Learning Curve 15 Macro

What is the value of the monetary base, given that the value of deposits at all depository institutions equals $2492.61 billion,currency is $1153.20 billion, and bank deposits held at the Fed are $1486.10 billion?

1486.10+ 1153.20= 2639.30

Calculate the change in reserves necessary to achieve the $400 billion increase.

40 billion

Suppose the Federal Reserve (Fed) decides the current money supply of $2.1 trillion is too low, and that an increase of $400billion is necessary. What tool can the Fed use to accomplish this increase? Assume the current reserve ratio is 0.1.

Buy government securities.

_____ is paper bills and coins held by people and nonbank firms.

Currency

Quantitative easing occurs when the Fed sells longer-term government bonds or other securities.

False

Which of these statements about liquidity traps is false?

Firms are unlikely to undertake investment during liquidity traps because interest rates are prohibitively high.

what are not tools of the federal reserve?

Fiscal Policy Eurodollars pork spending treasury department LIBOR 30 year treasury bill interest rate

Which statement describes the impact on inflation and real GDP the Fed's policy has in the short run?

Inflation decreases and real GDP decreases.

Suppose that a bank has loaned money to two businesses: a trustworthy computer manufacturer and a risky mining venture. Unfortunately, the mining venture fails, and the mining firm goes bankrupt. The bank has no insurance for this situation. Now, on its balance sheet, the bank has more liabilities than assets. What is this situation called, and what is the result of this situation?

Insolvency. The bank cannot pay back depositors

What moral hazard problem results from action by the Federal Reserve (the Fed)?

Large banks make risky decisions, understanding that the Fed will insulate them from bad choices.

Which of the following is defined as currency + checkable deposits?

M1

Classify each item as either part of the M2 measure of the money supply or as not part of the money supply.

M2: $900 M in checkable deposits $2 trillion in savings accounts $1.25 small time deposits $900 billion in cash held by public $650 billion in more market accounts Not in the money supply: 4.5 in trillion credit card debt $3trillion in government securities

In the long run, what is the impact of this Fed action on inflation and the growth rate of real GDP?

The inflation rate increases, and there is no impact on the growth rate of real GDP.

Of the following events that would occur as a part of the Fed using monetary policy to decrease aggregate demand, which would occur second?

The monetary base decreases.

Systemic risk is the risk that the failure of one financial institution will bring down other institutions as well.

True

The Fed has direct control only over the monetary base.

True

The M2 money supply includes M1 plus savings deposits, money market mutual funds, and small-time deposits.

True

The money supply will increase by more than the initial change in reserves.

True

If the Fed wants to decrease interest rates, it should:

buy bonds in open market operations.

The graph represents a hypothetical picture of the U.S. economy. The Federal Reserve (Fed) determines that the economy must be stimulated. Assume that the Fed will use open market operations, the reserve ratio is 0.1, and the desired change in the money supply is an increase of $650 billion. Which course of action will accomplish this goal?

buying $65 billion of government bonds (shift AD curve to the right upper)

When the Federal Reserve conducts open market operations, it

buys or sells government bonds.

Suppose banks increase excess reserves by $129991. If the reserve ratio is 4.0 percent, what is the maximum increase in the money supply?

change in money supply=(1/0.040)×$129991=$3249780

Suppose the Fed sells $300 billion in government securities and the reserve ratio is 0.2 . Calculate the resulting change in the money supply. Be certain to include a negative sign.

change in the money supply is -$1500 billion this results in AD decreasing (shifting to the left)

ΔReserves × MM equals the:

change in the money supply.

Another potential role of central banks is to foster confidence in the banking system by making sure that people can retrieve their money even if a bank goes bankrupt. What is the term for this?

deposit insurance

Banks hold reserves only to meet ordinary depositor demands for currency and payment services.

false

The money supply decreases

fed sells bonds

Rank the different types of bank accounts according to their liquidity.

highest checking account savings account certificate of deposit Lowest

For instance, when the Fed buys bonds, this ..... in demand for bonds causes nominal interest rates to ......

increase; decrease

When the Fed buys bonds, bank reserves ......., which reduces the need for banks to borrow. This causes the federal funds rate to ........

increase; decrease

The Fed .......... controls the money supply through open market operations.

indirectly

What are tools of the federal reserve?

open market operations federal funds rate loans payment of interest on reserves

When the Fed buys longer-term government bonds or other securities in an effort to influence long-term interest rates, it is engaging in:

quantitative easing

Which of the people or institutions listed exercises the most power over the quantity of money in the United States economy?

the United States Federal Reserve

Which number is the smallest?

the number of regional Federal Reserve Bank presidents on the Federal Open Market Committee

Which of the following will the Fed try to predict and monitor to estimate the effect of its actions on aggregate demand?

whether banks will lend out all the new reserves or only a portion

The money supply increases

Fed buys bonds

Which of the institutions has influence over the United States Federal Reserve (the Fed)?

The United States Senate the President of the United States the Federal Reserve Board of Governors (all of these baddies)

What is a liquidity trap?

When nominal interest rates cannot be lowered any further.

The Fed wants to use its tools to influence:

aggregate demand

In many countries, one of the roles of the central bank is to provide loans to distressed financial institutions. What is the term for this?

lender of last resort

When banks and other financial institutions take on too much risk, hoping that the Fed and regulators will later bail them out, this is called a(n):

moral hazard

If the Fed wants to decrease aggregate demand, it should:

sell bonds in an open market operation.