4-3: Model of Monetary Supply
leverage equation
assets / capital (owner's equity)
A system in which banks keep all deposits on reserve
100 percent reserve banking
When the Fed wants to lower the Federal Funds Rate it ______ securities, mostly U.S. Treasury issues, on the open market.
buys
To start a bank, the owners must contribute some of their own financial resources, which become the bank's ______
capital
A ____ in the reserve-deposit ratio or in the currency-deposit ratio increases the money multiplier and thus the money supply.
decrease
The interest rate that the Fed charges when it makes loans to banks.
discount rate
When the Fed sells securities, bank reserves ________ , and the fed funds rate tends to ________ .
fall, rise
The ________ is the interest rate that depository institutions—banks, savings and loans, and credit unions—charge each other for overnight loans.
fed funds rate
The system of _________ creates money because each dollar of reserves generates many dollars of demand deposits
fractional-reserve banking
another name for the monetary base is _______ (sum of currency and bank reserves)
high-powered money
Because banks are ______, however, a small decline in the value of their assets can potentially have a major impact on the value of bank capital.
highly leveraged
Thus, an increase in the interest rate on reserves will tend to ____ the reserve-deposit ratio, ____ the money multiplier, and ____ the money supply
increase, decrease, decrease
The money supply is proportional to the monetary base. Thus, an _______ in the monetary base increases the money supply by the same _______.
increase, percentage
The central bank's policy of paying banks an interest rate for the deposits that they hold as reserves.
interest on reserves
discount rate: the _____ that the Fed charges when it makes loans to banks
interest rate
When the Fed lends to a bank that is having trouble obtaining funds from elsewhere, it is said to act as the ______.
lender of last resort
In addition to selling bonds to the public, the Fed can also alter the monetary base and the money supply by _______ to banks.
lending reserves
The ________ the reserve-deposit ratio, the more loans banks make, and the more money banks create from every dollar of reserves. Thus, a _______ in the reserve-deposit ratio raises the money multiplier and the money supply.
lower, decrease
The _______ the discount rate, the cheaper are borrowed reserves, and the more banks borrow at the Fed's discount window. Hence, a reduction in the discount rate raises the _______ and the _______ .
lower, monetary base, money supply
The federal funds rate is a market rate determined by the demand for loans of federal funds by banks short of reserves and the supply of federal funds by banks with excess reserves.
market rate, short on reserves, excess reserves
The money supply is proportional to the _______.
monetary base
When the Fed buys bonds from the public, the dollars it pays for the bonds increase the _________ and thereby increase the _________
monetary base, money supply
The Federal Reserve influences the money supply either by changing the ____ or by changing the ____ and thereby the ____
monetary base, reserve ratio, money multiplier
The higher the interest rate on reserves, the ____ reserves banks will choose to hold
more
When the Fed sells bonds to the public, the dollars it receives _______ the monetary base and thus _______ the money supply
reduce, decrease
Banks borrow from the Fed when they think they do not have enough _______ on hand, either to satisfy bank regulators, meet depositor withdrawals, make new loans, or satisfy some other business requirement.
reserves
The system of fractional-reserve banking creates money because each dollar of _________ generates many dollars of _________ .
reserves, demand deposits
When the Fed buys securities, bank reserves ________ , and the fed funds rate tends to ________ .
rise, fall
The less banks borrow, the ______ the monetary base, and the ______ the money supply.
smaller, smaller
