Econ 2105 - Chpt. 11

If banks desire to hold no excess reserves, the reserve ratio is 10 percent, and a bank that was previously just meeting its reserve requirement receives a new deposit of $400, then initially the bank has a

$360 increase in excess reserves and $40 increase in required reserves.

The problem faced by the Fed stems from two of the Ten Principles of Economics. Those principles are as follows:

(1) Society faces a short-run trade-off between inflation and unemployment, and (2) prices rise when the government prints too much money.

The Federal Reserve System consists of:

-Board of Governors (7 members), located in Washington, DC -12 regional Fed banks, located around the U.S. -Federal Open Market Committee (FOMC), includes the Bd of Govs and presidents of some of the regional Fed banks The FOMC decides monetary policy.

The Fed's 3 Tools of Monetary Control

1.) Open-Market Operations (OMOs): the purchase and sale of U.S. government bonds by the Fed (Used the Most) 2.) Reserve Requirements (RR):affect how much money banks can create by making loans (Rarely Used) 3.) The Discount Rate: the interest rate on loans the Fed makes to banks (Used 2nd Most)

Liabilites Deposits - 10,000 Assets Reserves - 750 Loans - 9,250 If all banks in the economy have the same reserve ratio as this bank, then the value of the economy's money multiplier is:

13.33.

Suppose the Fed requires banks to hold 10 percent of their deposits as reserves. A bank has $20,000 of excess reserves and then sells the Fed a Treasury bill for $9,000. How much does this bank now have to lend out if it decides to hold only required reserves?

29,000

Open-Market Operations (OMOs)

A tool of monetary policy, it involves the Fed's buying (or selling) of securities from (or to) commercial banks and the general public.

12 Federal Reserve Banks

Boston, New York, Philadelphia, Cleveland, Richmond, Atlanta, Chicago, St. Louis, Minneapolis, Kansas City, Dallas, San Francisco

M1

Currency, demand deposits, traveler's checks, and other checkable deposits.

Problems Controlling the Money Supply

If households hold more of their money as currency, banks have fewer reserves, make fewer loans, & money supply falls. If banks hold more reserves than required, they make fewer loans, & money supply falls. Yet, Fed can compensate for household & bank behavior to retain fairly precise control over the money supply.

Bank Reserves

In a fractional reserve banking system, banks keep a fraction of deposits as reserves and use the rest to make loans.

The Federal Funds Market

Is the inter-bank market where excess reserves from one bank can be loaned to another bank

Ben S. Bernanke

Since February 1, 2005 he has been chairman of the Federal Reserve

Which of the following is not correct?

The Federal Open Market Committee meets every 12 weeks.

Federal Reserve

The central bank of the U.S. Controls the the supply of money and attempts to control interest rates.

Reserve Ratio

The fraction of deposits that banks hold as reserves.

A run on banks

When people suspect their banks are in trouble, they may "run" to the bank to withdraw their funds, holding more currency and less deposits

Central bank

a government monetary authority that issues currency and regulates the supply of credit and holds the reserves of other banks and sells new issues of securities for the government

T-account

a simplified accounting statement that shows a bank's assets & liabilities.

Medium of exchange

an item that buyers give to sellers when they want to purchase goods and services

Store of value

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

Demand deposits

balances in bank accounts that depositors can access on demand by writing a check

Which of the following does the Federal Reserve not do? act as a lender of last resort convert Federal Reserve Notes into gold conduct monetary policy serve as a bank regulator

convert Federal Reserve Notes into gold

Which of the following lists ranks types of assets from most liquid to least liquid?

currency, demand deposits, money market mutual funds

Other things the same if reserve requirements are decreased, the reserve ratio

decreases, the money multiplier increases, and the money supply increases.

Banks' liabilities include

deposits, assets include loans & reserves.

M2

everything in M1 plus savings deposits, small time deposits, money market mutual funds, and a few minor categories.

The money supply decreases if

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

Credit cards are

important for analyzing the monetary system.

Which of the following lists two things that both increase the money supply?

lower the discount rate, lower the reserve requirement

Fiat money

money by government decree

When the Fed purchases $200 worth of government bonds from the public, the U.S. money supply eventually increases by

more than $200.

Suppose banks desire to hold no excess reserves. If the reserve requirement is 10 percent and if a bank receives a new deposit of $10, then this bank

must increase its required reserves by $1.

Commodity money

objects that have value in themselves and that are also used as money

Reserve Requirements

regulations set by the Fed requiring banks to keep a certain percentage of their deposits as cash in their own vaults or as deposits in their Federal Reserve district bank

Imagine that the federal funds rate was above the level the Federal Reserve had targeted. To move the rate back towards it's target the Federal Reserve could

sell bonds. This selling would reduce the money supply.

The Money Multiplier

the amount of money the banking system generates with each dollar of reserves The money multiplier equals 1/R.

If a bank has a reserve ratio of 8 percent, then

the bank keeps 8 percent of its deposits as reserves and loans out the rest.

Liquidity refers to

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

The Discount Rate

the interest rate on loans the Fed makes to banks

The Federal Funds Rate

the interest rate the commercial banks charge each other for borrowing and lending reserves is called

At the Federal Reserve,

the nation's monetary policy is made by the Federal Open Market Committee, which meets about every six weeks.

Currency

the paper bills and coins in the hands of the public

money supply (or money stock)

the quantity of money available/circulating in the economy. (currency + deposits)

Monetary policy

the setting of the money supply by policymakers in the central bank

Unit of account

the yardstick people use to post prices and record debts

When the Federal Reserve sells assets from its portfolio to the public with the intent of changing the money supply,

those assets are government bonds and the Fed's reason for selling them is to decrease the money supply.