Macroeconomics study ch14
If the required reserve ratio is 0.2, and the Fed buys $3,000 of U.S. government securities, the maximum amount by which the money supply can increase is
$15,000
The simple money multiplier is defined as
1/required reserve ratio
Which of the following would likely increase the money supply?
A bank sells government securities to the Fed.
A single bank can increase the money supply by the increase in its excess reserves times the simple money multiplier.
False
M1, the money supply narrowly defined, consists of coins, paper currency, checkable deposits, travelers checks, and certificates of deposit (CDs).
False
When the Fed buys U.S. government securities from a bank, that bank's excess reserves and required reserves increase but total reserves decrease.
False
When the Fed buys U.S. government securities from a bank, that bank's required reserves and total reserves increase but excess reserves decrease.
False
When the Fed buys U.S. government securities from a member bank, that bank's excess reserves, required reserves, and total reserves all increase.
False
The largest component of the Federal Reserve's liabilities is in the form of
Federal Reserve notes
Which of the following is not true of Federal Reserve notes?
They are redeemable for gold.
Banks create money when they make loans.
True
Banks in need of reserves can borrow from the Fed or in the federal funds market.
True
If the Fed buys a $1,000 U.S. government bond from a bank, it pays it by giving the bank $1,000 in reserves--reserves that it simply creates out of thin air.
True
If the Fed wishes to reduce the money supply, it can sell U.S. government securities to member banks.
True
If you know the required reserve ratio and the amount of a bank's deposits, then you know the minimum amount of reserves the bank is required to hold.
True
Coins in the United States are manufactured and distributed by the
U.S. Mint
The largest component of the Federal Reserve's asset portfolio is
U.S. government securities
A $20 Federal Reserve note is
an asset to a commercial bank if it is currently in the bank's vault
In order to meet a deficiency of excess reserves, a bank could
borrow from another bank in the federal funds market
The largest component of M1 is
checkable deposits
Which of the following make up the money supply as it is most narrowly defined?
coins and currency held by the nonbank public, checking deposits, and traveler's checks
To increase the money supply, the Fed might
decrease the reserve requirement and the discount rate
What essential factor enables commercial banks to create money?
excess reserves
The money expansion process continues until there are no more
excess reserves in the system that banks are willing to lend
Banks borrow excess reserves from each other on a day-to-day basis in the
federal funds market
Banks earn a profit on the difference between
interest charged on loans and interest paid on deposits
The Federal Reserve may increase the money supply by
lending reserves to banks
If the required reserve ratio is 20 percent and a bank has $100,000 in checkable deposits, then its
required reserves are $20,000
The appropriate open market operation for reducing the money supply is
selling U.S. government securities
When the Fed buys U.S. government securities from a member bank, the immediate effect on that member bank's balance sheet is
that there is no change in the total amount of assets or liabilities
If the Fed sells U.S. government securities to a member bank and debits that bank's reserve account,
the Fed's assets decrease
If the Fed buys U.S. government securities from a bank and credits the bank's reserve account,
the Fed's assets increase
If a bank sells a $1,000 security to the Fed and the required reserve ratio is 20 percent,
the bank has $1,000 in additional excess reserves, all of which it can lend out
The higher the required reserve ratio,
the smaller the money multiplier
A 2005 quarter is called token money because
there is less than a quarter's worth of metal in it
Suppose that a bank has $100 million in checkable deposits and the required reserve ratio is 0.1. Required reserves are
$10 million
If the required reserve ratio is 10 percent and a bank receives a new deposit for $100,000, then the
bank's liabilities increase by $100,000
Banks in need of reserves can borrow from the Fed or in the federal funds market.
banks make short-term loans to other banks
In the federal funds market,
banks make short-term loans to other banks
If the Fed purchases government securities on the open market, the money supply will
increase through the commercial banking system regardless of who the seller is
The Fed can reduce the money supply by
selling securities
