected future price - worth a lot in the future; can only be sold today at a low price - worth a lot right now; cannot be sold until the future, when its value will be higher

Yes, even though they technically can't be used to buy goods and services.

Are savings accounts money? - Yes, because they can be used to buy goods and services. - No, because they technically can't be used to buy goods and services. - Yes, even though they technically can't be used to buy goods and services.

Federal Funds

The Fed has the most influence over a short-term interest rate called the _____________ ______________ rate.

Issue Money

The Federal Reserve acquires its unique powers through its ability to ____________ ______________.

Dual

The Federal Reserve is responsible for keeping unemployment low and keeping inflation low; therefore, we say the Fed has a _____________ mandate.

Open Market Operations

What is buying and selling of short-term U.S. government bonds on the open market?

Open Market Operations

What is the buying and selling of (usually) short-term U.S. government bonds on the open market?

Changes in the Money Supply= Changes in reserves * money multiplier

What is the equation for changes in the money supply?

MM= 1/RR where RR is the reserve ratio

What is the equation to find Money Multiplier?

Change in Money Supply= Change in Reserves x Money Multiplier ΔMS=ΔReserves×MM

What is the equation used to find the change in the money supply?

Currency

What is usually the most liquid asset since it can be spent almost everywhere?

Quantitative Tightening

What occurs when the Fed sells longer-term government bonds or other securities?

Money Multiplier

What tells us how much deposits expand with each dollar increase in reserves?

ΔMS = ΔReserves × MM.

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 × ΔRR. - ΔMS = 1 ÷ ΔReserves. - ΔMS = 1 ÷ (ΔReserves × MM). - ΔMS = ΔReserves × MM.

They can start easily and spread quickly

Banking panics are especially dangerous because: - they can start easily and spread quickly - the banking sector employs about 25% of workers in the United States. - they can lead to other panics, such as retail panics. - the government will respond by seizing all banking assets.

Open Market Operation

The buying and selling of government bonds by the Fed is known as?

Money Supply

The increase in reserves boosts the ____________ _____________ through a multiplier process.

Federal Funds Rate

The interest rate that a bank must pay on an overnight loan is called the ___________ __________ __________.

Increase the money supply through the money multiplier.

When banks use the money they receive from deposits to make loans, they: - decrease the money supply through the money multiplier. - increase the money supply through the money multiplier. - decrease the money supply through open market operations. - increase the money supply through open market operations.

Acting as a lender of last resort

When the Federal Reserve lends money to banks and other financial institutions because no one else will, it is: - acting as a primary market participant. - creating a liquidity crisis. - acting as a lender of last resort. - conducting open market operations.

Maintaining the U.S. Treasury's bank account

Which is one of the services that the Federal Reserve performs for the U.S. government? - printing money to finance government spending - setting marginal tax rates - maintaining the U.S. Treasury's bank account - calculating labor market statistics, such as the unemployment rate

An asset that can be easily converted into a widely-used means of payment with little loss in value.

Which of the following asset would be considered money? - An asset that has value and could at some time be accessed in order to make transactions. - An asset that can be bought or sold using a widely-used means of payment. - An asset that can be easily converted into a widely-used means of payment with little loss in value. - An asset that is infrequently used as a means of payment.

M2 includes saving deposits and money market mutual funds, but M1 does not.

Which of the following is true about M1 and M2? - M1 and M2 both include checking accounts and savings accounts. - Neither M1 nor M2 includes money market mutual funds. - M1 includes currency, but M2 does not. - M2 includes saving deposits and money market mutual funds, but M1 does not.

The Fed has a lot of control over just one interest rate, and interest rates influence economic activity in the short run only.

Which of the following summarizes the limitations of monetary policy? - The Fed can directly influence many different interest rates, but it can only influence them a little bit. - The Fed is most effective at influencing long-term interest rates but is unable to have a short-run impact on the economy. - The Fed has a lot of control over just one interest rate, and interest rates influence economic activity in the short run only. - The Fed directly sets all interest rates, but no interest rate has any short-run effect on the economy.

Lender of Last Resort

A lender that loans money to banks and other financial institutions when no one else will, often a central bank or a country's Treasury or Finance department, this is known as?

Banks begin to have liabilities in excess of the value of their assets.

A solvency crisis occurs when: - the assets and liabilities of banks become illiquid. - banks become solvent - a bank becomes insolvent. - banks begin to have liabilities in excess of the value of their assets.

Greater than its short-term assets, but whose overall assets are greater than its liabilities.

A solvent, illiquid bank is one whose short-term liabilities are: - less than its short-term assets, and whose overall assets are greater than its liabilities. - greater than its short-term assets, and whose overall assets are less than its liabilities. - greater than its short-term assets, but whose overall assets are greater than its liabilities. - less than its short-term assets, but whose overall assets are less than its liabilities.

Yes, because checking accounts can be used to buy goods and services.

Are checking accounts money? - Yes, because the value of a checking account is measured in dollars. - No, because checking accounts cannot be traded for goods and services. - Yes, because checking accounts can be used to buy goods and services. - No, because checking accounts are not physical money.

A widely accepted means of payment (Money is anything that can be used to buy goods and services)

Economists typically define money as: - a means of payment that lacks intrinsic value - a currency that is issued by a central bank - anything in which its value can be inflated - a widely accepted means of payment

12 Federal Reserve Banks each headquartered in a different region of the country.

How many Federal Reserve Banks make up the Federal Reserve?

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 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 _________. - 20; $200 billion - 5; $40 billion - 12.5; $187.5 billion - 1; $5 billion

The Federal Reserve

The bank that issues the money we use in the United States today is known as: - the Bank of America. - the Internal Revenue Service. - Lehman Brothers. - the Federal Reserve.

When deposit insurance isn't enough or when an institution isn't covered by deposit insurance.

The Fed acts as lender of last resort: - only when an institution is covered by deposit insurance but deposit insurance isn't enough. - when deposit insurance isn't enough or when an institution isn't covered by deposit insurance. - for any institution, household, or business, that faces a solvency crisis. - only when an institution is not covered by deposit insurance but deposit insurance would have been enough.

Seven-Member; President; Senate

The Fed has a ____________-member Board of Governors, who are appointed by the _____________ and confirmed by the ______________.

Short-term real interest rates.

The Fed has the most influence over: - both short- and long-term real interest rates. - long-term nominal interest rates. - long-term real interest rates. - short-term real interest rates.

Quasi; Quasi

The Fed is a ____________ private, ____________ public institution.

Government's; Banker's

The Fed is both the __________________ bank and the ____________ bank.

Increase or Decrease

The Federal Reserve can _____________ or _____________ reserves at banks by buying or selling government bonds.

Oversee the Internal Revenue Service.

The Federal Reserve does all of these activities EXCEPT: - oversee the Internal Revenue Service. - issue money. - keep accounts for private banks. - protect consumers with disclosure regulations.

Aggregate Demand; The Money Supply

The Federal Reserve is powerful because it can influence _______ through its control over _______. - the money supply; aggregate demand - aggregate supply; interest rates - interest rates; aggregate supply - aggregate demand; the money supply

The government and private banks.

The Federal Reserve's customers are: - private banks and other firms. - the government and private banks. - the government, private banks, and households. - firms and households.

Has more income and borrows more than any other bank customer.

The U.S. Treasury is the world's largest bank customer because it: - has more income and borrows more than any other bank customer. - writes the rules and regulations that affect all other bank customers. - lends more money than any other bank customer. - spends more money than any other bank customer.

People or institutions, who are insured, tend to take on too much risk.

The problem of moral hazard exists when: - a bank is solvent but many of its assets are illiquid. - the failure of one financial institution can lead to the failure of other institutions. - agencies like the Fed act based on politics rather than sound economics. - people or institutions, who are insured, tend to take on too much risk.

Systemic Risk

The risk that the failure of one financial institution can bring down other institutions is known as?

Federal Open Market Committee

The seven members of the Board of Governors, along with five rotating presidents of the regional Fed banks, make up the ______________ ____________ ______________ _____________.

The Federal Reserve

What has more influence over aggregate demand than any other institution and shifts in aggregate demand can greatly influence the economy in the short run?

The money supply components M1 and M2.

What have the most significant effects on aggregate demand?

Whether households expect inflation to rise or to fall

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

Insolvent Institution

What is a bank or institution whose liabilities are greater in value than its assets?

Zero Lower Bound

What is a situation in which the Federal Funds Rate is close to zero?

Quantitative Easing

What is a situation that occurs when the Fed buys longer-term government bonds or other securities?

Fractional Reserve Banking

What is a system in which banks hold only a portion of deposits in reserve, lending the rest?

Money

What is a widely accepted means of payment?

A U.S. dollar

What is also known as a Federal Reserve note? - a U.S. dollar - a euro - a 30-year bond - a 10-year Treasury bill

Liquid Asset

What is an asset that can be used for payments or, quickly and without loss of value, be converted into an asset that can be used for payments?

Illiquid Asset

What is an asset that cannot be quickly converted into cash without a large loss in value; note that a bank could be illiquid but not insolvent?

Reserve Deposits

What is included in MB that is not included in either M1 or M2? - checking accounts - currency - savings accounts - reserve deposits

Manage the nation's check payment system

What is something that the Federal Reserve does? - calculate labor market statistics, such as the unemployment rate - set marginal tax rates - print money to pay federal employee salaries - manage the nation's check payment system

Limiting systemic risk while checking moral hazard

What is the fundamental problem the Fed faces as a bank regulator?

Moral Hazard

What is the idea that people who are insulated from risk will tend to take on more risk?

Federal Open Market Committee

What is the most important and influential part of the Fed system?

It is the system of accounts that makes it possible to write checks from one bank to another

What is the nation's payment system?

Federal Funds Rate

What is the overnight lending rate from one major bank to another?

The Reserve Ratio (RR)

What is the ratio of reserves to deposits known as?

Governors of the Federal Reserve System are appointed for 14-year terms and cannot be reappointed.

Which statement is TRUE? - There are 2 Federal Reserve Banks, each headquartered in a different region of the country. - Governors of the Federal Reserve System are appointed for 14-year terms and cannot be reappointed. - There are 21 members of the Federal Open Market Committee. - There are 5 members of the Federal Reserve Board of Governors.

If banks want a reserve ratio of 1/10, then when the Federal Reserve increases reserves by $1,000, deposits must ultimately increase by $10,000.

Which statement is TRUE? - When banks are confident that depositors will not want to withdraw their cash or when loans seem profitable, they want a reserve ratio that is relatively high. - If banks want a reserve ratio of 1/10, then when the Federal Reserve increases reserves by $1,000, deposits must ultimately increase by $10,000. - The money multiplier tells us how much deposits expand with each dollar decrease in reserves. - If depositors start visiting the ATM a lot more often, banks will want to have a lower reserve ratio.

The discount rate is the interest rate banks pay when they borrow directly from the Fed.

Which statement is TRUE? - When the Federal Funds rate is close to zero, it is said to be near the zero-upper bound. - The U.S. Federal Reserve no longer uses interest payments on reserves to control the money supply. - The discount rate is the interest rate banks pay when they borrow directly from the Fed. - Quantitative easing occurs when the Fed sells longer-term government bonds or other securities.

Because money held in reserve isn't being lent and lending is how banks earn most of their profits.

Why do banks not want to hold too many reserves?