Chapter 14 M&B

Suppose that float increases by $10 million. If the Fed wanted to offset this with open market operations, would it make open market purchases or open market sales?(See answer below.)

. The increase in float increases the monetary base by $10 million, open market sales of $10 million would decrease the monetary base by $10 million and so offset the increase in the monetary base created by the increase in float.

2. Which of the following are assets of the Fed? A. government securities and loans to banks B. government securities but not loans to banks C. loans to banks but not government securities D. neither loans to banks nor government securities

A

5. U.S. paper currency is A. issued by the Federal Reserve and is a liability of the Fed. B.issued by the Federal Reserve and is an asset of the Fed. C. issued by the U.S. Treasury and is a liability of the Treasury. D. issued by the U.S. Treasury and is an asset of the Treasury.

A

7. If the Fed purchases $1 million of government bonds, then A. its assets increase by $1 million and the monetary base increases by $1 million. B. its assets increase by $1 million and the monetary base decreases by $1 million. C. its assets decrease by $1 million and the money base increases by $1 million. D. its assets decrease by $1 million and the monetary base decreases by $1 million.

A

Float would rise if the A. the Fed credited a bank the amount of a check it had deposited before it debited the bank on which the check was written. An increase in float increases the monetary base. b. the Fed credited a bank the amount of a check it had deposited before it debited the bank on which the check was written. An increase in float decreases the monetary base. c. the Fed debited a bank the amount of a check used by one if its customers to make a payment before it credits the account of the bank that deposited the check. An increase in float increases the monetary base. d. the Fed debited a bank the amount of a check used by one if its customers to make a payment before it credits the account of the bank that deposited the check. An increase in float decreases the monetary base.

A

If the interest rate the Fed targets were above its target the Fed could A. make open market purchases to increase reserves. B. make open market purchase to decrease reserves. C.make open market sales to increase reserves. D. make open market sales to decrease reserves.

A

For each of the following list what happens to the size of the monetary base? A. The Federal Reserve conducts open market purchases. B.The Federal Reserve increases discount lending. C. A bank customer withdraws currency from a bank account. D. Fed Float increases. E. Treasury deposits at the Fed increase. (See answers below)

A. increases B. increases C. does no tchange D. increases E. decreases

3. Currency in circulation includes A. currency held by the nonbank public and vault cash B. currency held by the nonbank public but not vault cash C. vault cash but not currency held by the nonbank public

B

4. Bank reserves include A. vault cash, deposits at the Fed, and Treasury bonds B. vault cash and deposits at the Fed but not Treasury bonds C. vault cash but not deposits at the Fed or Treasury bonds. D. deposits at the Fed, but not vault cash or Treasury bonds

B

Consider the previous question. The borrower now uses the $10,000 to buy a car. The car dealer deposits this $10,000 in Merchant's Bank. The reserve requirement is 10%. Merchant's Bank lends out as much of its reserves as it safely can by increasing the deposits of one of its customers. This customer than spends the money on home improvements and the builders deposit these funds into checkable deposits. Considering both the previous question and this question, by how much have the monetary base and reserves risen? A. the monetary base is unchanged and the money supply has risen by $10,000. b. the monetary base has risen by $10,000 and the money supply has risen by $19,000. c. the monetary base and the money supply have risen by $19,000. d. None of the above is correct.

B

If banks desire to hold a larger percentage of deposits as excess reserves and the Fed leaves the monetary base unchanged, then A. the money multiplier falls so the money supply rises. B. the money multiplier falls so the money supply falls. C. the money multiplier rises so the money supply rises. D. the money multiplier rises so the money supply falls.

B

The Fed lends out an additional $5 million to banks. Which of the following is correct? A. the Fed's assets decrease by $5 million. B. the monetary base increases by $5 million. C. bank reserves are unchanged. D. None of the above is correct.

B

Which of the following does the Fed set a target range for? A. both the federal funds rate and the interest rate on reserves. B.the federal funds rate but not the interest rate on reserves. C.the interest rate on reserves but not the federal funds rate. D. Neither the federal funds rate not the interest rate on reserves.

B

The Fed provides an emergency loan to a bank for $1,000,000.

Banks: Assets increase by $1,000,000 in reserves; liabilities increase by the same amount due to borrowing from the Fed. Fed: Assets increase by the $1,000,000 from the loan; liabilities increase by $1,000,000 due to the increase in reserves.

A bank borrows $500,000 in overnight loans from another bank.

Banks: the bank that borrows has a $500,000 rise in its reserves, an asset, and a $500,000 rise in its borrowings, a liability. The bank that lends has a $500,000 decrease in its reserves, an asset, and a $500,000 increase in its loans an asset

The Fed buys $100 million of bonds from the public and also lowers the required reserve ratio. What will happen to the money supply?

Buying bonds increases the monetary base and the money supply. Reducing required reserves increases the multiplier which increases the money supply at a given level of the monetary base. So, both actions increase the money supply.

1. Which of the following is a liability of the Federal Reserve? A. government securities B. loanstofinancialinstitutions C. currency held by the nonbank public D. None of the above is correct.

C

6. Midwest Bank has deposits at the Fed, these deposits are A. a liability of Midwest bank and a liability of the Fed. B. a liability of Midwest bank and an asset of the Fed. C.an asset of Midwest bank and a liability of the Fed. D. an asset of Midwest bank and an asset of the Fed.

C

If float increases, A. the Fed does not need to take any action to maintain the current level of the monetary base. b. the Fed could conduct open market purchases to return the monetary base to its former level. c. the Fed could conduct open market sales to return the monetary base to its former level.

C

If the amount of currency people want to hold relative to deposits decreases A. the money multiplier falls so the money supply rises. B. the money multiplier falls so the money supply falls. C. the money multiplier rises so the money supply rises. D. the money multiplier rises so the money supply falls.

C

If the multiplier is 1.5 and the Fed purchases $10 million of government bonds, by how much does the money supply change? A. $10 million B. $11.5 million C. $15million D. $25 million E. None of the above is true. The money supply falls.

C

The Fed buys $10,000 of bonds from Security National Bank. Security National Bank then lends out this $10,000 by adding it to the checking account of one of its customers. By how much do these actions alone change the monetary base and the money supply? A. the monetary base rises by $10,000 and the money supply is unchanged. B. the monetary base is unchanged, and the money supply rises by $10,000. C. the monetary base and the money supply both rise by $10,000. D. None of the above is correct

C

If the Treasury increases its deposits at the Fed, A. there is no change in reserves or the monetary base. B.reserves and the monetary base increase C. reserves decrease but the monetary base is unchanged. D. reserves and the monetary base decrease.

D

The Fed lends First National Bank of Smallville $25,000. Which of the following is correct? A. Smallville's reserves initially rise by $25,000. B. The Fed's assets and liabilities each rise by $25,000. C. The monetary base rises by $25,000. D. All of the above are correct.

D

The Fed purchases a $10,000 bond from Black Hawk Bank, as a result of this transaction alone A. the bank's assets and liabilities increase by $10,000 each. B. assets increase by $10,000 and its liabilities decrease by $10,000. C. liabilities increase by $10,000 and its assets decrease by $10,000. D. assets and liabilities remain the same size.

D

Which of the following is the correct way to compute the M1 multiplier? A. 1/(rr +e) B. (1+c)/(rr+e) C. 1/(rr+e+c) D. (1+c)/(rr+e+c)

D

If a bank sells $10 million of bonds to the Fed to pay back $10 million on the loan it owes, what is the effect on the level of checkable deposits?

None. The reduction of $10 million in discount loans and increase of $10 million of bonds held by the Fed leaves the level of reserves and the monetary base unchanged so that checkable deposits remain unchanged.

*** Classify each of these transactions as an asset, a liability, or neither for each of the "players" in the money supply process—the federal reserve, banks, and depositors. -->You get a $10,000 loan from the bank to buy an automobile.

Public: Assets rise by $10,000 due to automobile purchase, liabilities rise by $10,000 due to loan. Banks: Assets rise by $10,000 due to loan; this is offset by a decrease in reserves assets of $10,000.

You use your debit card to purchase a meal at a restaurant for $100.

Public: Assets rise by the value of the meal, $100, and are offset by a fall in assets due to lower checking account balances of $100. Banks: Assets and liabilities of the banking system as a whole are unaffected; however, individual banks' balance sheets will change as funds are transferred from your bank account to the restaurant's bank account.

You deposit $400 into your checking account at the local bank.

Public: Checking account balances rise by $400, currency holdings fall by $400. These are both assets so there is no change in total assets. Banks: Assets increase by $400 from reserves; liabilities increase by $400 due to checking account balance. Fed: $400 more in bank reserves $400 less in currency in circulation. These are both liabilities, so there's no change in total liabilities.

The Fed buys bonds from a bank, what happens to the bank's reserves? What happens to the bank's assets? (see answer below)

The immediate effect is that the bank has more in reserves and less in securities. Since both of these are assets of the bank, its assets do not increase. Eventually the bank is likely to lend out at least a portion of the increase in reserves.

Is the Fed able to offset the effects on the monetary base created by changes in float and changes in Treasury deposits?

Yes. An increase in float raises the monetary base and an increase in Treasury deposits at the Fed reduces the monetary base. The Fed can use open-market operations to offset these changes in the base.