ECON 210 ch 34
If the Fed acts to reduce interest rates today, it may take _____ before aggregate demand and economic growth begin to respond significantly.
6 to 18 months By that time, the recession may be over
What effect does a decrease in reserves have on the money supply?
A decrease in reserves decreases both M1 and M2. A decrease in reserves decreases the money supply through a multiplier process.
What effect does an increase in reserves have on the money supply?
An increase in reserves increases both M1 and M2. An increase in reserves increases the money supply through a multiplier process.
What is also known as a Federal Reserve note?
a U.S. dollar U.S. dollars are liabilities for the Federal Reserve.
An asset that can be quickly converted so that it can be used for payments is:
a liquid asset. Currency is the most liquid asset.
Discount window lending sets _____, and then the Fed _____.
an interest rate; waits to see how many banks want to borrow The term auction facility, on the other hand, sets the quantity of reserves, and then an auction determines the price.
What is something that the Federal Reserve does?
issue money The Federal Reserve issues U.S. currency.
What is something that the Federal Reserve does?
keep accounts for private banks The Federal Reserve is the bank for private banks.
A(n) _____ asset can be used for payments or can quickly and without loss of value be made usable for payments.
liquid
Which is one of the services that the Federal Reserve performs for the U.S. government?
maintaining the U.S. Treasury's bank account The U.S. Treasury has more income and borrows more than any other bank customer in the world.
The Federal Funds rate is the _____ lending rate from one major bank to another.
overnight
A liquid asset can be used for _____ or can quickly and without loss of value be made usable for payments.
payments
The Federal Reserve does all of these activites EXCEPT:
print money to pay federal employee salaries. The Federal Reserve does not print money for specific expenditures.
Which is NOT one of the services that the Federal Reserve performs for the U.S. government?
printing money to finance government spending The Federal Reserve issues U.S. currency, but not for this purpose.
The ratio of reserves to deposits is called the:
reserve ratio. The reserve ratio is determined primarily by how liquid banks wish to be.
Of the following assets, which is the MOST liquid?
reserves held by banks at the Fed According to Figure 34.1, currency is the most liquid asset, and reserves held by banks at the Fed are the second most liquid.
ΔReserves × MM equals:
ΔMS The change in the money supply caused by a change in reserves equals the amount of the change in reserves times the money multiplier.
In the past _____ issued notes that are used as money. Today _____ issue(s) notes that are used as money.
many banks; just one bank That one bank is the Federal Reserve.
What is something that the Federal Reserve does?
protect consumers with disclosure regulations The Federal Reserve regulates many aspects of banking.
Suppose that the money multiplier is 10. If reserves increase by $1,000, by how much will the money supply increase?
$10,000 $1,000 × 10 = $10,000.
If banks want a reserve ratio of 1/10 and the Fed increases reserves by $1,000, by how much must the money supply increase?
$10,000 The money multiplier is 1/RR, or 10. So $1,000 × 10 = $10,000.
If banks want to maintain a reserve ratio of 1/10, and the Fed increases reserves by $10,000, by how much must the money supply increase?
$100,000 The money multiplier is 1/RR, or 10. So $10,000 × 10 = $100,000.
Suppose that the money multiplier is 7. If reserves increase by $2,000, by how much will deposits increase?
$14,000 $2,000 × 7 = $14,000.
Suppose that banks want to maintain a reserve ratio of 1/10. If the Fed increases reserves by $5,000, by how much must the money supply increase?
$50,000 The money multiplier is 1/RR, or 10. So $5,000 × 10 = $50,000.
If banks want to maintain a reserve ratio of 1/5 and the Fed increases reserves by $10,000, by how much must the money supply increase?
$50,000 The money multiplier is 1/RR, or 5. So, $10,000 × 5 = $50,000.
Of the following events that would occur as a part of the Fed using monetary policy to decrease aggregate demand, which would occur third?
Short-term interest rates increase. Selling bonds in open market operations would decrease the money supply, which raises short-term interest rates, causing less borrowing and investing.
Which event would occur first as a part of the Fed using monetary policy to increase aggregate demand?
The Fed buys bonds in an open market operation. Buying bonds in open market operations would increase the money supply, which reduces short-term interest rates, causing more borrowing and investing.
Of the following events that would occur as a part of the Fed using monetary policy to decrease aggregate demand, which would occur first?
The Fed sells bonds in an open market operation. Selling bonds in open market operations would decrease the money supply, which raises short-term interest rates, causing less borrowing and investing.
The term auction facility sets _____, and then the Fed _____.
a certain quantity of reserves; reduces the interest rate until banks borrow the money The Fed stresses that there is no stigma associated with borrowing from the term auction facility.
A solvency crisis occurs when:
banks begin to have liabilities in excess of the value of their assets. A solvency crisis occurs when banks become insolvent.
Which factor is NOT one of the four major factors that economists believe determine the supply of savings?
financing large investments
The U.S. Treasury is the world's largest bank customer because it:
has more income and borrows more than any other bank customer. The Federal Reserve is the bank for the world's largest bank customer.
Which is one of the services that the Federal Reserve performs for the U.S. government?
managing the issuing, transferring and redeeming of U.S. Treasury bills, bonds, and notes Just as your bank can help you borrow money, the Federal Reserve helps the U.S. Treasury borrow money.
In the past:
many banks issued their own banknotes, but today the money we use in the United States is provided by one particular bank. That one bank is the Federal Reserve System.
The size of the money multiplier is:
not fixed, but depends on how much of their assets banks want to hold as reserves. Even though the Fed controls the monetary base, the Fed may not know how much or how quickly changes in the base will change the money supply.
Of the following assets, which is the LEAST liquid?
savings deposits According to Figure 34.1, savings deposits are the least liquid of the assets listed here.
The Federal Reserve does all of these activities EXCEPT:
set marginal tax rates. Congress sets tax rates.
ΔReserves × MM equals:
the change in the money supply. The change in the money supply caused by a change in reserves equals the amount of the change in reserves times the money multiplier.
The Federal Reserve's customers are:
the government and private banks. The Fed performs a lot of functions for the federal government and for private banks.
Which number is the smallest?
the number of regional Federal Reserve Bank presidents on the Federal Open Market Committee The Federal Open Market Committee has five regional Federal Reserve Bank presidents as members.
An insolvent bank is one:
whose liabilities are greater than its assets. When many banks become insolvent, it is called a solvency crisis.
A solvent, illiquid bank is one:
whose short-term liabilities are greater than its short term assets, but whose overall assets are greater than its liabilities. When many banks become illiquid, it is called a liquidity crisis.
When the Federal Reserve changes the money supply by changing reserves, which formula can be used to calculate the change in the money supply?
ΔMS = ΔReserves × MM. The change in the money supply caused by a change in reserves equals the amount of the change in reserves times the money multiplier.