Assignment 7

What statement is correct? In the special case of th 100% reserve banking the money multiplier is... 0 & banks create money. 0 & banks do not create money. 1& banks create money. 1 & banks do not create money.

1 & banks do not create money

What two things increase the money supply?

A decress in the discount rate & a decrease in the interest rate on reserves.

Functions of money...

A unit of account A store of value Medium of exchange

M1 is

Demand deposits, Traveler's checks Other checkable deposits, Currency

What does the Federal Reserve not do?

Makes loans to any qualified business that requests one.

You pay for cheese & bread from the deli with currency. What function of money does this best illustrate?

Medium of exchange

If the Federal Reserve increasesthe interest rate on bank deposits at the Fed, banks will want to hold

More reserves, so the money multiplier will fall.

Which of the following increases when the Fed makes open-market sales? Currency & Reserves Currency but not Reserves Reserves but not Currency Neither Currency nor Reserves

Neither Currency nor Reserves

The Fed can increase the money supply by conducting open-market

Purchases or by lowering the discount rate.

On a bank's T account, which are part of the banks assets?

Reserves but not deposits made by its customers.

The fed can decrease the money supply by conducting open-market

Sales or by raising the discount rate.

When conducting an open-market sale, the Fed

buys government bonds, and in so doing increases the money supply.

Fiat money

has no intrinsic value.

When the Fed conducts open-market sales,

it sells Treasury securities (government bonds), which decreases the money supply.

If the federal funds rate were below the level th Federal Reserve had targeted, the Fed could more the rate back towards its target by...

selling bonds. This selling would reduce the money supply.

The discount rate is the interest rate that

the Fed charges banks for loans

A problem that the Fed faces when it attempts to control the money supply is that

the Feddoes not control the amount of money that households choose to hold as deposits in banks.

The agency responsible for regulating the money supply in the United States is...

the Federal Reserve

The Fed's control of the money supply is not precise because

the amount of money in the economy depends in part on the behavior of depositors and bankers.

If a bank has a reserve ratio of 8%, then

the banks keep 8% of its deposits as reserves and loans out the rest.

M1 equals currency plus demand deposits plus

traveler's checks plus other checkable deposits.

A bank's reserve ratio is 10% and the bank has $2,000 in deposits. Its reserves amount to

$200

What is not included in M1? a $5 bill in your wallet $100 in you checking account $500 in your saving account All of the above are included in M1

$500 in you saving account

If R represents the reserve ratio for all banks in the economy, then the money multiplier is

1/R

If the reserve ratio is 2.5%, then the money multiplier is

40.

The federal funds rate is the interest rate that banks charge who?

Banks charge each other for short-term loans of reserves.

Store of value is...

Cash and Stock

In a fractional-reserve banking system, an increase in reserve requirements

Decrease both the money multiplier and the money supply.

M2 is

Everything in M1 Savings deposits , Small time deposits Money market mutual funds A few minor categories

Other things the same if reserve requirements are decreased, the reserve ratio

Increases, the money multiplier increases, and the money supply decreases.

A bank has a 10% reserve requirement, $5,000 in deposits, and has loaned out all it can given the reserve requirement.

It has $500 in reserves and $4,500 in loans.

What does the Fed aucition at the Term-Auction Facility?

Loans of a quantity determined at the auction.

Money market mutual funds are included in

M2 but not in M1

When can banks use to borrow from the Federal Reserve?

The discount window or the term auction facility.

In a system of 100% reserve banking,

banks do not influence the supply of money

When the Fed decreases the discount rate, banks will

borrow more from the Fed and lend more to the public. The money supply increases.

When the Federal Reserve conducts open-market operations to increase the money supply, it

buys government bonds from the public.

The primary difference between commodity money & fiat money is that..

commodity money has intrinsic value but fiat money does not.

As the reserve ratio increases, the money multiplier

decreases.

On a bank's T account, which are part of the banks liabilities?

deposits made by its customers but not reserves.

In a frational banking system, a bank

keeps only a fraction of its deposits in reserve.

Suppose banks decide to hold more excess reserves relative to deposits. Other things the same, this action will cause the

money supply to fall. To reduce the impact of this the Fed could buy Treasury bonds ( Government bonds).

Liquidity refers to

the ease with which an asset is converted to the meduim of exchange.

Economists used the word "money" to refer to

those assets regularly used to buy goods and services

If the central bank in some country lowered the reserve requirement, then the money multiplier for the country

would increase.