Chapter 16: The Monetary System

Suppose Joe changes his $1,000 demand deposit from Bank A to Bank B. If the reserve requirement is 10 percent, what is the potential change in demand deposits as a result of Joe's action?

$0

A bank has capital of $200 and a leverage ratio of 5. If the value of the bank's assets declines by 10 percent, then its capital will be reduced to

$100

If the reserve ratio is ¼ and the central bank increases the quantity of reserves in the banking system by $120, the money supply increases by

$480

suppose the Fed purchases a $1,000 government bond from you. If you deposit the entire $1,000 in your bank, what is the total potential change in the money supply as a result of the Fed's action if reserve requirements are 20 percent?

$5000

If the reserve ratio is 25 percent, the value of the money multiplier is

4

Which of the following statements about a bank's balance sheet is true? a. An increase in a bank's capital increases its leverage ratio. b. Assets minus liabilities equals owner's equity or capital. c. The largest liability on the bank's balance sheet is its loans. d. Because a bank is highly leveraged, a large change in the value of its assets has little impact on its capital. e. None of the above is correct.

Assets minus liabilities equals owner's equity or capital.

Which of the following is not a function of money?

Protection against inflation

fractional reserve banking

a banking system in which banks hold only a fraction of deposits as reserves

Which of the following actions by the Fed would tend to increase the money supply?

a decrease in reserve requirements

capital requirement

a government regulation specifying a minimum amount of bank capital

lender of last resort

a lender to those who cannot borrow anywhere else

Which of the following is NOT true about the Federal Reserve? a. It was established by the U.S. Constitution. b. It conducts open-market operations. c. It lends to banks. d. It regulates the banking system.

a. It was established by the U.S. Constitution.

Central bank

an institution designed to oversee the banking system and regulate the quantity of money in the economy

medium of exchange

an item that buyers give to sellers when they want to purchase goods and services

Store of value

an item that people can use to transfer purchasing power from the present to the future

Which of the following statements is true? a. The primary tool of monetary policy is the reserve requirement. b. When the Fed sells government bonds, the money supply decreases. c. The FOMC meets once per year to discuss monetary policy. d. The Federal Reserve was created in 1871 in response to the Civil War.

b. When the Fed sells government bonds, the money supply decreases.

Demand Deposits

balances in bank accounts that depositors can access on demand by writing a check

If the Fed wants to increase the money supply, it can

buy bonds in open-market operations.

Which of the following policy combinations would consistently work to increase the money supply?

buy government bonds, decrease reserve requirements, decrease the discount rate

The money stock includes all of the following EXCEPT a. bank balances accessible with debit cards. b. metal coins. c. lines of credit accessible with credit cards. d. paper currency.

c. lines of credit accessible with credit cards.

The M1 money supply is composed of

currency, demand deposits, traveler's checks, and other checkable accounts.

Fiat money is

d. a type of money set by government decree.

If the Fed raises the interest rate it pays on reserves, it will ________ the money supply by increasing ________.

decrease, excess reserves

Required reserves of banks are a fixed percentage of their

deposits

Reserves

deposits that banks have received but have not loaned out

Commodity money

has intrinsic value.

Isabella takes $100 of currency from her wallet and deposits it into her checking account. If the bank adds the entire $100 to reserves, the money supply ________, but if the bank lends out some of the $100, the money supply ________.

is unchanged, increases

intrinsic value

means that the item would have value even if it were not used as money

commodity money

money that takes the form of a commodity with intrinsic value

fiat money

money without intrinsic value that is used as money by government decree

In a system of fractional-reserve banking, even without any action by the central bank, the money supply declines if households choose to hold ________ currency or if banks choose to hold ________ excess reserves.

more, more

The Fed's tools of monetary control are

open-market operations, lending to banks, reserve requirements, and paying interest on reserves

An example of fiat money is

paper dollars

Which of the following policy actions by the Fed is likely to increase the money supply?

reducing reserve requirements

reserve requirement

regulations on the minimum amount of reserves that banks must hold against deposits

To insulate the Federal Reserve from political pressure,

the Board of Governors are appointed to fourteen-year terms.

money multiplier

the amount of money the banking system generates with each dollar of reserves

Federal Reserve (FED)

the central bank of the United States, often called the FED

Liquidity

the ease with which an asset can be converted into the economy's medium of exchange

reserve ratio

the fraction of deposits that banks hold as reserves

federal funds rate

the interest rate at which banks make overnight loans to one another

The discount rate is

the interest rate the Fed charges on loans to banks.

If banks increase their holdings of excess reserves

the money multiplier and the money supply decrease.

A decrease in the reserve requirement causes

the money multiplier to rise.

Suppose all banks maintain a 100 percent reserve ratio. If an individual deposits $1,000 of currency in a bank,

the money supply is unaffected.

Currency

the paper bills and coins in the hands of the public

open market operations

the purchase and sale of U.S. government bonds by the Fed

money supply

the quantity of money available in the economy

Leverage ratio

the ratio of assets to bank capital

Bank Capital

the resources a bank's owners have put into the institution

Money

the set of assets in an economy that people regularly use to buy goods and services from other people

monetary policy

the setting of the money supply by policymakers in the central bank

Leverage

the use of borrowed money to supplement existing funds for purposes of investment

Unit of account

the yardstick people use to post prices and record debts

The Board of Governors of the Federal Reserve System consists of

up to seven members appointed by the president.

If the Fed engages in an open-market purchase, and at the same time, it raises reserve requirements,

we cannot be certain what will happen to the money supply.