ECon 221 HW 14, 15, 16

A bank currently has $100,000 in checkable deposits and $15,000 in actual reserves. If the reserve ratio is 20 percent, the bank has ________ in money-creating potential. If the reserve ratio is 14 percent, the bank has __________ in money-creating potential:

a: -$5,000 b: $1,000

Suppose there is increase in the total demand for money. In this case:

the equilibrium interest rate will rise.

What is the monetary multiplier?

1/reserve ratio

Suppose the Federal Reserve sets the reserve requirement at 10 percent, banks hold no excess reserves, and no additional currency is held.

A: What is the money multiplier: 10 B: By how much will the total money supply change if the Federal Reserve changes the amount of reserves by -50 million?: -500 million C: Suppose the Federal Reserve wants to decrease the total money supply to $600 million. By how much should the Federal Reserve change reserves to achieve this goal?: -60 million

Excess reserves are equal to:

Actual reserves - required reserves.

What is the largest component of M1?

Checkable deposits

Which of the components of M1 is legal tender?

Currency

What are the components of the M1 money supply?

Currency in circulation and checkable deposits

"Whenever currency is deposited in a commercial bank, cash goes out of circulation and, as a result, the supply of money is reduced.

False, because a checkable deposit in a commercial bank is also part of the money supply.

The basic determinant of the asset demand for money is the:

Interest rate

The basic determinant of the transactions demand for money is the:

Level on nominal GDP

What near-monies are included in the M2 money supply?

Noncheckable savings deposits, money market deposit accounts, small time deposits, and money market mutual fund balances

Why is the face value of a coin greater than its intrinsic value?

People would sell it for its intrinsic value.

The basic objective of the monetary policy is to:

assist the economy in achieving full-employment, noninflationary level of total output.

The equilibrium interest rate is determined:

at the intersection of the total demand for money and the supply of money curve .

Excess reserves:

can be lent out, which increases the money supply.

If there is an increase in the nation's money supply, the interest rate will:

fall, investment spending will rise, aggregate demand will shift right, and real GDP and the price level will rise.

Total money demand is the:

horizontal sum of the transactions demand for money and the asset demand for money.

The monetary multiplier is

inversely related to the reserve ratio.

A major strength of monetary policy to:

its speed and flexibility

Monetary policy is easier to conduct than fiscal policy because:

monetary policy has a much shorter administrative lag than fiscal policy.

A single commercial bank can safely lend only an amount equal to its excess reserves, but the commercial banking system as a whole can lend by a multiple of its excess reserves because

one bank loses reserves to other banks, but the banking system as a whole does not.

The Federal Reserve requires commercial banks to have reserves because

reserves provide the Fed a means of controlling the money supply.

Reserves are an asset to commercial banks but a liability to the Federal Reserve Banks because:

these funds are cash belonging to commercial banks, but they are a claim that commercial banks have against the Federal Reserve Banks.