MacroEconomics

Suppose a banking system has $200 million in deposits, a required reserve ratio of 10 percent, and total bank reserves of $35 million. Then the potential increase in deposit creation for the whole banking system is equal to

$150 million.

Suppose a bank has $200,000 in deposits, a required reserve ratio of 10 percent, and bank reserves of $45,000. Then this bank can make new loans in the amount of

$25,000.

Suppose a bank has $2 million in deposits, a required reserve ratio of 10 percent, and total reserves of $500,000. Then it has excess reserves of

$300,000.

Suppose a bank has $1 million in deposits, a required reserve ratio of 25 percent, and total reserves of $600,000. Then it has excess reserves of

$350,000. The bank is required to hold $250,000. So the extra $350,000 counts as excess reserves.

Suppose a bank has $500,000 in deposits and a required reserve ratio of 10 percent. Then required reserves are

$50,000. 10% of 500,000 is $50,000

Suppose a banking system has a required reserve ratio of 0.15. How much can the money supply increase in response to a $1 billion increase in excess reserves for the whole banking system?

$6.67 billion. The money multiplier is 1 / required reserve ratio or 6.67. So $1 billion in new excess reserves leads to a $6.67 billion increase in new loans.

Suppose a bank has $600,000 in deposits, a required reserve ratio of 5 percent, and bank reserves of $90,000. Then the bank can make new loans in the amount of

$60,000. The bank is required to hold $30,000. So its excess reserves of $60,000 can be converted into new loans.

Suppose a bank has $200,000 in deposits, a required reserve ratio of 15 percent, and total reserves of $100,000. Then it has excess reserves of

$70,000. The bank is required to hold $30,000. So the extra $70,000 counts as excess reserves.

Given a required reserve ratio of 0.25, what is the maximum amount by which the money supply can increase in response to a $200 million increase in excess reserves for the whole banking system?

$800 million The money multiplier is 1 / required reserve ratio or 4. So a $200 million increase in reserves leads to an $800 million increase in new loans.

The money multiplier is equal to

1 ÷ required reserve ratio.

If the banking system has a required reserve ratio of 10 percent, the money multiplier is

10.0. The money multiplier is equal to 1/ required reserve ratio, which is 1/.1 or 10.

If real output (Q) is 8,000, and the money supply (M) is 6,000 and velocity (V) is 3, what is the price level (P)?

2.25 MV=PQ

If the banking system has a required reserve ratio of 25 percent, the money multiplier is

4.0. The money multiplier is equal to 1 / required reserve ratio, which is 1 / .25 or 4

If the banking system has a required reserve ratio of 20 percent, the money multiplier is

5.0. The money multiplier is equal to 1 / required reserve ratio, which is 1 / .2 or 5.

The Board of Governors consists of

7 members, appointed for 14-year terms.

If the economy is recessionary, the Fed would most likely

???

Deposit creation occurs when

A bank lends money.

Which of the following is not included in transactions accounts?

A money market mutual fund.

The Federal Open Market Committee includes

All 7 governors and 5 of the regional Reserve bank presidents.

Members of the Board of Governors are

Appointed by the president and confirmed by the Senate.

The Federal Reserve holds deposits from

Banks.

Monetary policy is set by the

Board of Governors

Currency in circulation is included in

Both M1 and M2.

NOW and ATS accounts are included in

Both M1 and M2.

Transactions account balances are included in

Both M1 and M2.

Traveler's checks are included in which of the following?

Both M1 and M2.

If the Fed wishes to reduce the money supply, it can do all of the following except

Buy shares of common stock in a large bank.

By raising the required reserve ratio, the Fed

Can reduce the lending capacity of the banking system.

Which of the following is not included in any of the measures of the money supply?

Cash in the vault of a commercial bank.

Regional Fed banks

Clear checks between private banks.

An essential function for a bank is to

Create money through lending.

One of the main functions of banks is

Creating money.

Which of the following is not included in the narrowest definition of the money supply or M1?

Credit card balances.

The basic money supply or M1 includes

Currency in circulation, transactions accounts, and traveler's checks.

Suppose Brian receives a check for $100 from a bank in Atlanta. He deposits the check in his account at a Dallas bank. The Dallas bank will most likely collect the $100 directly from the

Dallas regional Federal Reserve Bank.

The rate of interest charged by Federal Reserve banks for lending reserves to member banks is the

Discount rate.

A bank may lend an amount equal to its

Excess reserves.

The required reserve ratio is the

Fraction of total deposits banks must hold.

For something to be considered money it must be:

Generally accepted as a medium of exchange.

Our original banker in each town were the

Goldsmiths

According to the extreme monetarist position, using the equation of exchange, an increase in the quantity of money in circulation will

Increase the price level.

Which of the following is true about an increase in the discount rate?

It signals the Federal Reserve's desire to restrain money growth.

If the Fed wishes to increase the money supply, it could

Lower the discount rate.

In order to increase the money supply, the Fed can

Lower the reserve requirement, decrease the discount rate, or buy bonds.

The M2 money supply is defined as

M1 plus balances in most savings accounts and money market mutual funds.

The use of money and credit controls to achieve macroeconomic goals is

Monetary policy.

The federal funds rate is the interest rate charged when

One bank lends reserves to another bank.

The purchase and sale of government bonds by the Fed for the purpose of altering bank reserves is known as

Open market operations.

Which of the following is the principal mechanism used by the Federal Reserve to directly alter the reserves of the banking system?

Open market operations.

Which of the following is the tool used most frequently by the Fed?

Open market operations.

Which of the following services is performed by the regional Federal Reserve banks?

Providing currency to private banks.

In order to decrease the money supply, the Fed can

Raise the reserve requirement, increase the discount rate, or sell bonds.

The minimum amount of reserves a bank is required to hold is known as

Required reserve ratio.

The ratio of a bank's total reserves to its total transactions deposits is known as the

Reserve ratio.

The term fractional reserves refers to

Reserves being a small fraction of total transactions account balances.

Money is functioning as a store of value when you

Save your cash to pay for tuition next semester.

The money supply (M2) includes M1 plus balances in

Saving accounts and money market mutual funds.

Which of the following is not included in M1?

Savings account balances at a federal savings bank.

Which of the following is included in M2?

Savings accounts.

A reduction in the discount rate

Signals the Federal Reserve's desire for additional credit expansion.

All of the following are tools available to the Fed for controlling the money supply except

Taxes.

Which of the following serves as the central banker for private banks in the United States?

The 12 Federal Reserve banks.

Which of the following insures deposits at banks?

The FDIC.

Which of the following is responsible for the Fed's daily activity in financial markets?

The FOMC.

Which of the following is responsible for buying and selling government securities to influence reserves in the banking system?

The Federal Open Market Committee.

Which of the following is not considered to be a private depository institution?

The Federal Reserve.

Which of the following sets the legal minimum reserve ratio?

The Federal Reserve.

Students Bank and Trust has zero excess reserves. Ceteris paribus, if the required reserve ratio decreases.

The bank will be able to make additional loans.

Which of the following is true about the chairman of the Federal Reserve Board of Governors?

The chairman can be reappointed for more than one term.

Using the equation of exchange, if real output increases by 5 percent per year and velocity is stable, in order to keep the price level stable

The money supply must increase by 5 percent per year.

If bank customers decide as a group to pay off their loans and to not take out any new loans, ceteris paribus,

The money supply will decrease.

Monetarists argue that

The velocity of money is constant.

Which of the following is NOT true about the members of the Federal Reserve Board of Governors?

They each serve as chairman of the Board of Governors on a rotating basis.

Which of the following is not true for members of the Federal Reserve Board of Governors?

They usually serve two or three terms.

Initially a bank has a required reserve ratio of 20 percent and no excess reserves. If $5,000 is deposited into the bank, then initially, ceteris paribus,

This bank can increase its loans by $4,000.

Initially a bank has a required reserve ratio of 15 percent and no excess reserves. If $10,000 is deposited in the bank, then, ceteris paribus,

This bank can increase its loans by $8,500. The bank must only hold 15 percent or $1,500 (=10,000(.15)). So $8,500 of the $10,000 deposit is available to lend out.

Initially a bank has a required reserve ratio of 10 percent and no excess reserves. If $1,000 is deposited into the bank, then, ceteris paribus,

This bank can increase its loans by $900. The bank must only hold 10 percent or $100 (=1000(.10)). So $900 of the $1,000 deposit is available to lend out.

Excess reserves are

Total reserves less required reserves.

A bank account that permits direct payment to a third party is a

Transactions account.

The money supply (M1) includes currency held by the public plus

Transactions accounts plus travelers checks.

The different components of the money supply reflect

Variations in liquidity and accessibility of assets.

If a bank has total deposits of $6,000,000 and reserves of $600,000 Instructions: Round your responses to the nearest whole number. a. What is the current percentage of deposits held in reserve? b. What percentage of deposits are currently loaned out?

a. 10% b. 90% a. Current ratio of reserves to deposits is 10% (= reserves ÷ total deposits = $600,000 ÷ $6,000,000). b. A bank holds deposits as reserves or makes loans. The bank currently is lending $5,400,000 (= total deposits - reserves = $6,000,000 - $600,000). The current ratio of loans to deposits is 90% (= loans ÷ total deposits = $5,400,000 ÷ $6,000,000).

What is the value of the money multiplier when the required reserve ratio is Instructions: Round your responses to two decimal places. a. 12 percent? b. 8.5 percent?

a. 12 % 8.33 b. 8.5% 11.76 Use the equation: Money multiplier = 1 ÷ required reserve ratio. a. For this example, the money multiplier = 1 ÷ 12% = 1 ÷ 0.12 = 8.33. b. For this example, the money multiplier = 1 ÷ 8.5% = 1 ÷ 0.085 = 11.76.

If the Fed wishes to increase the money supply it can

decrease the discount rate.

Members of the Federal Reserve Board of Governors are appointed for one fourteen-year term

in an effort to isolate the Fed from political pressures.

Study the Bonus PowerPoint Lecture, "The Fed's Countercyclical Operations" found on Blackboard. Name the three tools of monetary policy that the Federal Reserve System can do to combat unemployment/recession. Make sure you say increase or decrease/buy or sell.

lower reserve requirement, lower discount rate, buy bonds

Members of the Federal Reserve Board of Governors are appointed for one fourteen-year term so that they

make their decisions based on economic, rather than political, considerations.

Money market mutual funds are

pools of money used to buy interest-bearing securities.

Money is functioning as a medium of exchange if you

purchase coffee at the local coffee shop before class.

Study the Bonus PowerPoint Lecture, "The Fed's Countercyclical Operations" found on Blackboard. Name the three tools of monetary policy that the Federal Reserve System can do to combat inflation. Make sure you say increase or decrease/buy or sell.

raise reserve requirement, raise the discount rate, sell bonds

If the Fed wishes to decrease the money supply it can

raise the discount rate

To decrease the money supply, the Fed can

raise the reserve requirement, raise the discount rate, or sell bonds.

If the economy is inflationary, the Fed would most likely

restrict bank lending by selling government securities

The chairman of the Federal Reserve Board of Governors

serves a four-year term and can be reappointed.

If money is used to transform current income into future purchases, it is functioning as a

store of value.

Which of the following is NOT a basic monetary policy tool used by the Fed?

taxes

Liquidity refers to

the degree to which an asset can be easily exchanged for money

Barter consists of

the direct exchange of one good for another without the use of money.

The Fed can use all of the following except ____________ to change the lending capacity of the banking system.

the excess reserve requirement

Which of the following is NOT a basic monetary policy tool used by the Fed?

the income tax rate

Ceteris paribus, if the Fed raises the reserve requirement, then

the lending capacity of the banking system decreases.

Monetarists argue that

the velocity of money is constant

The average number of times per year each dollar is used to transact an exhange is know as the

velocity of money

Which of the following is an example of barter?

Keisha takes care of the neighbor's children, and the neighbor mows Keisha's yard as repayment.

The various money supply measures (M1 and M2) are used to distinguish the

Liquidity and accessibility of assets.

Which of the following definitions of the money supply is the most liquid

M1

Currency held by the public plus balances in transactions accounts plus travelers checks is the definition of

M1.

Savings accounts are included in

M2 only.

The equation of exchange can be stated as

MV = PQ

Which of the following is not a characteristic of money?

Mechanism for barter.

When money is used to acquire goods and services, it is functioning as a

Medium of exchange.

Money is functioning as a standard of value when you

Use it to compare two houses that are different prices.

Suppose a bank has $5,000,000 in deposits, a required reserve ratio of 20 percent, and total reserves of $1,000,000. Then the bank has excess reserves of

$0 The bank is required to hold $1,000,000. So it has no excess reserves.

Suppose a bank has $100,000 in deposits, a required reserve ratio of 20 percent, and total reserves of $20,000. Then this bank can make new loans in the amount of

$0. The bank is required to hold $20,000. So it has no excess reserves and therefore cannot make any new loans.

Suppose a banking system has $100,000 in deposits, a required reserve ratio of 25 percent, and total bank reserves for the whole system of $25,000. Then the potential increase in deposit creation for the whole system is equal to

$0. There can be no potential deposit creation because the banking system has lent out all excess reserves.

Suppose a banking system has $200 million in deposits, a required reserve ratio of 10 percent, and total bank reserves of $35 million. Then the potential increase in deposit creation for the whole banking system is equal to

$150 million. The banking system in this scenario is required to hold $20 million in required reserves; it is currently holding $35 million. So it could create an additional $150 million through the money multiplier process.

Suppose a bank has $160,000 in deposits and a required reserve ratio of 10 percent. Then required reserves are

$16,000. The bank has to hold the fraction set by the Federal Reserve; in this case 10 percent of $160,000 is $16,000, which is not available for loans.

Suppose a banking system has a required reserve ratio of 10 percent. What is the maximum possible increase in the money supply in response to a $2 billion increase in excess reserves for the whole banking system?

$20 billion. The money multiplier is 1 / required reserve ratio or 10. So a $2 billion increase in reserves leads to a $20 billion increase in new loans.

If excess reserves are $10,000, demand deposits are $100,000, and the required reserve ratio is 10 percent, then total reserves are

$20,000. Total reserves equal excess reserves plus required reserves; the bank must hold $10,000 plus its $10,000 in excess reserves, which is $20,000.

Suppose a bank has $200,000 in deposits, a required reserve ratio of 10 percent, and bank reserves of $45,000. Then this bank can make new loans in the amount of

$25,000. The bank is required to hold $20,000. So its excess reserves of $25,000 can be converted into new loans.

Suppose a bank has $2 million in deposits, a required reserve ratio of 10 percent, and total reserves of $500,000. Then it has excess reserves of

$300,000. The bank is required to hold $200,000. So the extra $300,000 counts as excess reserves.

Suppose a banking system has $120 million in deposits, a required reserve ratio of 20 percent, and total bank reserves for the whole system of $100 million. Then the potential increase in deposit creation for the whole system is equal to

$380 million. The banking system in this scenario is required to hold $24 million in required reserves; it is currently holding $100 million. So it could create an additional $380 million through the money multiplier process

If the banking system has demand deposits of $200,000, total reserves equal to $60,000, and a required reserve ratio of 25 percent, the banking system can increase the volume of loans by a maximum of

$40,000. The banking system has $10,000 in excess reserves. So with a 25 percent required reserve ratio or money multiplier of 4, the banking system can create $40,000 in new loans.

Suppose a bank has $300,000 in deposits and a required reserve ratio of 15 percent. Then required reserves are

$45,000. The bank has to hold the fraction set by the Federal Reserve; in this case 15 percent of $300,000 is $45,000, which is not available for loans.

If excess reserves are $30,000, demand deposits are $100,000, and the required reserve ratio is 15 percent, then total reserves are

$45,000. Total reserves equal excess reserves plus required reserves; the bank must hold $15,000 plus its $30,000 in excess reserves, which is $45,000.

Suppose a banking system has a required reserve ratio of 0.10. How much can the money supply increase in response to a $500 increase in excess reserves for the whole banking system?

$5,000. The money multiplier is 1 / required reserve ratio or 10. So a $500 increase in reserves leads to a $5,000 increase in new loans.

If the banking system has demand deposits of $100,000, total reserves equal to $15,000, and a required reserve ratio of 10 percent, the banking system can increase the volume of loans by a maximum of

$50,000. The banking system has $5000 in excess reserves. So with a 10 percent required reserve ratio or money multiplier of 10, the banking system can create $50,000 in new loans.

Which of the following is not a transactions account?

A savings account.

The measure of the money supply M1 includes all of the following except

Balances in savings accounts.

Which of the following is included in M1?

Balances in transactions accounts.

Suppose University Bank has zero excess reserves. If the required reserve ratio decreases, the

Bank will be able to make more loans.

The banking system can lend the sum of its excess reserves because

Banks are required to keep only a fraction of deposits on reserve.

Farmer Brown wants some bacon for breakfast. He gets the bacon from Farmer Hernandez by giving her a dozen eggs. This type of transaction is referred to as

Barter.

The direct exchange of one good for another

Is barter.

Which of the following is not true about barter?

It allows people to obtain more goods than they would under a money payment system.

Which of the following is not correct about the money kept in transactions accounts?

It is backed by gold held by the government.

Which of the following is true about the quantity of money in the U.S. economy?

It is much greater than the amount of currency in circulation.

Which of the following is not true about M1?

Savings accounts makes up approximately one-third of it.

Which of the following appears in M2 but not in M1?

Savings accounts.

When money serves as a mechanism for transforming current income into future purchases, it is functioning as a

Store of value.

The majority of the basic money supply (M1) in the United States is in the form of

Transactions accounts and currency in circulation.

One of the essential functions a bank performs is that of

Transferring money from savers to borrowers.

Which of the following is not included in M2?

Treasury bills.

Using the information in the text, of the following three forms of money: cash, checking accounts, savings accounts, which is the largest component of a. M1? Checking accounts Savings accounts Cash b. M2? Cash Checking accounts Savings accounts

a. M1 Checking Accounts b. M2 Savings Accounts

The Economy Tomorrow How much does M1 and M2 change in the following situations? a. $700 check is cashed. M1 M2 b. $800 cash is withdrawn from a savings account. M1 M2 c. $200 in coins is deposited into a checking account. M1 M2

a. M1 Does not Change M2 Does not Change b. M1 increases M2 Does not Change c. M1 Does not Change M2 Does not Change

The Economy Tomorrow How much does M1 and M2 change in the following situations? a. $400 is transferred from bitcoin into a checking account. M1 M2 b. $500 check is cashed. M1 M2 c. $800 is transferred from one checking account to another. M1 M2

a. M1 Increases M2 Increases b. M1 Does not Change M2 Does not Change c. M1 Does not Change M2 Does not Change

Which of the following is not included in the money supply known as M3

credit cards