EC202 Week 5

The commercial banks on Sunny Island have checking deposits of $4 million, reserves of $600,000, and loans of $2.4 million. The desired reserve ratio is 10 percent. The banks have ________ of desired reserves and ________ of excess reserves.

$400,000; $200,000

The initial impact of the Fed's open market sale of government securities to banks is

a decrease of the banking system's reserve deposits at the Fed.

Members of the Federal Reserve System's Board of Governors

hold 14-year staggered terms

In the short run, when the Fed increases the quantity of money

bond prices rise and the interest rate falls.

The quantity theory of money predicts that in the ________, a 10 percent increase in the quantity of money leads to a 10 percent increase in ________.

long run; price level

The most direct way in which money replaces barter is through its use as a

medium of exchange

Controlling the quantity of money and interest rates to influence aggregate economic activity is called

monetary policy

The opportunity cost of holding money is the

nominal interest rate on assets other than money.

During periods of inflation, what function of money is most severely affected?

store of value

The monetary multiplier determines how much

the quantity of money will be expanded given a change in the monetary base.

An increase in currency held outside the banks is ______.

a currency drain

An open market operation occurs when the _________ buys or sells securities __________.

Federal Reserve System; in the open market

In the money market, if the interest rate exceeds the equilibrium interest, there is a surplus of money. How is the surplus eliminated?

People buy bonds to rid themselves of the surplus money, bidding up their prices and pushing interest rate down.

Describe the chain of events in the money creation process.

The monetary base increases. Banks acquire excess reserves which they loan out, increasing deposits and also the quantity of money. The new deposits then create additional excess reserves.

When the nominal interest rate rises, the quantity of money demanded decreases because

people shift funds from money holdings to interest-bearing assets.

The velocity of circulation is

the average number of times a dollar bill is used in a year to buy the goods and services in GDP.