Money and Banking in the economy Exam 1
A bank has excess reserves of $6,000 and demand deposit liabilities of $100,000 when the required reserve ratio is 20 percent. If the reserve ratio is raised to 25 percent, the bank's excess reserves will be
$1,000
In the simple deposit expansion model, if the Fed purchases $100 worth of bonds from a bank that previously had no excess reserves, the bank can now increase its loans by
$100 times the reciprocal of the required reserve ratio
In the simple deposit expansion model, if the banking system has excess reserves of $75, and the required reserve ratio is 20%, the potential expansion of checkable deposits is
$375 ( times by 5)
A bank has excess reserves of $1,000 and demand deposit liabilities of $80,000 when the reserve requirement is 20 percent. If the reserve requirement is lowered to 10 percent, the bank's excess reserves will be
$9,000
If reserves in the banking system increase by $100, then checkable deposits will increase by $1,000 in the simple model of deposit creation when the required reserve ratio is
.10
If the required reserve ratio is 15%, the simple deposit multiplier is
6.67
If the required reserve ratio is one-third, currency in circulation is $300 billion, checkable deposits are $900 billion, and there is no excess reserve, then the monetary base is
600 billion
The three players in the money supply process include
Banks, depositors, and the central bank
Ms-Money supply =
Currency in circulation(c) + Deposits (D)
An increase in monetary base goes into ______ is not multiplied, while an increase that goes into ______ is multiplied
Currency; Deposits
Decisions by depositors to increase their holdings of ________, or of banks to hold ________ will result in a smaller expansion of deposits than the simple model predicts.
currency; excess reserves
when the federal reserve sells a government bond to a primary dealer, reserves in the banking system _______ and the monetary base ______, everything else held constant
decrease; decrease
If the required reserve ratio is equal to 10 percent, a single bank can increase its loans up to a maximum amount equal to
its excess reserves
The purpose of the commitment by the Fed to keep the federal funds rate at zero for a long period of time is to
lower the long term interest rates
M1
most liquid assets
excess reserves are equal to
vault cash plus deposits with Federal Reserve banks minus required reserves.
x
x
If reserves in the banking system increase by $100, then checkable deposits will increase by $400 in the simple model of deposit creation when the required reserve ratio is
.25
If the required reserve ratio is 10 percent, currency in circulation is $400 billion, checkable deposits are $800 billion, and excess reserves total $0.8 billion, then the currency-deposit ratio is
.5
If reserves in the banking system increase by $100, then checkable deposits will increase by $100 in the simple model of deposit creation when the required reserve ratio is
1
If the required reserve ratio is 10 percent, currency in circulation is $400 billion, checkable deposits are $800 billion, and excess reserves total $0.8 billion, then the money supply is ________ billion.
1,200 billion
Money multiplier =
1/reserve ratio
if the required reserve ratio is 10%, the simple deposit multiplier is
10
If the required reserve ratio is 10 percent, currency in circulation is $400 billion, checkable deposits are $800 billion, and excess reserves total $0.8 billion, then the M1 money multiplier is
2.5
If a bank has excess reserves of $10,000 and demand deposit liabilities of $80,000, and if the reserve requirement is 20 percent, then the bank has actual reserves of
26,000
If the required reserve ration is 10 percent, currency in circulation is $400 billion, checkable deposits are 800 Billions, and excess reserves total .8 billion, then the monetary base is
480.8 billion
Everything else held constant, a decrease in holdings of excess reserves will mean
An increase in money supply
Everything else held constant, a decrease in the required reserve ratio on checkable deposits will mean
An increase in money supply
The monetary liabilities of the Federal Reserve include
Currency in circulation and reserves
If the banking system has a large amount of reserves, many banks will have excess reserves to lend and the federal funds rate will probably ________; if the level of reserves is low, few banks will have excess reserves to lend and the federal funds rate will probably ________.
Fall; rise
an assumption in the model of the money supply process is that the desired levels of currency and excess reserves
Grow proportionally with the checkable deposits
When the FED supplies the banking system with an extra dollar of reserves, deposits ______ by _______ than one dollar -- a process called multiple deposit creation.
Increase;more
M2 =
M1 + savings accounts + money market accounts + other near monies
Monetary Base (MB) =
MB=currency in circulation (C) + bank reserves (R)
________ are the most important monetary policy tool because they are the primary determinant of changes in the ________, the main source of fluctuations in the money supply.
Open market operations, monetary base
The most important advantage of discount policy is that the Fed can use it to
Perform its role as lender of last resort
There are two ways in which the Fed can provide additional reserves to the system: it can ______ government bonds or it can ________ discount loans to commercial banks
Purchase; Extend
If the Fed expects currency holdings to rise, it conducts open market ________ to offset the expected ________ in reserves.
Purchase; decrease
In the simple deposit expansion model, an expansion in checkable deposits of $1,000 when the required reserve ratio is equal to 20 percent implies that the Fed
Purchased $200 in government bonds
required reserve =
RRR • D
A _____ in market interest rates relative to the discount rate will cause discount borrowing to _______
Rise; Decrease
Both ________ and ________ are Federal Reserve assets.
Securities; loans to financial institutions
In the model of the money supply process, the depositor's role in influencing the money supply is represented by
The currency of holdings
Everything else held constant, an increase in currency holdings cause ____
The money supply to fall
The discount rate is kept ________ the federal funds rate because the Fed prefers that ________.
above; banks can monitor each other for credit risk
Funds held in ________ are subject to reserve requirements.
all checkable deposits
Discount policy affects the money supply by affecting the volume of ________ and the ________.
borrowed reserves; monetary base
the interest rate the fed charges banks borrowing from the fed is the
discount rate
If the Fed injects reserves into the banking system and they are held in excess reserves, then the money supply
does not change
Total reserves are the sum of ________ and ________.
excess reserves; required reserves
when the fed extends a $100 discount loan to the first national bank, reserves in the banking system
increase by $100
Assuming initially that the required reserve ratio = 15%, the currency-deposit ratio = 40%, and the excess reserve ratio = 5%, a decrease in the excess reserve ratio to 0% causes the M1 money multiplier to ________, everything else held constant.
increase from 2.33 to 2.55 1+CR/rrr+cr+err
When the Fed wants to raise interest rates after banks have accumulated large amounts of excess reserves, it would
increase the interest rate paid on excess reserves
Everything else held constant, if the sum of the required reserve ratio and the excess reserve ratio is less than one, an increase in the currency-deposit ratio causes the M1 money multiplier to ________ and the money supply to ________.
increase; decrease
when the primary dealer sells a government bond to the federal reserved, reserves in the banking system ________ and the monetary base ______, everything else is held constant
increase; decrease
To lower interest rates on residential mortgages to stimulate the housing market, the Fed extended its open market operations to purchase
mortgage backed securities
The Fed's open market operations normally involve only the purchase of government securities, particularly those that are short-term. However, during the crisis, the Fed started new programs to purchase
mortgage backed securities and long term treasuries
Suppose that from a new checkable deposit, First National Bank holds two million dollars in vault cash, eight million dollars on deposit with the Federal Reserve, and one million dollars in required reserves. Given this information, we can say First National Bank has ________ million dollars in excess reserves.
nine million
the policy tool of changing reserve requirements is
no longer used
purchase and sales of government securities by the federal reserve are called
open market operations
The percentage of deposits that banks must hold in reserve is the
required reserve ratio
Total reserves =
required reserves + excess reserves
The quantity of reserves demanded equals
required reserves plus excess reserves
Open market sales shrink ________ thereby lowering ________.
reserves and the monetary base; the money supply
In the simple deposit expansion model, a decline in checkable deposits of $1,000 when the required reserve ratio is equal to 20 percent implies that the Fed
sold $200 in government bonds
The purpose for a central bank to set negative interest rates on bank's deposit is to
stimulate the economy by encouraging banks to lend out the deposits they were keeping at the central bank.
Suppose that from a new checkable deposit, First National Bank holds two million dollars in vault cash, eight million dollars on deposit with the Federal Reserve, and nine million dollars in excess reserves. Given this information, we can say First National Bank faces a required reserve ratio of ________ percent.
ten percent
The interest rate charged on overnight loans of reserves between banks is the
the federal funds rate
The sum of the Fed's monetary liabilities is called
the monetary base
