Econ 202 Chapter 11

A bank which must hold 100 percent reserves opens in an economy that had no banks and a total initial money supply (currency) of $1,000. If customers deposit $87 into the bank, what is the value of the money supply?

$1,000; banks in a 100 percent reserve banking system accept deposits but don't loan out the reserves

If the reserve ratio is 5 percent, then $500 of new reserves can generate

$10,000 of new money in the economy; 1/0.05= 20, 20x 500= $10,000

The manager of the bank where you work tells you that the bank has $500 million in deposits and $350 million dollars in loans. If the reserve requirement is 5 percent, how much is the bank holding in excess reserves?

$125 million; check work

A bank's reserve ratio is 20 percent and the bank has $1,000 in deposits. Its reserves amount to

$200; the RR of a bank is the fraction of deposits that banks hold as reserves, Multiply 20% by $1,000

Refer to the Table. What is the M1 money supply?

$252.5 billion

Refer to the Table. What is the M2 money supply?

$440 billion; M2 includes: everything in M1, savings deposits, small time deposits, money market mutual funds, and miscellaneous /minor categories of M2. M1 includes: currency, demand deposits, travelers checks, other checkable deposits Neither include large time deposits or credit card balances

If a bank has just enough reserves to meet the required reserve ratio of 25 percent, and receives a deposit of $800, it has initially experienced a

$600 increase in excess reserves and a $200 increase in required reserves

Under what reserve ratio is a bank unable to create money?

100%; when banks hold only a fraction of deposits as reserves, the banking system creates money

If $200 of new reserves generates $1,000 of new money in the economy, then the reserve ratio is

20%; 200 times something equals 1,000, 1,000/200=5 which is the money multiplier, if money multiplier is 1/R=5 then reserve ratio must be 20% since 1/0.20=5

If R represents the reserve ratio for all banks in the economy, then the money multiplier must be equal to 1 divided by what?

R; formula is 1/R

Which of the following is not correct about the Fed?

The Federal Reserve Chair is appointed by the speaker of the house to a four-year term

Refer to the Table. The required reserve ratio is 10 percent. Which of the following is true?

This banks reserve ratio is 20%, its excess reserves are $1,000; check work

U.S. dollars are an example of fiat money and alcohol used to make trades is an example of commodity money.

True

Which of the following is the best example of the medium of exchange function of money?

You give a maid money to clean your house

Which of the following is not a function of money?

a tool to increase barter

A store of value is

an item that people can use to transfer purchasing power from the present to the future

When it buys government bonds to increase the money supply, the Fed is

conducting an open-market purchase

When it sells government bonds to decrease the money supply, the Fed is

conducting an open-market sale

Central banks are institutions

designed to oversee the banking system and regulate the quantity of money in the economy

First Bank of Zogua, a fictional bank, has just received a $100 deposit from an individual. This deposit appears on what part of T-account of the First Bank of Zogua?

liabilities; deposits are liabilities because bank owes that money to the depositors

Which of the following is not included in M1?

money market mutual funds

Which of the following decrease when the Fed makes open market purchases?

neither currency nor reserves

When the Fed buys U.S. government bonds, it has conducted

open market purchases which increase the money supply

Suppose a bank is operating with a leverage rate of 20. A 4 percent increase in the value of assets

will result in an 80 percent increase in owner's equity; 20 x 4

If the reserve ratio is 20 percent, then $150 of new reserves can generate

$750 of new money in the economy

Suppose the banking system currently has $100 billion in reserves, the reserve requirement is 10 percent, and excess reserves amount to $5 billion. What is the level of deposits?

$950 billion; Required reserves: Reserves - Excess reserves (100-5=95 billion), 1/0.10=10, 95x 10= 950 billion deposits

Suppose a bank has total assets of $1,000, capital of $50, and liabilities of $950; the leverage ratio for this bank is ____.

20; leverage ratio is assets/capital, 1,000/50= 20

Refer to the Table. This bank's leverage ratio is

24; leverage ratio is assets/capital

If the reserve ratio is 20 percent, the money multiplier is

5; 1/0.20= 5

Which of the following is not an example of currency?

A $1,000 balance stored in a checking account

Which of the following does the Federal Reserve do?

Act as a lender of last resort to banks

Which of the following is not true in a system of 100-percent-reserve banking?

Banks influence the supply of money; banks in a 100 percent reserve banking system accept deposits but don't loan out the reserves

Funds in an account where you can access by writing a check or through your debit card are best described as

Demand deposits

The government of fictional country of Dobar has decided to use paper currency, known as Dobar dollars, as money. Which of the following best describes Dobar dollars?

Dobar dollars are fiat money with no intrinsic value

Ashley owns a home worth $500,000 and owes $100,000 in student loans. If you asked an economist, she would say Ashley has $400,000 worth of money.

False

The Federal Open Market Committee (FOMC) is responsible for carrying out the Fed's tasks of regulating banks and ensuring the health of the financial system.

False; Federal Reserve does this

The Fed most often influences the money supply by changing reserve requirements for banks.

False; The Fed most frequently influences the money supply using open market operations.

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

False; The Federal Reserve is responsible

When the Fed sells government bonds the money supply increases and the federal funds rate decreases.

False; if the Fed sells bonds, bank reserves decrease and banks need more overnight loans from each other to comply with reserve requirements , the rise in demand for these types of overnight loans leads to an increase in the cost of these loans or an increase in the federal funds rate. The decrease in reserves from banks also allows for fewer loans to be made, which decrease the money supply

Which type of money has no intrinsic value?

Fiat money; most paper money used around the world is fiat money

Under what system do banks generally lend out the majority of the funds deposited?

Fractional reserve banking

One of the key differences between a fractional-reserve banking system and a 100-percent-reserve banking system is that

In a fractional reserve banking system, banks only keep a fraction of deposits as reserve, while banks in a 100-percent reserve banking system keep all deposits as reserves

Given the following information, what are the values of M1 and M2?

M1= 340 billion M2= 1,400 billion

You purchase a beer at a bar using cash. The fact that the bar accepts your cash for the beer beUt illustrates which function of money?

Medium of exchange

The two primary tasks of the Federal Reserve are

Monetary policy and bank regulation

Which of the following assets is most liquid?

Money

If you want to measure and record economic value, you will primarily use which function of money?

Money as a unit of account

Which of the following best defines commodity money?

Money that takes the form of a commodity with intrinsic value

Suppose the money multiplier is equal to 1 in the economy of the fictional country of Opria. What does this indicate about the type of banking system in Opria?

Opria uses a 100-percent reserve system and banks do not create money

Which of the following lists all items included in M2 but not in M1?

Savings deposits, small time deposits, money market mutual funds, and other minor categories

Suppose the Fed wishes to decrease the money supply, which of the following open market operations will the Fed conduct to accomplish this goal?

Sell bonds to the public ; open market operations involve the purchasing and selling of US government bonds by the Fed

Which of the following best describes what occurs under the Fed's Term Auction Facility?

The Fed auctions a set amount of funds, and the bank that offers to pay the highest rate for the funds will get to borrow from the Fed

Which of the following will make banks want to hold more reserves at the Fed, causing the money multiplier to decrease?

The Fed increases the interest rate on bank deposits held at the Fed; if the Fed increases interest paid on reserves held at the Fed, then banks will be encouraged to hold more reserves at the Fed, which will increase the reserve ratio in the economy, which will decrease the money multiplier

Which of the following is not true regarding the Federal Reserve?

The Fed was created to facilitate the federal government's collection of taxes as well as its expenditures; Fed is independent of national government

Which of the following scenarios does not involve the use of commodity money?

The government of the fictional country of Owana orders the use of paper dollars as money

Which of the following most closely fits an economist's definition of "money"?

The set of assets in an economy that people regularly use to buy goods and services

When the Fed purchases government bonds the money supply increases and the federal funds rate decreases.

True

Raymond works as a valuation expert. His job is to look at companies, assess how much their assets and liabilities are worth, and place a dollar valuation on the company that other companies must pay in an acquisition. Raymond's company valuations are an example of the unit of account function of money.

True; A unit account is the yardstick people use to post prices and record debts. When you want to measure and record economic value, you will need to use money as the unit of account. By valuing the company's assets and liabilities, Raymond has placed a price tag on the company and has measured the economic value of the company, these valuations of the unit of account function of money

Which scenario is the best example of the unit of account function of money?

You have a yard sale, and you put a price tag of $50 on your old TV and $10 for your old pots; giving economic value/prices to items

Which of the following best illustrates the concept of a store of value?

You purchase a home in anticipation of selling it in 2 years when the real estate market "heats up"; A store of value is an item that people can use to transfer purchasing power from the present to the future

Jerome Powell was

appointed Chair of the Board of Governors in 2017 by President Donald Trump.

The members of the Federal Reserve's Board of Governors

are appointed by the president of the US and confirmed by the US senate

Stocks and bonds

are examples of stores of value, but not units of account nor medium of exchange.

First Bank of Zogua, a fictional bank, has made a $1 million loan. This loan appears on what part of T-account of the First Bank of Zogua?

assets; loans are assets from bank's perspective, they represent money owed to the bank by borrowers that will be paid at a later date, reserves are also counted in the bank's assets

All else equal, which of the following will cause the money supply to fall?

banks decide to hold more excess reserves relative to deposits

Banks can borrow money from the Fed's discount window. Alternatively banks can

borrow money from the Fed's Term Auction Facility

If the money multiplier is 5 and the Fed wants to increase the money supply by $100,000, it could

buy $20,000 worth of bonds; when the Fed purchases government bonds, money supply increases, 100,000/5=20,000

In order to ensure banks can pay back depositors, Bank regulators impose

capital requirements

The Fed conducts open market operations that cause bank withdrawals and lending to decrease. The Fed has

conducted open market sales; open market sales decrease money supply

Which of the following are used to defer payments and are therefore not money?

credit cards

As a result of sizable losses in 2008 and 2009, banks experienced a shortage of capital, which induced them to ____

decrease lending because they had to meet capital requirements

To increase the money supply the Fed can conduct open-market purchases. Alternatively, the Fed can

decrease the discount rate

Suppose that in a country people lose confidence in the banking system and so hold relatively more currency and less deposits. As a result, bank reserves will

decrease, and the money supply will eventually decrease

In a 100-percent-reserve banking system, if an individual deposits money in their checking account, currency would

decrease, but demand deposits would increase by the same amount and M1 would not change; each deposit in a bank reduces currency

The Fed changes the discount rate and, as a direct result, reserves have increased. The Fed has most likely

decreased the discount rate

As the reserve ratio increases, the money multiplier

decreases

Assume banks hold no excess reserves. If the Fed increases the reserve ratio from 5 percent to 10 percent, then the money multiplier

decreases from 20 to 10

The money supply increases if

households decide to hold relatively less currency and relatively more deposits and banks decide to hold relatively less excess reserves and make more loans.

One reason that the Fed's control of the money supply is not precise is because ____

households' decisions, which are out of the Fed's control, impact the money supply; households choose to hold deposits in banks, how much they hold depends on factors outside of the Fed's control, such as confidence in the banking system

Refer to the Table. The required reserve ratio is 10 percent and First National Bank sells $200 of its short-term securities to the Federal Reserve. This action will initially

increase First National's reserves by $200. Its excess reserves are $1,200; check work

If the reserve ratio is 10 percent, banks do not hold excess reserves, and people do not hold currency, then when the Fed purchases $50 million worth of government bonds, bank reserves

increase by $50 million and the money supply eventually increases by $500 million; Money multiplier is 1/0.10=10, when the Fed purchases the bonds, there is initially $50 million of new money in the hands of the public, public then deposits this money since they're not holding currency, which causes reserves to rise by $50 million, and the money supply eventually increases by $50 million x 10= $500 million

Suppose the Fed purchases $50,000 worth of government bonds from the public. You know that eventually the money supply will

increase by more than $50,000; If Fed purchases $50,000 worth of government bonds from the public, the 50k ends up in the hands of the public, when public deposits this money into banks the bank reserves increase by 50k, when these banks make loans with these new reserves, new money is created on top of the initial 50k increase, therefore the money supply increases by more than 50k

To decrease the money supply the Fed can conduct open-market sales. Alternatively, the Fed can

increase the discount rate

In a 100-percent-reserve banking system, if an individual withdraws money from their checking account, currency would

increase, but demand deposits would decrease by the same amount and M1 would not change

The Fed changes the discount rate and, as a direct result, reserves have decreased. The Fed has most likely

increased the discount rate; discount rate is the interest rate on the loans the Fed makes to other banks. When the Fed inc the discount rate --> banks tend to borrow less money from the Fed since the interest they have to pay back has increased---> lead to decreased borrowing from the Fed --> less money in the bank reserves

Assume banks hold no excess reserves. If the Fed decreases the reserve ratio from 20 percent to 10 percent, then the money multiplier

increases from 5 to 10; Money multiplier equals 1/R, where R is the reserve ratio

The banking system currently has $200 billion of reserves, none of which are excess. People hold only deposits and no currency, and the reserve requirement is 20 percent. If the Fed lowers the reserve requirement to 10 percent and at the same time buys $20 billion worth of bonds, then by how much does the money supply change?

it rises by $1200 billion; if banking system holds $200 million in reserves, 1/.20=5, 5x200= 1,000 billion in deposits. If Fed lowers requirement to 10%, 1,000x0.10= 100 billion bank only required to hold 100 billion in deposits. If Fed buys $20 billion worth of bonds, results in 20 billion in new money, 1/0.10= 10, 10 x (100 billion + 20 billion) = $1,200 billion

You sell your old smartphone online for cash. The fact that you accept cash for your old smartphone best illustrates which function of money?

medium of exchange

The Fed has decreased the money supply through open market operations. Which of the following has occurred?

open market sales, and bank reserves decrease

When the Fed sells U.S. government bonds, it has conducted

open market sales, which decrease the money supply

The New York Federal Reserve Bank

president always gets to vote at the FOMC meetings.

In response to the credit crunch in 2008 and 2009, the U.S. Treasury ____

put public funds into the banking system to increase the amount of bank capital

The amount of reserves banks must hold against deposits is known as

reserve requirement

One reason that the Fed's control of the money supply is not precise is because ____

the Fed does not control the amount that banks choose to lend

The rate charged at the Fed's "discount window" is known as the

the discount rate

Which of the following best defines liquidity?

the ease with which an asset is converted to the medium of exchange

The interest rate at which banks lend reserves to each other overnight is known as

the federal funds rate

Bank assets divided by bank capital is known as

the leverage ratio

If 1/R is the money multiplier in an economy, what must R represent?

the reserve ratio for all banks in the economy

Suppose the money multiplier has increased. Which of the following is the most likely cause?

the reserve ration decreases