econ ch 14

A money multiplier of 2 means that every $1 billion increase in the monetary base will result in a ______ billion increase in the money supply.

$2

Key assumptions for deriving the money multiplier:

- banks hold no excess reserves - the nonbank public does not increase its holdings of currency

Calculate the value of the money multiplier in each of the following​ situations: Banks hold no excess​ reserves, the required reserve ratio is​ 100%, and households and firms hold currency and deposits in equal amounts. The value of the money multiplier is ______ The required reserve ratio is​ 0, banks hold reserves equal to the value of their​ deposits, and households and firms hold half as much in currency as in deposits. The value of the money multiplier is ______ The required reserve ratio is​ 0, households and firms hold twice as much in currency as in​ deposits, and banks hold reserves equal to three-quarters the value of their deposits. The value of the money multiplier is _________

1 1 1.09

3 actors included in the model of how the money supply is determined:

1. the federal reserve-responsible for controlling the money supply and regulating the banking system 2. the banking system-creates the checking accounts that are a major component of M1 3. the nonbank public (all households and firms)-decides the form in which they wish to hold the money (e.g. currency vs checking deposits)

if (C/D) increases from 0.5 to 0.6, then the value of the multiplier falls from 1.5/0.75 = 2 to 1.6/0.85 = ________.

1.88

The monetary base increased sharply in the fall of ________ and stayed at high levels through 2016. Most of the increase occurred because of an ________________ in the bank reserves component, not the currency in circulation component.

2008, increase

MB equal the Bnon and ____

BR

discount loan is made by the _________ to a commercial bank

Fed

•The money multiplier is determined by the actions of three actors in the economy: the _______, the _______________ public, and __________.

Fed, nonbank, banks

you can combine the check clearing items into one term

Float

money supply=money multiplier * monetary base-->

M=( (C/D)+1)/(C/D + rrD + ER/D) ) * B

If the Fed wishes to contract the total value of checkable deposits in the banking​ system, what action can it​ take?

The Fed can sell Treasury bills to financial institutions.

What is the total change in Wells​ Fargo's assets and​ liabilities?

The total change in assets is​ zero, with an additional ​$358,000 in loans and a loss of ​$358,000 of reserves. The total change in liabilities is​ zero, with the ​$358,000 checking account being spent.

Why does the​ Fed's purchase of Treasury bills lead to​ "multiple deposit​ creation"?

The​ Fed's purchase of Treasury bills increases the amount of reserves at banks.

Suppose that JPMorgan Chase sells ​$300 million in Treasury bills to the Fed. a. Use​ T-accounts to show the immediate impact of this sale on the balance sheets of JPMorgan Chase and the Fed. ​(Enter your responses as integers. Include a minus sign to indicate a negative​ change, but do not include a plus sign for a positive change.​) b. Suppose that before selling the Treasury​ bills, JPMorgan Chase had no excess reserves. Suppose that the required reserve ratio is 20​%. Suppose that JPMorgan Chase makes the maximum loan it can from the funds acquired by selling the Treasury bills. Assume that the loan was made to a JP Morgan Chase customer and deposited into his or her account. Use a​ T-account to show the initial impact of granting the loan on JPMorgan​ Chase's balance sheet. ​(Enter your responses as integers. Include a minus sign to indicate a negative​ change, but do not include a plus sign for a positive change.​) c. Now suppose that whoever took out the loan in part​ (b) writes a check for this amount and that the person receiving the check deposits it in Wells Fargo Bank. Show the effect of these transactions on the balance sheets of JPMorgan Chase and Wells Fargo after the check has been cleared. ​(Enter your responses as integers. Include a minus sign to indicate a negative​ change, but do not include a plus sign for a positive change.​) d. If currency in circulation is ​$600 ​billion, total reserves of the banking system are ​$800 ​billion, and total checkable deposits are ​$2,900 ​billion, what is the maximum increase in the money supply that can result from the transaction in part​ (a)? (That​ is, the maximum increase after all actions resulting from the transaction in part​ (a) have​ occurred.) Be sure to use the realistic money​ multiplier, as opposed to the simple deposit​ multiplier, in the calculation.

a. JP Morgan Chase Bank:-300 mil in securities300 mil in reserves Federal Reserve:300 mil in securities300 mil in reserves b. 300,300 c. -300,-300 300,300 d. 600+2900/600+800=2.502.50*300 mil= 750 mil

An article on marketwatch.com in​ mid-2020 observed:​ "Growth in the balance sheet has been slowing as the Fed has tapered the pace of its asset​ purchases." What types of asset purchases is the article referring​ to? The article is referring to the​ Fed's purchases of​ ________. A. U.S. Treasury securities B. bank reserves C. physical​ assets, such as machinery D. all of the above

a. U.S. Treasury securities

Is multiple deposit creation possible in this​ system? Does your answer depend on whether the warehouse receipts can be bought and sold and redeemed by someone other than the person who deposited the​ gold? A. Multiple deposits would work if other institutions did not accept the gold receipts as deposits. B. Multiple deposits would only work if other institutions accepted the gold receipts as deposits. Your answer is correct. C. It is impossible for multiple deposit creation to exist under this system. D. The more people that deposited​ gold, the less likely the possibility of multiple deposit creation

b. Multiple deposits would only work if other institutions accepted the gold receipts as deposits.

can use the balance sheet: assets=liabilities, or fed. reserve notes + reserves must equal the sum of all Fed assets - all other Fed liabilities, or fed reserve notes + reserves = securities + discount loans + gold and SDRs + coin + cash items in process of collection + other fed assets - treasury deposits - foreign and other deposits - deferred availability cash items - other fed liabilities and capital

balance sheet stuff

Why would the Fed slowing the rate at which it is purchasing these assets result in the growth of the monetary base​ slowing? When the Fed purchases these​ assets, it causes​ ________. This means that if the Fed stops buying these​ assets, the growth rate of the monetary base would slow.

bank reserves and currency in circulation to increase

An increase in discount loans affects __________ side(s) of the Fed's balance sheet:

both so, $1 million of discount loans increases bank reserves and the monetary base by $1 million

float

cash items in process of collection - deferred availability cash items

When examining the​ Fed's balance​ sheet, in most​ periods, the two most important are:

currency in circulation and reserve balances of banks

Consider the following​ data: Currency ​$100 billion Bank reserves ​$400 billion Checkable deposits ​$1,200 billion Time deposits ​$1,200 billion Excess reserves ​$80 billion Calculate the values for the​ currency-to-deposit ratio, the ratio of total reserves to​ deposits, the monetary​ base, the M1 money​ multiplier, and the M1 money supply. The​ currency-to-deposit ratio is _____________ The ratio of total reserves to deposits is ___________ The monetary base is ​$__________ billion. The M1 money multiplier is _________ The M1 money supply is ​$________ billion

currency/checkable deposits 100/1200=0.08 bank reserves/checkable deposits 400/1200=0.33 currency+bank reserves 100+400=500 (checkable deposits+currency)/(bank reserves+currency) --> (1200+100)/(400+100)=2.6 checkable deposits+currency 1200+100=1300

A Federal Reserve publication notes that when economists analyze the money supply​ process, they typically assume that the money multiplier is​ "independent of the policy actions of the central​ bank." Briefly explain what this assumption​ means? A. The Fed rarely changes the money multiplier so economists typically assume that it will remain constant. B. The money multiplier has nothing to do with the money supply. C. The money multiplier is not affected by central bank actions. D. The money multiplier is determined by a variety of factors over which the central bank has no control. If this assumption were incorrect​, then the central bank would be able to control the money supply through changes in the monetary base ___________ changes in the money multiplier

d. The money multiplier is determined by a variety of factors over which the central bank has no control. and

In medieval​ times, goldsmiths would often offer to store gold in return for a fee. They provided anyone depositing gold with a warehouse​ receipt, which represented a legal claim on the goldsmith to exchange the receipt for the amount of gold written on it. Part 2 How are the medieval goldsmiths like modern​ banks? A. People asked the goldsmiths to store gold for them in return for a receipt to prove the gold was there.​ Today, we ask banks to store our paychecks and portions of our savings in return for checking and savings accounts. B. The goldsmiths became more like modern banks when the​ goldsmith's receipts, instead of the gold​ itself, began to be used as the medium of exchange. C. The goldsmiths became more like modern banks when the goldsmiths began to make loans on their holdings of gold. D. All of the above

d. all of the above

A higher excess reserves-to-deposit ratio (ER/D) will cause a ______________ in the money multiplier decreases, and a lower currency-to-deposit ratio (C/D) will ___________ the multiplier.

decrease, increase

The discount rate _____________ from most interest rates because it is set by the Fed, whereas most interest rates are determined by demand and supply in financial markets.

differs

The Fed's holdings of Treasury securities actually ________ while the base was exploding.

fell

If banks were to suddenly begin lending the nearly $1 trillion in excess reserves, the result would be a rapid ___________ in the money supply and inflation. Fear of this potential for a much higher rate of inflation in the future drove some investors in 2016 to buy gold.

increase

an ___________________ in the money supply is a multiple of the initial increase in reserves

increase

an increase in the Monetary base causes a multiple ____________ of the money supply

increase

if the excess reserves-to-deposit ration (ER/D) decreases, the money multiplier will ____________

increase

Whenever the Fed purchases assets of any kind, the monetary base ________________

increases

The Fed changes the monetary base by changing the _____________ of its assets— through buying and selling Treasury securities or making discount loans to banks.

levels

Suppose that Wells Fargo lends ​$358,000 to​ Jamal's Jerseys. Using​ T-accounts, show how this transaction is recorded on the​ bank's balance sheet. ​(Enter your responses as an integer. Include a minus sign to indicate a negative​ change, but do not include a plus sign for a positive change.​) Wells Fargo

loans: $358,000 checkable deposits: $358000

money multiplier expanded equation

m=(C+D)/(C+RR+ER)

excess reserves-to-deposit ratio

measures banks' holdings of excess reserves relative to their checkable deposits so, m (money multiplier)= (C+D/C+RR+ER)*(1/D / 1/D)=(C/D)+1/(C/D + RR/D ER/D)

both open market operations and discount loans change the ________________ ________, but the Fed has the greater control over OMO

monetary base

when money multiplier is stable, the fed can control the money supply by controlling the __________________ __________

monetary base

MB=federal reserve notes + treasury currency - coin + reserves MB= currency in circulation + reserves or MB = C + R (called the uses of the base, how the base is use but does not tell us the source of the base)

monetary base formula

In order to build a complete account of the money supply process, we change the simple deposit multiplier in three ways: 1. Rather than a link between reserves and deposits, we need a link between the ______________ base and the ______________ supply. 2. We need to include the effects of changes in the nonbank public's desire to hold currency _______________ to checkable deposits. 3. We need to include the effects of changes in banks' desire to hold _______________ reserves.

monetary, money, relative, excess

the _______________ ___________________ links the monetary base to the money supply

money multiplier

m=M/B

money multiplier is = to the ratio of the money supply to the monetary base

money multiplier helps us understand the factors that determine _____________ ____________

money supply

The U.S. Mint describes the demand for the​ gold, silver, and platinum coins it produces as being dependent on the prices of these metals as commodities. In​ addition, the Mint​ notes: "These commodity prices​ are, in​ turn, dependent on variables such as . . .​ [1] perceived strength as a​ safe-haven asset . . . and​ [2] earnings potential from other commodities or​ investments." Briefly explain whether these two factors help account for the surge in demand for gold coins in 2020. The more these metals are perceived as​ safe-haven assets, the ___________ investors will want to purchase them during uncertain​ times, like those experienced during the​ Covid-19 pandemic. As the earnings potential from other commodities or investments​ increases, the demand for these precious metals will likely _________________

more, decrease

does the public's preference for currency relative to checkable deposits affect the monetary base?

no, it does not

multiple deposit creation

part of the money supply process in which an increase in bank reserves results in rounds of bank loans and creation of checkable deposits.

Open market operations are carried out electronically with _________________ dealers by the Fed's trading desk.

primary

If​ Jamal's spends the money to buy materials from​ Zach's Zippers, which has its checking account at PNC​ Bank, show the effect on Wells​ Fargo's balance sheet. ​(Enter your responses as an integer. Include a minus sign to indicate a negative​ change, but do not include a plus sign for a positive change.​)

reserves: -$358,000 checkable deposits: -$358,000

The sharp increase in the monetary base beginning in 2008 was a ______________ of the Fed's purchases of hundreds of billions of dollars worth of mortgage-backed securities and other financial assets

result

The simple deposit multiplier also works in ______________. When the Fed reduces reserves by selling government securities in an open market sale, there is a multiple deposit contraction.

reverse

factors that increase monetary base

securities, discount loans, gold and SDR certificate accounts, float, other federal reserve assets, treasury currency, treasury deposits with the fed, foreign and other deposits with the fed, other federal reserve liabilities and capital accounts

•The more currency the nonbank public holds relative to checkable deposits, the ________________ the multiplier deposit creation process.

smaller

•The more excess reserves banks hold relative to their checkable deposits, the __________________ the multiplier deposit creation process.

smaller

Currency is a liability to the Fed rather than an​ asset, even though currency is considered​ valuable, because:

the Fed is responsible for maintaining the value of currency and a holder of currency could exchange it at the Fed.

open market purchase

the fed's purchase of securities

open market operations

the fed's purchases and sales of securities, usually U.S. treasury securities, in financial markets

open market sale

the fed's sale of securities

discount rate

the interest rate the Fed charges on discount loans

currency to deposit ratio (C/D)

the ratio of currency held by the nonbank public to the checkable deposits

simple deposit multiplier

the ratio of the amount of deposits created by banks to the amount of new reserves.

monetary base (high-powered money)

the sum of bank reserves and currency in circulation

monetary base

the sum of borrowed plus nonborrowed reserves

monetary base

the sum of currency in circulation and bank reserves

money supply

the sum of currency in circulation and checkable deposits

M equals MB __________ the money multiplier

times

Key points about the multiplier expression: 1. The money supply will change in the same direction of a change in the monetary base or the money multiplier. 2. An increase in C/D causes the value of the money multiplier and the money supply to decline. 3. An increase in rrD causes the value of the money multiplier and the money supply to decline. 4. An increase in ER/D causes the value of the money multiplier and the money supply to decline.

true

The money supply is growing with each loan. The initial increase in bank reserves and in the monetary base is resulting in a multiple change in the money supply.

true

so, say that the Fed buys $1 million worth of Treasury bills from Wells Fargo. Wells Fargo will electronically transfer ownership of the bills to the Fed, and the Fed will pay for them by depositing $1 million in Bank of America's reserve account at the Fed. true/false?

true

true/false monetary base = currency in circulation + reserves

true

true/false the money multiplier depends on rr, ER/D and C/D

true

monetary base (det. by the Fed) * money multiplier (det. by the Fed, the banking sys., and nonbank public)= money supply

yep

do discount loans alter bank reserves?

yes

•Substituting the previous two equations and using definition of float-->

•MB = (securities) + (discount loans) + (gold and SDRs) + (float) + (other Fed assets) + (Treasury currency) - (Treasury deposits) - (foreign and other deposits) - (other Fed liabilities)