ECO3223 Ch 14 Exam Review
What is the effect on the monetary base of an Open Market Purchase? What is the effect on the monetary base of an Open Market Sale?
- An Open Market Purchase will increase the monetary base by the amount of the purchase - An Open Market Sale will decrease the monetary base by the amount of the purchase
What are the two components of the monetary base? Which can the Fed control more tightly?
- The monetary base consists of currency in circulation plus reserves - The Fed can more tightly control reserves
If the seller of bonds to the Fed keeps the proceeds in currency, what will be the effect on the monetary base? On reserves? On deposit expansion?
- The monetary base will increase by the amount of the sale - Reserves are not affected - Deposits are not affected
What is the money multiplier "m"?
- m: (1+c)/(r+e+c) * c = currency ratio * r = required reserve ratio * e = excess reserves ratio
Who are the four "players" in the money supply process?
1) Federal Reserve 2) Banking system 3) Borrowers 4) Depositors
How can the money multiplier explain the events of 1929-1933?
After a first bank panic, depositors started preferring currency to deposits, thus increasing c. In response, banks also increased e. According the money multiplier formula, this would decrease m and thus contract the money supply.
Does the Fed have complete control over the composition of the monetary base?
Although factor's outside the Fed's control can complicate the Fed's control of the monetary base, they do not prevent the Fed from accurately controlling it.
How does the Fed use changes in its balance sheet to conduct monetary policy?
The Fed manipulates currency in circulation and reserves (on the liabilities side) and securities and loans to financial institutions (on the asset side).
What effect do Discount Loans have on the monetary base?
An increase in loans to financial institution will increase the monetary base
How is m different from the simple deposit multiplier?
M takes into account the currency ratio and excess reserves ratio
What two factors influence the level of excess reserves in the banking system?
The level of excess reserves is influenced by the level of loan and deposit creation
What is the monetary base?
The monetary base consists of currency and reserves. It is referred to as "high-powered money" because an increase in the monetary base will typically case a more than proportionate increase in the supply of demand deposits through banks' loan-making activities.
What determines the quantity of new loans a bank is able to make?
The quantity of new loans a bank is able to make is determined by the amount of deposit the bank receives and the reserve requirement.
Does the Fed have complete control over expansion of the monetary base?
There are factors, namely float, Treasury deposits at the Fed, and decisions by the Treasury to have the Fed intervene in the foreign exchange market, that are outside the Fed's control. Additionally, the Fed has no control over how much of its Open Market Purchases is kept as currency and deposited as reserves.