Macro ch14

Suppose a transaction changes a bankʹs balance sheet as indicated in the following T-account, and the required reserve ratio is 10 percent. Assets: Reserves + $2,000 Liabilities: Deposits + $2,000 As a result of the transaction, the bank can make a maximum loan of

$1,800

With a required reserve ratio of 50 percent, an increase in reserves of $10,000 could lead to a maximum increase in checking account deposits in the entire banking system of

$20,000

First Union has no excess reserves when a new deposit of $20,000 is made. The required reserve ratio is 5 percent. How much can the banking system create in checking account balances?

$400,000 (20,000/.05)

With a required reserve ratio of 20 percent, an increase in reserves of $10,000 could lead to a maximum increase in checking account deposits in the entire banking system of

$50,000 (10,000/0.20)

Suppose that potential GDP grows by 3 percent a year and money growth is 5 percent a year. In the long run, what will be the inflation rate?

2 percent P=M-Y

If the required reserve ratio is 10 percent, and banks do not hold excess reserves, when the Fed buys $10 million dollars of bonds from the public, bank reserves

increase initially by $10 million and the money supply eventually increases by $100 million.

If the Fed buys U.S. Treasury bonds, then this

increases reserves, encourages banks to make more loans, and increases the money supply

When a grocery store accepts your $5 bill as payment for bread and milk, the $5 bill serves as a

medium of exchange.

Which of the following is an appropriate policy for the Federal Reserve to pursue if it wants to decrease the money supply?

raise the reserve requirement

If banks do not loan out all their excess reserves then the real world multiplier is (RR is the required reserve ratio)

smaller than 1/RR

Which of the following is not a tool the Federal Reserve can use to manage the money supply?

changing tax rates

The statement ʺThis Dell laptop costs $2,500ʺ illustrates which function of money?

unit of account

Assume that deposits in a bank equal $200,000, the bank has issued loans equal to $140,000, its actual reserves are $60,000, and of the $60,000 of actual reserves, $20,000 are excess reserves. What is the required reserve ratio?

20%

According to the quantity theory of money, if the money supply grows at 6%, real GDP grows at 2%, and the velocity of money is constant, then the inflation rate will be

4%. M+V = P+Y 6+0 = P+2

According to the quantity theory of money, if the money supply grows at 10%, real GDP grows at 2%, and the velocity of money is constant, then the inflation rate will be

8%. M+V=P+Y

Which of the following is correct? A) The Federal Reserve has 12 regional banks. The Board of Governors has 14 members who serve 7-year terms. B) The Federal Reserve has 12 regional banks. The Board of Governors has 7 members who serve 14-year terms. C) The Federal Reserve has 14 regional banks. The Board of Governors has 12 members who serve 7-year terms. D) None of the above is correct.

B) The Federal Reserve has 12 regional banks. The Board of Governors has 7 members who serve 14-year terms.

Suppose you deposit $2000 into Bank of America and that the required reserve ratio is 10 percent. How does this affect the bankʹs balance sheet?

Excess reserves rise by $1,800

Which of the following is true of ʺfiat moneyʺ?

It does not serve well as a medium of exchange

Which of the following is the best explanation of ʺmoral hazardʺ?

It is the prospect that a party insulated from risk may behave differently from the way it would behave if it were fully exposed to the risk

If Rob deposits $300 in currency into his savings account at Bank of America,

M1 decreases

If households in the economy decide to take money out of savings accounts and put this money into checking accounts this will

None of the above is correct

A farm worker gets paid today in money, but plans to spend the money next week. This illustrates which function of money?

Store of value

Which of the following statements about the Federal Reserve is incorrect?

The members of the Board of Governors are also presidents of the Federal Reserveʹs regional banks.

The Board of Governors of the Federal Reserve is

a seven-member board, each one serving a 14-year term

Other things equal, which of the following would increase the size of the real -world deposit multiplier?

banks choose to hold less excess reserves than before

Assets: Reserves =$100,000 Loans =$300,000 Liabilities: Deposits =$400,000 Assume that a bankʹs initial balance sheet is as above, and that the required reserve ratio is 10 percent. If someone deposits $100,000 into this bank, it will

be in a position to make a maximum of $150,000 of new loans (new total deposit*.1+reserves)

Which of the following is an appropriate policy for the Federal Reserve to pursue if it wants to increase the money supply?

buy U.S. treasury bonds

The primary tool the Federal Reserve uses to increase the money supply is

buying Treasury securities.

If households in the economy decide to take money out of checking account deposits and put this money into savings accounts this will

decrease M1 and not change M2.

In the nineteenth century when there were often bank runs caused by crop failures, banks would make relatively fewer loans and hold relatively more excess reserves. By itself, these actions by the banks should have

decreased both the money multiplier and the money supply.

A fractional reserve banking system is one in which banks hold less than 100 percent of ________ in reserves

deposits

By making exchange ________, money allows for ________ and higher ________.

easier; specialization; productivity

Fiat money

has no or very little value except as money.

Assets: Reserves =$50,000 Loans =$150,000 Liabilities: Deposits =$200,000 Assume that a bankʹs initial balance sheet is as above, and that the required reserve ratio is 10 percent. If someone deposits $100,000 into this bank, it will

have $120,000 in excess reserves.