Econ. Unit 6 Lesson 2

Which of the following is most liquid?

checking deposits

In a fiat money economy, money is created when:

commercial banks make loans.

To increase the money supply, the Federal Reserve could do which of the following?

conduct an open market purchase of U.S. Treasury securities

If the Fed wants to increase the money supply, then which of the following policy tools can it employ?

Lower the required reserve ratio.

If I were to give cash to my mother for her birthday and she kept the cash under her mattress, which of the following changes would take place?

M1 and M2 would remain unchanged.

If I were to receive cash from my sister and I deposited it into my checking account, which of the following changes would occur?

M1 and M2 would remain unchanged.

If Ann were to convert some of her checkable deposits into a certificate of deposit, which of the following changes would take place?

M1 would decrease; there would be no change in M2.

Which of the following would NOT decrease the supply of money in a fiat money economy?

The Federal Reserve decides to link the value of money to a scarce, rare earth metal

I have a checking account at the local bank, and my sister has a car loan at the same bank. How does each of these appear on the bank's balance sheet?

The checking account is a liability, and the car loan is an asset

To the extent a bank holds excess reserves, which of the following is a consequence?

The deposit multiplier is smaller.

In economic terms, how would you state what has happened when your neighbor says he is unwilling to help you mow your lawn because you are unwilling to help him teach his kids how to speak with a British accent?

The double coincidence of wants was not satisfied.

Which of the following events could cause inflation in the United States—a country that uses fiat money?

The government decides to print more money.

Since October 2008, the Federal Reserve has started paying interest on excess reserves held by banks. Under these circumstances, if the Fed buys a Treasury security worth $200 million from a bank, which of the following can be expected regarding the change in money supply? Assume that the required reserve ratio is 10%, and that all currency is deposited into the banking system.

The money supply will increase by less than $2 billion.

If a bank has a required reserve ratio of 10% and has required reserves of $100,000,000, how much does the bank hold in deposits?

$1,000,000,000

Using a required reserve ratio of 10% and assuming that banks keep no excess reserves, imagine that $300 is deposited into a checking account. By how much more does the money supply increase if the Fed lowers the required reserve ratio to 7%?

$1,286

If a bank has a required reserve ratio of 15% and has required reserves of $225,000,000, how much does the bank hold in deposits?

$1,500,000,000

If a bank has a required reserve ratio of 20% and has required reserves of $300,000,000, how much does the bank hold in deposits?

$1,500,000,000

If the transaction demand for money is $400 billion and the velocity of money is 4, nominal GDP would be __________________. (The velocity of money refers to how many times a dollar is spent in a year)

$1,600 billion

Suppose the level of checkable deposits in 2012 represents total reserves and there were 500 banks with equal shares of the checkable deposits. How much could one bank lend if the reserve ratio was 10%? How much could all banks lend?

$1.845 billion and $9,225 billion

If a bank has a required reserve ratio of 10%, excess reserves of $10,000,000, and deposits of $500,000,000, how much can the bank lend out?

$10,000,000

Use the following example to answer the questions that follow: Imagine that you deposit $25,000 in currency (which you had been storing in your closet), into your checking account at the bank. Assume that this institution has a required reserve ratio of 25%. As a result of this deposit, what is the maximum amount in loans that can be made by all the banks in the banking system?

$100,000

Suppose that the Bank of Oranges has excess reserves of $80,000,000 and checkable deposits of $500,000,000. If the bank has a reserve requirement of 10%, what is the bank's total amount of reserves?

$130,000,000

Suppose the reverse ratio was 8% and the level of checkable deposits in the United States in 2010 represents total reserves. How much money could the entire banking system create?

$14,386.5 billion

Suppose that you take $150 in currency out of your pocket and deposit it in your checking account. Assuming a required reserve ratio of 10%, what is the largest amount (in dollars) by which the money supply could increase as a result of your action and the action of the banking system?

$15

Use the following example to answer the questions that follow: Imagine that you deposit $25,000 in currency (which you had been storing in your closet), into your checking account at the bank. Assume that this institution has a required reserve ratio of 25%. As a result of this deposit, by how much will the bank's excess reserves increase?

$18,750

Use the following example to answer the questions that follow: Imagine that you deposit $25,000 in currency (which you had been storing in your closet), into your checking account at the bank. Assume that this institution has a required reserve ratio of 25%. As a result of this deposit, what is the maximum amount the bank can hold as loans?

$18,750

Suppose the current reserve ratio is 25% and the level of checkable deposits represents total reserves. If the Federal Reserve lowered the reserve ratio to 20%, excess reserves are now _______ and the money multiplier is ____.

$820 billion; 5

If a bank has a required reserve ratio of 25% and there is $10,000 in deposits, what is the amount of required reserves?

$2,500

A bank has excess reserves of $400,000 and makes a new loan for $50,000. If the bank faces a 25% required reserve ratio, by how much will the money supply increase when the loan is made?

$200,000

Use the following example to answer the questions that follow: Imagine that you deposit $25,000 in currency (which you had been storing in your closet), into your checking account at the bank. Assume that this institution has a required reserve ratio of 25%. As a result of this deposit, by how much will the bank's reserves increase?

$25,000

Which of the following interest rates would be probable if the FED instituted expansionary monetary policy?

$25,000

If nominal GDP is $900 billion, and on average, each dollar is spent three times per year, then the amount of money demanded for transaction purposes will be

$300 billion

If Bank of Mateer has a required reserve ratio of 40% and there is $100,000 in deposits, what is the amount of required reserves?

$40,000

If a bank has a required reserve ratio of 25% and there is $10,000 in deposits, what is the maximum possible change to the money supply?

$40,000

A bank has excess reserves of $1,000,000 and makes a new loan for $500,000. If the bank faces a 10% required reserve ratio, by how much will the money supply increase when the loan is made?

$5,000,000

Suppose that the Bank of Bananas has excess reserves of $10,000,000 and checkable deposits $200,000,000. If the bank has a reserve requirement of 25%, what is the bank's total amount of required reserves?

$50,000,000

Use the following example to answer the questions that follow: Imagine that you deposit $25,000 in currency (which you had been storing in your closet), into your checking account at the bank. Assume that this institution has a required reserve ratio of 25%. As a result of this deposit, by how much will the bank's required reserves increase?

$6,250

If Bank of Mateer has a required reserve ratio of 40% and there is $100,000 in deposits, is the maximum amount of money it can loan.

$60,000

The University Bank currently has $800 million in deposits. If the required reserve ratio is 15%, then what is the maximum amount of loan that the bank can legally lend?

$680 million

If a bank has a required reserve ratio of 25% and there is $10,000 in deposits, what is the maximum amount of loans that can be made by this bank?

$7,500

Suppose that the Bank of Apples has excess reserves of $450,000 and checkable deposits of $30,000,000. If the bank has a reserve requirement of 30%, what is the bank's total amount of reserves?

$9,450,000

If the required reserve ratio is 10%, what is the simple deposit multiplier?

10

Calculate the amount of currency in billions of dollars in the economy from the given information. Assume zero traveler's checks for answering this question.

2,000.

Which of the following interest rates would be probable if the FED instituted expansionary monetary policy?

2.5%

If the required reserve ratio is 25% then the simple money multiplier is

4

If the required reserve ratio is 20%, what is the simple deposit multiplier?

5

Which of the following diagrams reflect the change in the nominal interest rate that would occur when the FED buys bonds?

A

Which of the following is an assumption made in the money-creation process?

All currency is deposited in a bank.

Which of the following diagrams represent the change in the nominal interest rate that would occur when the federal reserve raises the reserve requirement?

B

Which of the following is true about banks in a fractional reserve banking system?

Banks are able to create money when excess reserves are lent to individuals who need to borrow money.

What is true about banks in a fractional reserve banking system?

Banks face the risk of not having enough cash to meet withdrawal needs.

Which of the following is an assumption made in the money-creation process?

Banks hold no excess reserves.

How is it that the banking system is able to lend by a multiple of its excess reserves?

Banks only have to hold a fraction of their deposits as reserves and can lend the rest to borrowers.

As financial intermediaries, how do commercial banks pay their expenses and earn a profit?

Banks pay depositors a lower interest rate than they charge borrowers.

If the Federal Reserve determined that banks needed to increase the amount of owner's equity, how could this be achieved?

Banks would increase reserves, but borrowings would decrease.

If the government were to print more money, which of the following would occur?

Both M1 and M2 would increase.

Which of the following diagrams represents the change that would take place if more money were held as an asset by the public?

C

Which of the following diagrams reflect the changes that would occur in the nominal interest rate as a result of a decrease in the overall price level?

D

If a bank that faces a 25% reserve ratio received a deposit of $30,000 and makes a loan to a customer for $10,000, what is the consequence if the bank then deposits the rest of the funds at the Federal Reserve?

Excess reserves increase by $12,500 and required reserves increase by $7,500.

If a bank that faces a 10% reserve ratio received a deposit of $50,000 and makes a loan to a customer for $5,000, what is the consequence if the bank then deposits the rest of the funds at the Federal Reserve?

Excess reserves increase by $40,000 and required reserves increase by $5,000.

You receive a bonus check from your employer for $10,000, and you deposit this in a bank that faces a 20% reserve ratio. What is the consequence if the bank then deposits your check at the Federal Reserve?

Excess reserves increase by $8,000 and required reserves increase by $2,000.

You receive a $1,000 check from your parents for your birthday, and you deposit this in a bank that faces a 10% reserve ratio. What is the consequence if the bank then deposits your check at the Federal Reserve?

Excess reserves increase by $900 and required reserves increase by $100.

Which of the following would be a consequence in an economy where there is no money?

Exchanges would take longer.

Which of the following is not a characteristic of fiat money?

It is always backed by something of high intrinsic value.

Suppose you have $10,000 in your checking account. You withdraw $500 cash from your account and hide it under your pillow for future use. If the required reserve ratio is 10%, what will be the maximum impact on money supply today as a result of your action?

Money supply will decrease by $4,500.

If the Fed increases the discount rate, which of the following accurately describes the sequence of events that will follow in the banking system, finally leading to a decline in the money supply?

Reserves ?5?; Excess reserves ?5?; Loans ?5?; Deposits ?5?; Money supply ?5?

If a bank increases the amount of cash it has in its vault, how would this affect the bank's balance sheet?

Reserves would increase, liabilities would stay the same, and owner's equity would increase.

If a local bank decides to convert some of its U.S. Treasury securities into cash, which it will hold in its vault, what impact will this have on the bank's balance sheet?

Reserves would increase, liabilities would stay the same, and owner's equity would increase.

I am about to leave on a trip and I have used cash to buy traveler's checks. Which of the following changes have occurred?

There have been no changes to M1 or M2.

Which of the following would NOT increase the supply of money in a fiat money economy?

There is a discovery of gold.

Dave Macy decides to sell his gold jewelry and deposits the cash at his local bank. How would this be recorded on the bank's balance sheet?

There will be no change to the money supply.

You go to Starbucks and see the price of a tall latte is quoted as $3.00. You buy the latte and pay with $3.00 cash. In the first instance money serves as ___________ while in the second instance money serves as ___________.

a unit of account; a medium of exchange

Which tool of monetary policy could the Federal Reserve use if it wanted to increase the money supply?

all of these

The total demand for money curve will shift to the right when there is ________________________ in nominal GDP. (Remember, nominal GDP will change as a result of a change in output or price level)

an increase

How is owner's equity calculated?

assets - liabilities

Which of the following diagrams represents the change in nominal interest rates that result from an increase in the price level?

c

Suppose the Federal Reserve engages in open-market operations. It sells $20 billion in U.S. securities. It also raises the reserve ratio. This causes excess reserves to _______, the money supply to ________, and the money multiplier to ________.

decrease; decrease; decrease

The value of money:

decreases when the price level increases.

When an economy experiences inflation, the value of money:

decreases.

A bank can make loans when:

excess reserves are greater than zero.

One way to increase a bank's amount of required reserves is to:

increase deposits.

To decrease the money supply, the Federal Reserve could do which of the following?

increase the discount rate

The asset demand for money varies ____________________ with the interest rate.

inversely

The transaction demand for money is most closely associated with money serving as a

medium of exchange

The Federal Reserve uses __________ today to actively manage monetary policy. The Federal Reserve has not used __________ to actively manage monetary policy since 1992.

open-market operations; reserve requirements

A bank's balance sheet will indicate that institution's ability to manage which of the following two conflicting objectives?

profitability and liquidity

Open market operations include _____________ while quantitative easing includes _____________ by the Fed.

purchases of U.S. Treasury securities; purchase of mortgage-backed securities.

The amount of credit, from credit cards, available to consumers in 2012 was $1,057 billion. This would cause the M1 money supply to ____ and the M2 money supply to ______.

remain unchanged; remain unchanged

Using Graph C, suppose the FED increases the money supply by buying government securities (bonds). The money supply curve will shift ______________, the interest rate will _____________, and the quantity demanded of money will _________________.

right, decrease, increase

If the FED increased the money supply, the MS curve would shift to the ______________ and the interest rate would __________________.

right, fall

The asset demand for money is most closely associated with money serving as a

store of value

One reason why banks are required to deposit a minimum amount of reserves at the Federal Reserve is so that:

the Federal Reserve can control the ability of banks to lend money to others

One reason why banks are required to deposit a minimum amount of reserves at the Federal Reserve is so that:

the Federal Reserve can control the ability of banks to lend money to others.

In reality, individuals do not deposit all of their cash into the banking system. Consequently:

the simple money deposit multiplier is smaller.

When can a bank make loans?

when the bank has reserves greater than the amount of required reserves

The sale of existing U.S. Treasury securities by the Federal Reserve:

will decrease the money supply.

The purchase of existing U.S. Treasury securities by the Federal Reserve:

will increase the money supply.