Chap 14
The M2 money multiplier is ___________ the M1 multiplier. A. substantially larger than B. not much different than C. substantially smaller than D. twice as large as
A. substantially larger than It is a broader concept of the supply of money compared to M1. Besides all the components of M1, it also includes savings of the people with the post offices. Thus, M2 = M1 + Deposits with post office saving bank account
Under 100% reserve banking, the money multiplier will be:
1 In a financial panic, you would expect the money multiplier to decrease If large amounts of reserves enter the banking system but are held as excess reserves, it is possible for the money multiplier to fall below one.
If Jane Brown closes her account at the First National Bank and uses the money instead to open a money market mutual fund account, what happens to M1? Why? A. M1 increases due to a shift from one component of the money supply (chequable deposits) with less multiple expansion to another (money market mutual funds) with more B. M1 decreases due to a shift from one component of the money supply (chequable deposits) with less multiple expansion to another (money market mutual funds) with more C. M1 does not change because the funds that go to the money market mutual fund are first deposited into the mutual fund's bank account D. M1 increases because the funds that go to the money market mutual fund are first deposited into the mutual fund's bank account
C
Two primary assets of the Federal Reserve System are: A. government securities and Treasury deposits. B. government securities and Federal Reserve notes outstanding. C. government securities and loans to commercial banks. D. Federal Reserve notes outstanding and reserves of commercial banks.
C. government securities and loans to commercial banks.
Loans that the Fed makes to banks appear on the balance sheet as part of its __________, and deposits made by banks appear on the Fed's balance sheet as part of its ____________. A. securities; net worth B. liabilities; assets C. assets; liabilities D. net worth; reserves
C. assets; liabilities
What happens to checkable deposits in the banking system when the Fed lends an additional $1 million to the First National Bank, assuming that the required reserve ratio on checkable deposits is 10%, banks do not hold any excess reserves, and the public's holdings of currency do not change? A. Checkable deposits rise by $900,000. B. Checkable deposits rise by $1 million. C. Checkable deposits rise by $100,000. D. Checkable deposits rise by $10 million.
What happens to checkable deposits in the banking system when the Fed lends an additional $1 million to the First National Bank, assuming that the required reserve ratio on checkable deposits is 10%, banks do not hold any excess reserves, and the public's holdings of currency do not change? A. Checkable deposits rise by $900,000. B. Checkable deposits rise by $1 million. C. Checkable deposits rise by $100,000. D. Checkable deposits rise by $10 million.
multiple deposit creation
When the Fed supplies the banking system with $1 of additional reserves, deposits increase by a multiple of this amount.
required reserve ratio
the fraction of deposits that the Fed requires be kept as reserves
Why might the procyclical behavior of interest rates (rising during business cycle expansions and falling during recessions) lead to procyclical movements in the money supply? (Assume the Fed does not change the discount rate.) A. The excess reserves ratio e falls with rising interest rates and the money supply rises when e falls. B. The excess reserves ratio e rises with rising interest rates and the money supply rises when e rises. C. Discount loan borrowing is positively related to interest rates and the money supply is positively related to the level of discount loans from the Fed. D. Discount loan borrowing is negatively related to interest rates and the money supply is negatively related to the level of discount loans from the Fed. E. Both A & C are correct. F. Both B & D are correct.
A. The excess reserves ratio e falls with rising interest rates and the money supply rises when e falls. C. Discount loan borrowing is positively related to interest rates and the money supply is positively related to the level of discount loans from the Fed. The rise in interest rates in a boom increases the cost of holding excess reserves and the incentives to borrow from the Fed. Therefore, e falls, which increases the amount of reserves available to support checkable deposits, and the volume of discount loans increases, which raises the monetary base. The result is a higher money supply during a boom. Similarly, when interest rates fall during a recession, the money supply also has a tendency to fall because e rises and the volume of discount loans falls.
The money multiplier declined significantly during the period 1930-1933 and also during the recent financial crisis of 2008-2010. Yet the M1 money supply decreased by 25% in the Depression period but increased by more than 20% during the recent financial crisis. What explains the difference in outcomes? A. There was a significant increase in the monetary base during the recent financial crisis. B. There was a minimal increase in the currency ratio during the recent financial crisis. C. The excess reserves ratio increased rapidly during the recent financial crisis. D. The overall level of deposit expansion decreased during the recent financial crisis.
A. There was a significant increase in the monetary base during the recent financial crisis.
As financial intermediaries, banks: A. accept deposits and make loans B. buy securities from people who need to borrow money C. have few interactions with the average person D. sell securities to people who have money to lend
A. accept deposits and make loans
A purchase of government bonds from the public by the Federal Reserve Bank: A. increases the monetary base directly and may increase reserves. B. reduces the wealth of the public. C. decreases the monetary base. D. increases reserves directly and may increase the monetary base.
A. increases the monetary base directly and may increase reserves.
Predict what will happen to the money supply if there is a sharp rise in the currency ratio. A. The money supply increases B. The money supply falls C. The money supply stays the same D. The effect on the money supply is ambiguous
B. The money supply falls
If the economy starts to boom and loan demand picks up, what do you predict will happen to the money supply? A. The money supply will decrease B. The money supply will increase C. The money supply will not change D. The effect on the money supply is ambiguous
B. The money supply will increase
If the economy starts to boom and loan demand picks up, what do you predict will happen to the money supply? A. The money supply will not change B. The money supply will increase C. The money supply will decrease D. The effect on the money supply is ambiguous
B. The money supply will increase
The monetary base is comprised of: A. currency in circulation and Federal Reserve notes. B. currency in circulation and reserves. C. reserves and government securities. D. currency in circulation and government securities
B. currency in circulation and reserves.
reserves
Banks' holding of deposits in accounts with the Fed (all banks have an account at the FED) plus currency that is physically held by banks (vault cash) The cash that Fed has on hand such as money in a vault or in an account that it has with the central bank. Basically, it's cash ex) people withdraw a bunch of cash at Christmas... banks Assets are reduced by the decline in reserves & checkable deposits
Reserves are: A. deposits at the Fed plus vault cash. B. liabilities for the Fed. C. assets for banks. D. All of the above are correct. E. None of the above are correct.
D. All of the above are correct.
If a bank depositor withdraws $1,000 of currency from an account, what happens to reserves, checkable deposits, and the monetary base? Assume that the required reserve ratio on checkable deposits is 10% and banks do not hold any excess reserves. A. Reserves fall by $10,000, checkable deposits fall by $1,000, and the monetary base remains unchanged. B. Reserves do not change, checkable deposits fall by $1,000, and the monetary base falls by $10,000. C. Reserves do not change, checkable deposits fall by $10,000, and the monetary base falls by $1,000. D. Reserves fall by $1,000, checkable deposits fall by $10,000, and the monetary base remains unchanged.
D. Reserves fall by $1,000, checkable deposits fall by $10,000, and the monetary base remains unchanged.
The players in the money supply process include all of the following except: A. banks. B. depositors. C. the central bank. D. the Treasury.
D. the Treasury.
primary dealers
Federal reserve purchases and sales of bonds are always done through primary dealers.
non borrowed monetary base
MB^n The monetary base minus borrowed reserves Borrowed reserves are discount loans Non-borrowed reserves are bank reserves—that is, the funds a financial institution holds in cash—that are its own, and not money on loan from a central bank. In practice, the vast majority of reserves in the U.S. are non-borrowed; getting loans from the Federal Reserve is relatively expensive and carries a stigma.
monetary base
The sum of the Fed's monetary liabilities (currency in circulation and reserves) and the U.S. Treasury's monetary liabilities (Treasury currency in circulation, primarily coins). AKA high-powered money =currency in circulation + ( required reserve ratio*checkable deposits) + excess reserves ratio + purchase of bonds
single deposit multiplier
as each bank makes a loan and creates deposits, the reserves find their way to another bank, which uses them to make additional loans and create additional deposits. AS you have seen, this process continues until the initial increase in reserves results in multiple increases in deposits. ( with a 10% required reserve ratio, the simple multiplier is 10. 10 to 100, 100 to 1000) The multiple increases in deposits generated from an increase in the banking system's reserves. The behavior of depositors and banks plays no role in this simple model.
Float
cash items in process of collection at the Fed minus deferred-availability cash items
Solve for the money supply
currency in circulation + checkable deposits
solve for the currency deposit ratio
currency in circulation / checkable deposits
What effect might a financial panic have on the money multiplier and the money supply? Why? In a financial panic, you would expect the money multiplier to _____ and the money supply to _____, which would cause the excess reserves ratio to _______. Thus depositors are likely to _____ their holdings of currency.
decrease decrease increase increase A financial panic would probably decrease the money multiplier and the money supply for a given monetary base. In a financial panic, you would expect banks to make less risky loans and have more liquidity on hand, which would increase the excess reserves ratio. In addition, depositors may worry about the health of banks and increase their holdings of currency, which would also decrease the money multiplier.
money multiplier
denoted by m, which tells us how much the money supply changes for a given change in the monetary base: M = MB * m m= (c + 1) / (rr + e + c) a ratio that relates to the change in the money supply to a given change in the monetary base The money multiplier is typically larger than 1,
excess reserves ratio
excess reserves / checkable deposits