FINAL ECON EXAM Chapter 14/15/16 study guide
The Fed sells $25 billion of foreign assets and sells $25 billion of Treasury securities.
Monetary base decreases by $50 billion
The Fed conducts a sterilized foreign exchange intervention.
Monetary base does not change
The Fed sells $25 billion of foreign assets and purchases $25 billion of Treasury securities.
Monetary base does not change
The Fed purchases $25 billion of foreign assets.
Monetary base increases by $25 billion
Currency $760 billion Checkable deposits $560 billion Bank reserves $560 billion M1 multiplier =
rrd/ reserves/ checkable er/d is excess to checkable 0 in this case M1 = cd/+1/ cd+rrd+0
How can the FOMC use open market operations to lower its target for the federal funds rate? To lower its target for the federal funds rate, the Fed can conduct an open market ____ of securities. supply shifts
purchase, left
Reducing Egypt's current account deficit would _____ strain on its balance of payments by _____ Egypt's balance of payments deficit.
reduce, reducing
GOLD STANDARD: During the Great Depression, the gold standard
required some countries to pursue a contractionary monetary policy to maintain the gold standard, thereby making the reduction of unemployment difficult to achieve.
Currency $760 billion Checkable deposits $560 billion Bank reserves $560 billion Ratio of total reserves to deposits is
reserves / checkable
In a currency intervention, the central bank either buys foreign assets, which ___ its balance sheet, or sells foreign assets which ____ its foreign assets
Increase, descreases
If currency in circulation is $500 billion, total reserves of the banking system are $700 billion, and total checkable deposits are $2 comma 500 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.) The increase in the money supply is ______
($500+$2500)/ ($500 +$700) then times 100 for the increase
GOLD STANDARD: Was it a fixed exchange rate system or a flexible exchange rate system?
A fixed exchange rate system
2 billion Fed market sale, Reserves, a ___,___. by $2 billion
A liability, decreases
How does a sterilized central bank intervention affect the SUPPLY curve for a country's currency
A sterilized central bank intervention does not affect the A supply curve for a country's currency.
The Fed buys $1.8 billion in Japanese government bonds, denominated in yen, and, at the same time, conducts an open market sale of $1.8 billion of U.S. Treasury securities. What happens to the monetary base? Is this a sterilized or an unsterilized foreign exchange intervention? T account
Assets: Foreign: 1.8 bil Treasury securities: -1.8 bil Liabilities: Monetary base: 0 bil
Suppose that the bank sells $5 million in securities to get new cash. Show the bank's balance sheet after this transaction. The reserves of the balance sheet increase by $5 million, the securities of the balance sheet fall by $5 million, and everything else is the same.
Assets: Add 5 million to prior Loans: stay same Securities: Subtract 5 million from prior Checkable: stay same Net Worth: stay same
`Suppose that Bank of America lends $297,000 to Jill's Jerseys. Using T-accounts, show how this transaction is recorded on the bank's balance sheet.
BOA: Loans:297K Liabilities:297K Reserves:-297K Checkable Desposits:-297K
Currency $150 billion Bank reserves $400 billion Checkable deposits $1 200 billion Time deposits $1 800 billion Excess reserves $80 billion The ratio of total reserves to deposits is
Bank Reserves / Checkable Deposits
Why might a country impose capital controls?
Because currency crises are fueled in part by sharp inflows and outflows of financial investments
Why must the current account balance plus the financial account balance equal zero?
Because each international transaction is two-sided, representing an exchange of goods, services, or assets among households, businesses, or governments.
What would be the value of the M1 money multiplier if banks hold no excess reserves, the currency-to-deposit ratio is 0.56, and the required reserve ratio for checkable deposits is 68%? The value of the M1 money multiplier =
C/D= .56 rrD=.68 Er/D = 0 M1 = Cd +1/Cd +rrd + erD = (.56+1)/(.56+.68+0)
Currency $760 billion Checkable deposits $560 billion Bank reserves $560 billion . Suppose that the ratio of total reserves to deposits changes from the value you calculated in part (a) to 2. Money multiplier is
Cd +1/ cd+2+0
Suppose that before selling the Treasury bills, JPMorgan Chase had no excess reserves. Suppose that the required reserve ratio is 10%. 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.
Chase: Loans: 100 mil Checkable Deposits: 100 mil
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
Chase: Reserves: -100 mil Checkable Deposits: -100 mil Wells: Reserves: 100 mil Checkable Deposits: 100 mil
Suppose that JPMorgan Chase sells $100 million in Treasury bills to the Fed. T account for Chase/Fed
Chase: Securities: -100 mil Reserves 100 mil FED: Securities:100 mil Reserves:100 mil
Currency $150 billion Bank reserves $400 billion Checkable deposits $1 200 billion Time deposits $1 800 billion Excess reserves $80 billion Monetary Base=
Currency + Bank Reserves
Currency $760 billion Checkable deposits $560 billion Bank reserves $560 billion Monetary base =
Currency + Reserves
Currency $150 billion Bank reserves $400 billion Checkable deposits $1 200 billion Time deposits $1 800 billion Excess reserves $80 billion the M1 money supply is
Currency + checkable deposits
Currency $150 billion Bank reserves $400 billion Checkable deposits $1 200 billion Time deposits $1 800 billion Excess reserves $80 billion What is Currency to deposit Ratio:
Currency / Checkable Deposits
C/d
Currency / checkable
Using the Taylor rule, calculate the target for the federal funds rate for July 2010 using the following information Fed Funds rate target =
Current inflation rate + Equilibrium FED funds rate+ (.5 times current inflation - target inflation rate) + (.5 times the output gap)
Currency $150 billion Bank reserves $400 billion Checkable deposits $1 200 billion Time deposits $1 800 billion Excess reserves $80 billion M1 Money multiplier
Er/D= excess reserves / checkable Cd/ = from above rrd= M1 = Cd+ 1/ Cd+rrd+Er/d
The Fed sells $6.5 billion in Chinese government bonds, denominated in yuan. What happens to the Fed's international reserves and the monetary base? Is this a sterilized or an unsterilized foreign exchange intervention? Use t account?
Foreign Assets : -6.5 bil Bank Reserves (liabilities) : -6.5 bil
GOLD STANDARD: Did countries that ran trade deficits experience gold inflows or gold outflows?
Gold outflows
GOLD STANDARD: How would a gold inflow affect a country's inflation rate?
Increase
GOLD STANDARD: How would a gold inflow affect a country's monetary base?
Increase
What are the disadvantages of imposing capital controls?
Increased government corruption with bribes to government officials. Impetus is given to the formation of a black market for the currency so entities can evade the capital controls. A heightened reluctance of multinational firms to expand operations in countries with capital controls.
A open "currency intervention" is a deliberate action by a central bank to:
Influence the country's exchange rate
How does the Danish central bank's selling kroner weaken the kroner? S/d?
It increases the supply of kroner in exchange for euros Supply right, demand left, new E point
Why would it be important for the Danish central bank to keep the exchange rate between the kroner and the euro within a target range?
It is beneficial for trade in goods, services and financial securities.
Why would a reduction in value of the Egyptian pound help reduce Egypt's current account deficit?
It would increase net exports
After weakening, would it take ___ Danish kroner to buy a Euro
More
Suppose that the bank sells $5 million in securities to get new cash. Show the bank's balance sheet after this transaction. The reserves of the balance sheet increase by $5 million, the securities of the balance sheet fall by $5 million, and everything else is the same. what is the new excess reserves
New total reserves - same required reserves = new excess
GOLD STANDARD: Were countries able to pursue active monetary policies?
No
Suppose that PNC Bank sells $7 million in Treasury bills to the Fed and then makes a $7 million loan to David's Donut Emporium and Boat Repair. Use a T-account
PNC Bank Securities: -7 million Loans : 7 million
Suppose the Bank of Japan sells $10 billion of U.S. Treasury securities. The sale of $10 billion of U.S. Treasury securities by the Bank of Japan will ____ interest rates in Japan. The ____ Japanese interest rates will ____ the demand for yen and ____ the supply of yen, pushing ____ the exchange value of the yen. Supply shifts ____, new equilibrium point is?
Raise, higher, increase, decrease, up Shift left, and new is up
In the following bank balance sheet, amounts are in millions of dollars. The required reserve ratio is 3% on the first $30 million of checkable deposits and 14% on any checkable deposits over $30 million. Calculate Banks Excess Reserves:
Required Reserves: 3% of 30 million + 14% of 150 million Take Reserves in Assets - Answer from above
What are the Fed's traditional monetary policy tools?
Reserve Requirement discount Policy Open Market Operations
Suppose that the business spends the proceeds of the loan by writing a check. Revise the bank's balance sheet and calculate its excess reserves after the check has cleared. The reserves of the balance sheet fall down by $13.5 million, checkable deposits of the balance sheet fall by $13.5 million and everything else is the same as in part Required reserves == Excess =
Reserves in loan sheet from part d excess = 0
Suppose that the bank loans its excess reserves in part (b) to a local business. Show the bank's balance sheet after the loan has been made but before the business has spent the proceeds of the loan. Loans of the balance sheet increase by $13.5 million, checkable deposits of the balance sheet also increase by $13.5 million, and everything else is the same as in part
Reserves: Same from part B Loans: Add 13.5 to old Securities: same from part b Checkable: add 13.5 to old Net worth: same from part b
Suppose that the business spends the proceeds of the loan by writing a check. Revise the bank's balance sheet and calculate its excess reserves after the check has cleared. The reserves of the balance sheet fall down by $13.5 million, checkable deposits of the balance sheet fall by $13.5 million and everything else is the same as in part
Reserves: subtract 13.5 from part c Loans: same as part c Securities:same as part c Checkable: subtract 13.5 from c Net:same as part c
What does discount policy imply?
Setting the discount rate and the terms of discount lending
Discount rate before the policy action of December 13, 2005, when the federal funds rate was 4% and the discount rate 5%. Then, use your graph to explain how the Fed would raise the federal funds rate by 25 basis points (1/4%) What policy action would the Fed use to bring about this increase in the target federal funds rate? Supply
The Fed would sell Treasury Securities supply is up and left
What is pegging?
The decision by a country to keep the exchange rate fixed between its currency and another country's currency.
What impact did these changes have on the size of the money multiplier?
The increase in ER/D was significantly larger than the decrease in C/D, causing the value of the money multiplier to decline.
What was the trend in the levels of the monetary base from 1959 through the most recent month available?
The monetary base had been increasing steadily from 1959 up until the 2007dash2009 recession, during which it increased to unprecendented levels.
Which of the following are disadvantages of pegging?
The pegged currency can become undervalued The pegged currency can become overvalued
In your calculations, the inflation gap is negative if the current inflation rate is below the target inflation rate. How does the targeted federal funds rate calculated using the Taylor rule compare to the actual federal funds rate of 0% to 0.25%?
This Taylor rule federal funds rate target is lower than the Fed's actual target range
Explain the effect on the demand for reserves of the supply of reserves of the action an increase in the required reserve ratio:
This would increase the demand for reserves
R/d
Total Reserves / checkable deposits
If the Fed uses the federal funds rate as a policy instrument, then decreases in the demand for reserves will lead to _____ in the level of reserves.
a decrease
Reserves, a __, ___ by $2 billion
a liability, increases
The Fed buys a new information technology system for the Federal Reserve Bank of Atlanta from DeShawn's Computer Services for $1 million REserves, ___<___ by #1 million
a liability, increases
The Fed carries out a $2 billion open market sale Discount Loans, ___,____, by $2 billion
an asset, decreases
The Fed buys a new information technology system for the Federal Reserve Bank of Atlanta from DeShawn's Computer Services for $1 million Discount loans, ___,,____by $1 million
an asset, increases
The Fed increases discount loans by $2 billion: Discount Loans, ___, ____ by $2 Billion
an asset, increases
If the Fed uses the level of reserves as a policy instrument, then increases in the demand for reserves will lead to _____ in the federal funds rate.
an increase
Use a T-account for Bank of America and a T-account for the Fed to show the result of the Fed selling $12 million in Treasury bills to Bank of America.
boa: Securities: 12 mil Reserves: -12 mil FED securities:-12 mil liabilities: -12 mil
Suppose banks increase demand for reserves: to offset the effect on federal funds rate on an increase in the demand for reserves the Fed, could __securities
buy supply curve shift left
The January 22, 2008, press release of the Federal Open Market Committee (FOMC) states that the FOMC "decided to lower its target for the federal funds rate by 75 basis points to 3½ percent." The press release goes on to say that "In a related action the Board of Governors approved a 75-basis point decrease in the discount rate to 4 percent. What policy action would the Fed use to lower the federal funds rate by 75 basis points? The Fed would ____ Treasury securities.
buy, supply shifts up to 4.75 and left
m1 money multiplier
cd+1/rrd+cd+0
Currency $760 billion Checkable deposits $560 billion Bank reserves $560 billion money supply is
currency + checkable
Currency $760 billion Checkable deposits $560 billion Bank reserves $560 billion the Cd is
currency / checkable
monetary base
currency in circulation + reserves
Suppose that a U.S. firm buys 12 BMW autos for $38,000 each. How is this transaction recorded in the balance-of-payments accounts for the United States? The purchase of the 12 BMW autos would be recorded in the ____ account as a $____payment to ______ , which is recorded as a _____ number.
current, BMW times price, foreigners, negative
The Federal Reserve seeks to reduce
cyclical unemployment
To weaken a currency means to ___ the foreign exchange rate of a currency
decrease
The Fed sells $6.5 billion in Chinese government bonds, denominated in yuan. What happens to the Fed's international reserves and the monetary base? Is this a sterilized or an unsterilized foreign exchange intervention? The Fed's International reserves ____ and the monetary base _____ This is ____ intervention
decrease by 6.5 mil decreases by 6.5 mil An unsterilized
How does an open market sale of Treasury securities by the Fed affect the price of Treasury securities, the yield on Treasury securities, the monetary base, and the money supply? An open market sale of Treasury Securities ___ the price of Treasury securities therby ___ the yield of Treasury securities The sale of Treasury Securites ___ the monetary base and ___ the money supply
decrease, increasing decreases, decreases
Suppose that in equilibrium, the federal funds rate is equal to the interest rate the Fed is paying on reserves. Analyze the effect of an open market sale of Treasury securities on the equilibrium federal funds rate. An open market sale of Treasury securities by the Fed _____ , causing the federal funds rate to _____ .
decreases the supply of reserves, rise or remain unchanged
A "strain" on Egypt balance of payments means a balance of payments ___ with ___ in international reserves
deficit, reduction
If the U.S. current account SURPLUS is $272 billion, and if the statistical discrepancy is zero, what is the financial account balance? The financial account balance would be a ____ of $272 billion. ]Does this financial account balance represent a net capital outflow or a net capital inflow? The financial account balance would represent a net capital ____
deficit,outflow
The Fed buys $1.8 billion in Japanese government bonds, denominated in yen, and, at the same time, conducts an open market sale of $1.8 billion of U.S. Treasury securities. What happens to the monetary base? Is this a sterilized or an unsterilized foreign exchange intervention? The monetary base ____, This is ____ invervention
does not change, a sterilized
In an unsterilized currency intervention, the central bank ___ offset the effect of the intervention on the monetary base, whereas with a sterilized currency intervention it ____ offset the effect of the intervention on the monetary base.
does not, does
Suppose that the bank loans its excess reserves in part (b) to a local business. Show the bank's balance sheet after the loan has been made but before the business has spent the proceeds of the loan. Loans of the balance sheet increase by $13.5 million, checkable deposits of the balance sheet also increase by $13.5 million, and everything else is the same as in part Required reserves rises to___excess equals __ double check this one (7 on chp 14)
excess equals = reserves in t account - new required
A country's balance of payments might not equal to zero when the official settlements balance is
excluded
Briefly explain what happened to the currency-to-deposit ratio (C/D) and the excess reserves-to-deposit ratio (ER/D) during the financial crisis of 2007-2009. The Currency to deposti ratio ___, and the excess reserves to deposit ratio __ during the financial crisis
fell, rose
Later, the German company uses the money to buy a $456,000 U.S. Treasury bond at a Treasury auction. How is this transaction recorded in the balance-of-payments accounts for the United States The purchase of the US treasury bond would be recorded in the ___ account as a $____ receipt from ____ which is recorded as a ____number
financial, 456K, foreigners, positive
The Fed doesn't seek to reduce the unemployment rate to zero because the tools of monetary policy are
in effective in reducing the level of frictional unemployment
All of the following are reasons why a central bank might undertake a currency intervention, except:
increase investor confidence
Consider the following data (all values are in billions of dollars): June 1930 June 1931 June 1932 Currency $3.681 $3.995 $4.959 Checkable deposits $21.612 $19.888 $15.49 Bank reserves $3.227 $3.307 $2.829 currency and reserves ___ relative to deposits becasue depositors were___account in response to the crisis
increased, liquidating
If the required reserve ratio is 20%, the value of the simple deposit multiplier
is 5 (1/.2_)
money supply =
m1 money multipier times monetary base (answers form earlier)
Which of the Fed's traditioanl monetary policy tools is the most important
open market operations
Fed decides to increase target for FED funds rat from 2 to 2,4 and discount from 2.5 to 2.75 to achieve desired increase in FED funds rate, Fed reserve could seek to ___ securites supply shift
sell supply moved up and left
To RAISE the foreign exchange value of its currency, would a central bank buy or sell foreign assets? What would be the effect on the monetary base? What would be the effect on domestic interest rates? To raise the foreign exchange rate, the central bank would ___ foreign assets, which would ___ the monetary base, and ___domestic interest rates
sell, reduce, raise
What is the simple deposit multiplier? The simple deposit multiplier is
the ratio of the amount of deposits created by banks to the amount of new reserves.
What is the controversy over China's pegging the value of the yuan? The value of the yuan is ___ making Chinese exports ___ and imports to China _____
undervalued, cheaper, more expensive
What are capital controls?
Government-imposed restrictions on foreign investors buying domestic assets. Government-imposed restrictions on domestic investors buying foreign assets.
What is the total change in Bank of America's assets and liabilities? The total change in Bank of America's assets equals
zero, with an additional $297 000 in loans and a loss of $297000 of reserves. The total change in liabilities equals zero, with the $297000 checking account being spent.
