Chapter 14 HW - Test #2
When float increases,
When float increases, then the monetary base increases with it.
As financial intermediaries, banks:
accept deposits and make loans
According to the multiple deposit creation of deposits, an increase in the required reserve ratio will not affect raise reduce the total amount of deposits in the banking system.
reduce
The currency that is physically held by banks is known as
vault cash
The First National Bank receives an extra $100 of reserves but decides not to lend any of these reserves. How much deposit creation takes place for the entire banking system?
$0
Money Multiplier =
(1 + CDR) / RR + ER + CDR
If the Fed buys $1 million of bonds from the First National Bank, but an additional 10% of any deposit is held as excess reserves, what is the total increase in checkable deposits? Assume that the required reserve ratio on checkable deposits is 10% and the public's holdings of currency do not change. A. Checkable deposits increase by $5 million. B. Checkable deposits increase by $50 million. C. Checkable deposits increase by $10 million. D. Checkable deposits increase by $1 million.
A. Checkable deposits increase by $5 million.
Classify the following transaction as affecting either assets, a liabilities, or neither for each of the "players" in the money supply process—the Federal Reserve, banks, and depositors. You get $10,000 loan from the bank to buy an automobile. A. Depositors: Assets rise and liabilities rise. Banks: Assets rise, but this is offset by a decrease in reserves assets. B. Banks: Assets and liabilities increase. Fed: Assets and liabilities increase. C. Assets and liabilities of the banking system as a whole are unaffected, however, individual bank balance sheets will change. D. Depositors: Assets are unaffected. Banks: Assets increase and liabilities increase. Fed: Liabilities are unaffected.
A. Depositors: Assets rise and liabilities rise. Banks: Assets rise, but this is offset by a decrease in reserves assets.
"The Fed can perfectly control the amount of reserves in the system." Is this statement true, false, or uncertain? Explain your answer. A. False. A shift from deposits to currency will affect the amount of reserves, and since other players are involved in this process, the Fed ultimately cannot control the level of reserves in the system. B. True. Because the Fed sets the required reserve ratio for banks, it effectively has control over the amount of reserves in the banking system. C. True. The Fed is able to effectively control the monetary base and the amount of reserves through open market operations. D. Uncertain. The amount of control the Fed has over reserves is variable, as it often depends on current economic conditions.
A. False. A shift from deposits to currency will affect the amount of reserves, and since other players are involved in this process, the Fed ultimately cannot control the level of reserves in the system.
Following the financial crisis in 2008, the Federal Reserve began injecting the banking system with massive amounts of liquidity, and at the same time, very little lending occurred. As a result, the M1 money multiplier was below 1 for most of the time from October 2008 through 2011. How does this relate to your answer to the previous step? A. If large amounts of reserves enter the banking system but are held as excess reserves, it is possible for the money multiplier to fall below one. B. The amount of excess reserves held does not affect the value of the money multiplier. C. If the central bank injects the banking system with massive amounts of liquidity, the money multiplier always falls below one. D. If large amounts of reserves enter the banking system but are held as excess reserves, the money multiplier tends to rise above one.
A. If large amounts of reserves enter the banking system but are held as excess reserves, it is possible for the money multiplier to fall below one.
If a bank depositor withdraws $1,000 of currency from an account, what happens to reserves, checkable deposits, and the monetary base? Assume that the required reserve ratio on checkable deposits is 10% and banks do not hold any excess reserves. A. Reserves fall by $1,000, checkable deposits fall by $10,000, and the monetary base remains unchanged. B. Reserves fall by $10,000, checkable deposits fall by $1,000, and the monetary base remains unchanged. C. Reserves do not change, checkable deposits fall by $1,000, and the monetary base falls by $10,000. D. Reserves do not change, checkable deposits fall by $10,000, and the monetary base falls by $1,000.
A. Reserves fall by $1,000, checkable deposits fall by $10,000, and the monetary base remains unchanged.
Which of the following players can affect the money supply by changing reserve requirements? A. The central bank. B. Depositors. C. Banks.
A. The central bank.
Traveler's checks have no reserve requirements and are included in the M1 measure of the money supply. When people travel during the summer and convert some of their checking account deposits into traveler's checks, what happens to the money supply? Why? A. The money supply increases due to a shift from one component of the money supply (checkable deposits) with less multiple expansion to another (traveler's checks) with more. B. The money supply decreases due to a shift from one component of the money supply (checkable deposits) with more multiple expansion to another (traveler's checks) with less. C. The money supply decreases due to a shift from one component of the money supply (checkable deposits) with less multiple expansion to another (traveler's checks) with more. D. The money supply increases due to a shift from one component of the money supply (checkable deposits) with more multiple expansion to another (traveler's checks) with less.
A. The money supply increases due to a shift from one component of the money supply (checkable deposits) with less multiple expansion to another (traveler's checks) with more.
The money multiplier declined significantly during the period 1930-1933 and also during the recent financial crisis of 2008-2010. Yet the M1 money supply decreased by 25% in the Depression period but increased by more than 20% during the recent financial crisis. What explains the difference in outcomes? A. There was a significant increase in the monetary base during the recent financial crisis. B. There was a minimal increase in the currency ratio during the recent financial crisis. C. The excess reserves ratio increased rapidly during the recent financial crisis. D. The overall level of deposit expansion decreased during the recent financial crisis.
A. There was a significant increase in the monetary base during the recent financial crisis. The difference is that the monetary base increased dramatically during the recent financial crisis, which was more than enough to offset the fall in the multiplier. During the Great Depression, the monetary base rose modestly, if at all
The interest rate charged to banks that borrow funds from the Fed is known as the: A. discount rate B. prime rate C. federal funds rate D. bond rate
A. discount rate
If Steffi withdraws $400 in cash from her checking account, then A. the amount of reserves decline. B. it is impossible to tell what happens to the reserves. C. the amount of reserves stay the same. D. the amount of reserves rise.
A. the amount of reserves decline.
A bank has a required reserve ratio of 10%. If the bank has deposits of $100,000 and is holding $12,000 in reserves: A. the bank is holding $2,000 in excess reserves. B. the bank is not meeting its reserve requirement. C. all reserves are excess reserves. D. all reserves are required reserves.
A. the bank is holding $2,000 in excess reserves.
An open market sale of a $100 to a bank results to the T-account entries for the Banking System of A. -$100 in securities and +$100 in reserves. B. +$100 in securities and -$100 in reserves. C. -$100 in securities and -$100 in reserves. D. +$100 in securities and +$100 in reserves
B. +$100 in securities and -$100 in reserves.
Under 100% reserve banking, the money multiplier will be: A. 0 B. 1 C. 10 D. 100 E. infinite
B. 1
"The Fed can perfectly control the amount of the monetary base, but has less control over the composition of the monetary base." Is this statement true, false, or uncertain? Explain your answer. A. True. By controlling the discount rate, the Fed is able to accurately predict banks' borrowings from the Fed, which allows the Fed to control the amount of reserves in the banking system and hence the monetary base. B. False. Since the Fed cannot control the amount of discount lending to financial institutions, it does not have perfect control over the amount of reserves in the banking system and hence the monetary base. C. True. Because the Fed can alter the monetary base through its open market operations, it effectively gives the Fed perfect control of the monetary base. D. Uncertain. Perfect control of the monetary base is only guaranteed if MBn = MB − BR.
B. False. Since the Fed cannot control the amount of discount lending to financial institutions, it does not have perfect control over the amount of reserves in the banking system and hence the monetary base.
If the central bank sells €1 million of bonds and banks reduce their borrowings from the central bank by €1 million, predict what will happen to the money supply. A. The monetary base would rise by €2 million, leading to an increase in the money supply B. The monetary base would fall by €2 million, leading to a decline in the money supply C. The sale of bonds would offset the reduction in borrowings so there would be no change in the monetary base and money supply D. The effect on the money supply is ambiguous
B. The monetary base would fall by €2 million, leading to a decline in the money supply
If the economy starts to boom and loan demand picks up, what do you predict will happen to the money supply? A. The money supply will decrease B. The money supply will increase C. The money supply will not change D. The effect on the money supply is ambiguous
B. The money supply will increase
The monetary base is comprised of: A. reserves and government securities. B. currency in circulation and reserves. C. currency in circulation and government securities. D. currency in circulation and Federal Reserve notes.
B. currency in circulation and reserves.
Money Supply =
Currency in circulation + demand (checkable) deposits
The criticisms of the simple multiple deposit creation model include the following statements except that A. the simple model does not allow for the possibility that banks hold excess reserves. B. the simple model incorporates the idea that the public holds a significant amount of loans in the form of currency. C. the actual creation of deposits is much less mechanical than the simple model indicates. D. the Fed is not the only player whose behavior influences the money supply.
B. the simple model incorporates the idea that the public holds a significant amount of loans in the form of currency. The simple model of multiple deposit creation assumes that the public does not hold their loans in the form of currency. As a result, the model's predictions are not accurate if this assumption does not hold.
Loans that the Fed makes to banks appear on the balance sheet as part of its __________, and deposits made by banks appear on the Fed's balance sheet as part of its ____________. A. liabilities; assets B. assets; liabilities C. net worth; reserves D. securities; net worth
B. assets; liabilities
During the Great Depression years from 1930-1933, both the currency ratio "c" and the excess reserve ratio "e" rose dramatically. What effect did these factors have on the money multiplier?
Both of these factors worked to reduce the money multiplier. This can be seen in Figure 3 in the chapter, which indicates a dramatically declining money supply, while the monetary base grew modestly, if at all.
currency-deposit ratio
Currency in circulation / Checkable deposits
An open market sale of a $100 government security to a bank results to the T-account entries for the Federal Reserve of A. -$100 in securities and +$100 in reserves. B. +$100 in securities and -$100 in reserves. C. -$100 in securities and -$100 in reserves. D. +$100 in securities and +$100 in reserves
C. -$100 in securities and -$100 in reserves. An open market purchase from a bank increases the securities and reserves in the Fed T-account by the amount of the purchase. The opposite is true when an open market sale occurs instead.
Which of the following players can affect the money supply by its holdings of excess reserves? A. The central bank. B. Depositors. C. Banks
C. Banks
If Jane Brown closes her account at the First National Bank and uses the money instead to open a money market mutual fund account, what happens to M1? Why? A. M1 decreases due to a shift from one component of the money supply (chequable deposits) with less multiple expansion to another (money market mutual funds) with more B. M1 increases because the funds that go to the money market mutual fund are first deposited into the mutual fund's bank account C. M1 does not change because the funds that go to the money market mutual fund are first deposited into the mutual fund's bank account D. M1 increases due to a shift from one component of the money supply (chequable deposits) with less multiple expansion to another (money market mutual funds) with more
C. M1 does not change because the funds that go to the money market mutual fund are first deposited into the mutual fund's bank account
Which of the following would be likely to be true if there is an increase in the market lending rates that banks charge? A. The currency ratio is likely to increase, and this will reduce the money multiplier. B. The level of borrowed reserves from the Fed is likely to reduce, and this will reduce the money multiplier. C. The excess reserves ratio is likely to reduce, and this will increase the money multiplier. D. The amount of checkable deposits is likely to reduce, and this will increase the money multiplier.
C. The excess reserves ratio is likely to reduce, and this will increase the money multiplier.
Suppose the Fed increases the interest rate it pays on excess reserves held at the Fed. What would happen to the level of e (the excess reserve/deposit ratio)? A. The level of e would fall. B. The level of e would not change. C. The level of e would rise. D. The effect on the level of e would be ambiguous.
C. The level of e would rise.
What do you predict would happen to the money supply if expected inflation suddenly increased? A. The money supply will not change B. The money supply will decrease C. The money supply will increase D. The effect on the money supply is ambiguous
C. The money supply will increase
The Fed buys $100 million of bonds from the public and also lowers the reserve requirement r. What will happen to the money supply? A. The money supply will not change. B. The money supply will decrease. C. The money supply will increase. D. The effect on the money supply is ambiguous.
C. The money supply will increase.
Assume that the required reserve ratio on checkable deposits is 10% and the public's holdings of currency do not change. If reserves in the banking system increase by $1 billion as a result of discount loans of $1 billion, and checkable deposits increase by $9 billion, why isn't the banking system in equilibrium? A. There are $100 billion of excess reserves that banks will seek to lend out. B. There are $1 billion of excess reserves that banks will seek to lend out. C. There are $100 million of excess reserves that banks will seek to lend out. D. The banking system is in equilibrium. Show the T-account for the banking system in equilibrium.
C. There are $100 million of excess reserves that banks will seek to lend out. Assets: Reserves (+$1 bil.) Loans (+$10 bil.) Liabilities: Dis. loans (+$1 bil.) Check dep. (+$10 bil.)
If the nonbank public holds currency in addition to deposits, then an open market purchase will result in A. less control of the monetary base by the Fed. B. a smaller decrease in total deposits than is predicted by the simple deposit multiplier. C. a smaller increase in total deposits than is predicted by the simple deposit multiplier. D. greater control of the monetary base by the Fed.
C. a smaller increase in total deposits than is predicted by the simple deposit multiplier. When the nonbank public holds currency in addition to deposits, then an open market operation has a smaller effect in total deposits than is predicted by the simple deposit multiplier.
The monetary base rises when there is an increase in: A. Treasury currency outstanding. B. Treasury deposits at the Fed. C. float. D. Only A and C are correct. E. All of the above are correct.
C. float.
During the Great Recession, The monetary base increased significantly while the M1 levels remained relatively flat. The effects of large increases in monetary base during the Great Recession were nullified by A. rise in currency ratio. B. drop in excess reserves ratio. C. rise in excess reserves ratio. D. fall in currency ratio.
C. rise in excess reserves ratio.
The players in the money supply process include all of the following except: A. banks. B. the central bank. C. the Treasury. D. depositors.
C. the Treasury.
The ratio of the money supply to the monetary base is called: A. the currency ratio B. high-powered money C. the money multiplier D. the required reserve ratio
C. the money multiplier
Assume that the required reserve ratio on checkable deposits is 10%, banks do not hold any excess reserves, and the public's holdings of currency do not change. If the Fed reduces reserves by selling $5 million worth of bonds to the banks, what will the T-account of the banking system look like when the banking system is in equilibrium? What will have happened to the level of checkable deposits?
Checkable deposits fall by 50 million and the T-account is: Banking System: Assets: Reserves: -5 million Securities: +5 million Loans: -50 million Liabilities: Checkable deposits: -50 million
Suppose that the Fed buys $1 million of bonds from the First National Bank. If the First National Bank and all other banks use the resulting increase in reserves to purchase securities only and not to make loans, what will happen to checkable deposits? Assume the required reserve ratio is 10 percent. A. Checkable deposits decline by $10 million. B. Checkable deposits increase by $1 million. C. Checkable deposits decline by $1 million. D. Checkable deposits increase by $10 million.
Checkable deposits increase by $10 million.
Reserves are: A. assets for banks. B. deposits at the Fed plus vault cash. C. liabilities for the Fed. D. All of the above are correct. E. None of the above are correct.
D. All of the above are correct.
The monetary base is affected by: A. the Federal Reserve through open market operations. B. the Federal Reserve through its extension of discount loans. C. float and Treasury deposits at the Federal Reserve. D. All of the above are correct. E. None of the above are correct.
D. All of the above are correct.
If you decide to hold $100 less cash than usual and therefore deposit $100 more cash in the bank, what effect will this have on checkable deposits in the banking system if the rest of the public keeps its holdings of currency constant? Assume the required reserve ratio is 10% and banks do not hold any excess reserves. A. Checkable deposits fall by $1,000. B. Checkable deposits fall by $100. C. Checkable deposits increase by $100. D. Checkable deposits increase by $1,000. E. Checkable deposits do not change.
D. Checkable deposits increase by $1,000.
When the Federal Reserve buys a government security on the open market, it is called A. float. B. a discount loan. C. an open market sale. D. an open market purchase
D. an open market purchase
Which of the following are found on the asset side of the Fed's balance sheet? A. monetary base B. currency in circulation C. reserves D. government securities
D. government securities
Two primary assets of the Federal Reserve System are: A. government securities and Federal Reserve notes outstanding. B. government securities and Treasury deposits. C. Federal Reserve notes outstanding and reserves of commercial banks. D. government securities and loans to commercial banks.
D. government securities and loans to commercial banks.
When the Fed gives a discount loan of $100 to a bank, A. currency in circulation increases by $100. B. the Fed's liabilities decrease by $100. C. the monetary base decreases by $100. D. the monetary base increases by $100
D. the monetary base increases by $100
By definition, when the Fed conducts an open market purchase, it is: A. decreasing the quantity of reserves. B. buying bonds. C. increasing the quantity of reserves. D. selling bonds. E. Both B and C are correct.
E. Both B and C are correct.
Excess reserves ratio =
ER / Checkable Deposits
If the Fed sells $2 million of bonds to the First National Bank, what happens to reserves and the monetary base?
First National Bank Assets: Reserves (-$2 mil.) Securities (+$2 mil.) Fed Reserve System Assets: Securities (-$2 mil.) Liabilities: Reserves (-$2 mil.) Reserves fall by $2 million, and the monetary base falls by $2 million.
If the Fed lends five banks an additional total of $100 million but depositors withdraw $50 million and hold it as currency, what happens to reserves and the monetary base?
Five Banks Assets: Reserves (+$50 mil.) Liab: Disc. loans (+$100 mil.) Deposits (-$50 mil.) Fed Asset: Disc. loans (+$100 m) Liab: Reserves (+$50 mil.) Currency (+$50 mil.) Reserves increase by $50 million, and the monetary base increases by $100 million.
If the Fed sells $2 million of bonds to Irving the Investor, who pays for the bonds with a briefcase filled with currency, what happens to reserves and the monetary base? Use T-accounts to explain your answer.
Irving Assets: Currency (-$2 mil.) Securities (+$2 mil.) Fed Assets: Securities (-$2 mil.) Liabilities: Currency (-$2 mil.) Reserves remain unchanged, and the monetary base falls by $2 million.
The process whereby, when the Fed supplies the banking system with $1 of additional reserves, deposits increase by a multiple of that amount is known as ________________
Multiple deposit creation is the process in which the deposits the Fed supplies in the banking system increase to a multiple of the deposit amount.
In October 2008, the Federal Reserve began paying interest on the amount of excess reserves held by banks. How, if at all, might this affect the multiplier process and the money supply?
Multiplier: Decreases MS: Decreases
An open market sale of $100 of government security to the nonbank public results to _______ an increase a reduction no change in checkable deposits in the Nonbank Public's T-account.
a reduction
The operation of the Fed and its monetary policy involve actions that affects its record of holdings known as the Fed's
balance sheet
The monetary policy player that determines the borrowed reserves is the
banking system
The Federal Reserve System is the ___________ for the United States, which is defined as the government agency responsible for __________.
central bank; the conduct of monetary policy
When a bank pays off its borrowings from the Fed, the amount of reserves in the banking system ____
drops
An open market purchase increases the monetary base if the proceeds are kept in _________
either currency or deposit
The monetary policy player that determines the nonborrowed monetary base is the
federal reserve system
An open market sale of government securities to the nonbank public ___________ the monetary base.
lowers
Money Supply (also) =
monetary base x money multiplier
The monetary policy player that determines the currency holdings is the
nonbank public
A shift from currency to deposits will ______ the monetary base in the banking system.
not affect
Reserve Ratio =
required reserves/checkable deposits
The money multiplier when people hold currency and when banks hold excess reserves is ___________ the simple multiplier (the multiplier found when currency held and excess reserves are both zero).
smaller than
The ______ lists the changes that occur in balance sheet items, starting from the initial balance sheet position.
t-account
If the seller of securities keep the proceeds in deposits after an open market purchase by the Fed, then the effect on monetary base is ___________ if the proceeds are kept as currency instead.
the same
define Float:
the temporary net increase in bank reserves occurring from the Fed's check-clearing process. cash items in process of collection at the Fed - deferred-availability cash items