Macro final
reserve ratio
the fraction of bank deposits that a bank holds as reserves
commercial banks
accepts deposits and its covered by deposit insurance
How banks create money
1) fraction of deposit held in reserves 2) Remainder can be loaned (excess reserves) 3) Quantity of money increases with a multiplier effect
If the reserve ratio is 25%, and the money supply increases by $100,000. The initial reserve injection by Federal Reserve was: 1. $25,000. 2. $10,000. 3. $2500. 4. $4000.
1. $25,000. (100,00 x .25)
Table: assets: reserves = $20,000, loans = ______ liabilities: deposits = ______ If the reserve ratio is 25%, deposits are: 1. $80,000. 2. $60,000. 3. $5,000. 4. $15,000.
1. $80,000. (20,000 / .25)
The discount rate is the interest rate that the Fed charges on loans to banks. 1. True 2. False
1. True
Which of the following financial assets belongs to M2, but not to M1? 1. a savings account 2. currency 3. a checkable deposit 4. travelers' checks
1. a savings account
Which of the following is part of M1? 1. checking account balances 2.shares of corporate stock 3. currency in a bank's vault 4. short-term certificates of deposit (CDs)
1. checking account balances
Which of the following combination of assets are considered to be money? 1. currency in circulation, checkable bank deposits, and travelers' checks 2. currency in circulation and in bank vaults, checkable bank deposits, and travelers' checks 3. currency in circulation, checkable bank deposits, and credit cards 4. currency in circulation and in bank vaults, checkable bank deposits, and credit cards
1. currency in circulation, checkable bank deposits, and travelers' checks
If the Fed conducts a $10 million open-market sale and the reserve requirement is 20%, the monetary base will: 1. decrease by $10 million. 2. decrease by $50 million. 3. increase by $8 million. 4. increase by $10 million
1. decrease by $10 million.
If the required reserve ratio is 10%, and a depositor withdraws $500 from her checkable deposit, the money supply will ______ if the banking system does NOT hold any excess reserves. 1. decrease by $4,500 2. be unchanged 3. decrease by $500 4. decrease by $5,000
1. decrease by $4,500 (rr=required reserve= RR/D=0.1 or 10% according to the question. So, the bank had to keep $50 in their required reserves. The rest $450 (500-50) was ready to be loaned out. And the banking system could create 10 times more money out of this $450)
Improvements in information technology have: 1. decreased the demand for money. 2. increased the demand for money. 3. not affected the demand for money 4. shifted the demand for cash to the right.
1. decreased the demand for money.
advantages to fiat money
1. doesn't take up real resources beyond the paper it is printed on 2. the supple of money can be adjusted based on the needs of the economy, not what is found
Currency in the United States today is _______ money. 1. fiat 2. commodity-backed 3. commodity 4. intrinsic
1. fiat
Banks create money when they: 1. make loans. 2. hold excess reserves. 3. pay withdrawals to depositors. 4. take deposits.
1. make loans.
A bank run occurs when: 1. many bank depositors are trying to withdraw their funds from the bank. 2. too many people are trying to borrow more at one time. 3. interest rates start to increase. 4. interest rates are higher than inflation rates.
1. many bank depositors are trying to withdraw their funds from the bank.
3 roles of money
1. medium of exchange 2. store of value 3. unit of account
how banks affect money supply
1. reduce money supply by removing some currency from circulation 2. increase money supply by making loans, the total value of which is much larger than their reserves
assets: loans= $900,000 ; reserves = $100,000 liabilities: deposits = $1,000,000 Suppose that the reserve ratio is 10% when the Fed buys $11,000 of U.S. Treasury bills from the banking system. If the banking system does NOT want to hold any excess reserves, _______ will be added to the money supply. 1. $250,000 2. $110,000 3. $666,667 4. $1,000,000
2. $110,000 (1/rr=1/0.1=10 = 11,000 dollars into the economy, 10 times more will be the money supply)
If a bank gets a new deposit of $100 cash and it has a 20% required reserve ratio, then the total amount deposits created by the banking system as a whole can increase by is (assume no one keeps cash in this economy and all the cash is deposited in banks): 1. $1,000. 2. $500. 3. $80. 4. $20.
2. $500. (Initial deposit * (1/rr)= 100*(1/0.2)= $500)
The largest monetary aggregate is: the total volume of stocks and bonds, because they store most of the national wealth. 1. M1, because it contains all the currency in circulation. 2. M2, because it contains all bank deposits and other deposits and deposit-like assets. 3. the reserves in the vaults of Federal Reserve banks, because they are the money multiplier.
2. M2, because it contains all bank deposits and other deposits and deposit-like assets.
Scenario: Money Creation The reserve requirement is 20%, and Leroy deposits his $1,000 check received as a graduation gift in his checking account. The bank does NOT want to hold excess reserves. Which of the following is an accurate description of the bank's balance sheet immediately after the deposit? 1. Reserves decrease by $1,000, and demand deposits decrease by $1,000. 2. Reserves increase by $1,000, and demand deposits increase by $1,000. 3. Reserves decrease by $200, and demand deposits increase by $1,000. 4. Reserves increase by $1,000, and demand deposits decrease by $1,000.
2. Reserves increase by $1,000, and demand deposits increase by $1,000.
An example of a double coincidence of wants is: 1. an electronics store owner who wants car repairs finding a car mechanic who wants money. 2. a car mechanic who wants a TV finding an owner of an electronics store who wants a car repaired. 3. a car dealer who wants a new employee finding a car mechanic who wants money. 4. a car dealer who wants a TV finding an electronics store owner who wants money.
2. a car mechanic who wants a TV finding an owner of an electronics store who wants a car repaired.
Suppose you transfer $500 from your checking account to your savings account. With this transaction, M1 _____ and M2_____. 1. decreased; increased 2. decreased; stayed the same 3. increased; stayed the same 4. stayed the same; increased
2. decreased; stayed the same
If the Federal Reserve wants to increase the monetary base, the Fed might: 1. increase the reserve ratio. 2. engage in an open market purchase of Treasury bills. 3. increase the discount rate. 4. decrease personal income taxes.
2. engage in an open market purchase of Treasury bills.
When the short-term interest rate _____, the opportunity cost of holding money _____, and the quantity of money individuals want to hold _____. 1. rises; falls; rises 2. falls; falls; rises 3. falls; falls; falls 4. rises; falls; falls
2. falls; falls; rises
If the required reserve ratio is 25% and a customer deposits $300 into her checkable deposit, the money supply will ______ if the banking system does NOT hold any excess reserves. 1. increase by $300 2. increase by $1,200 3. be unchanged 4. increase by $900
2. increase by $1,200 (If rr=0.25 then the money multiplier is 1/0.25=4. So, with a deposit of $300, 1200 dollars will be created.)
To _______ the money supply, the Fed could ________. 1. decrease; lower the discount rate 2. increase; lower the reserve requirements 3. decrease; conduct open-market purchases 4. increase; raise the federal funds rate
2. increase; lower the reserve requirements
Monetary base is: 1. the sum of checkable bank deposits and bank reserves. 2. the sum of reserves held by the banks and currency in circulation. 3. the sum of checkable bank deposits and currency in circulation. 4. the sum of savings deposits and currency in circulation.
2. the sum of reserves held by the banks and currency in circulation.
Scenario: First National Bank First National Bank has $80 million in checkable deposits, $15 million in deposits with the Federal Reserve, $5 million cash in the bank vault and $5 million in government bonds. Consider the information for First National Bank. If the minimum reserve ratio is 20%, how much is the bank required to keep in reserves? 1. $25 million 2. $20 million 3. $16 million 4. $10 million
3. $16 million (The sum of $15m and $5m represents the total amount of reserves this bank is keeping (sum of required and excess if any). So $20 m total is in reserves. R= $20 & Checkable deposits=D=$80 if rr=20%, then the banks keeps 20% of its deposits: 20%* $80m=$16 m)
Scenario: Money Creation The reserve requirement is 20%, and Leroy deposits his $1,000 check received as a graduation gift in his checking account. The bank does NOT want to hold excess reserves. How much of the deposit is the bank required to keep in reserves? 1. $1,000 2. $800 3. $200 4. $100
3. $200
Scenario: Money Creation The reserve requirement is 20%, and Leroy deposits his $1,000 check received as a graduation gift in his checking account. The bank does NOT want to hold excess reserves. How much can the bank loan based on the $1,000 deposit? 1. $1,000 2. $0 3. $800 4. $200
3. $800
Suppose a bank has excess reserves of $800 and the reserve ratio is 30%. If Andy deposits $1,000 of cash into his checking account and the bank lends $600 to Molly, that bank can lend an additional: 1. $300. 2. $800. 3. $900. 4. $100.
3. $900. (The bank has to keep $300 (30% of $1,000), but it can lend out the rest of $700. They already did lend $600, so another $100 plus whatever they have in excess reserves is left to be lent out= $900)
If a bank has deposits of $100,000, loans of $75,000, cash on hand of $10,000, and $15,000 on deposit at the Federal Reserve, then its reserve ratio is: 1. 5%. 2. 12.5%. 3. 25%. 4. 10%.
3. 25%. (The Reserve ratio is the ratio of reserves to deposits (R/D). Here the bank has 100,000 deposits so the denominator D is 100,000 dollars and the nominator (R) is the sum of cash on hand and what the Bank has at the Fed (10k+15k=25k). So the answer is (25k/100k)*100=25%.)
If you transfer $1,000 from your savings account to your checking account: 1. M1 and M2 don't change. 2. M1 decreases by $1,000, and M2 increases by $1,000. 3. M1 increases by $1,000, but M2 doesn't change. 4. M1 increases by $1,000, and M2 decreases by $1,000.
3. M1 increases by $1,000, but M2 doesn't change.
A decrease in the demand for money would result from: 1. an increase in nominal GDP. 2. an increase in the price level. 3. a decrease in real GDP. 4. an increase in income
3. a decrease in real GDP.
Commodity money is: 1. whatever the government has decreed is money. 2. money used for commodity futures trading. 3. a good used as a medium of exchange that has other uses. 4. whatever people accept as money.
3. a good used as a medium of exchange that has other uses.
Which of the following is a "near-money"? 1. a debit card 2. a credit card 3. a savings account 4. a traveler's check
3. a savings account (You cannot shop with the funds in your saving account, but you can easily transfer between your saving and checking and then shop!)
A reserve ratio is the: 1. proportion of cash and security reserves the bank needs to hold. 2. loan to deposit ratio in the bank's balance sheet. 3. fraction of deposits that the bank is required to hold. 4. money belonging to the bank's largest depositors
3. fraction of deposits that the bank is required to hold.
If a bank has deposits of $100,000, cash on hand of $10,000 and $15,000 on deposit at the Federal Reserve, and the required reserve ratio is 0.20, then the bank: 1. has no excess reserves. 2. has insufficient reserves to meet requirements. 3. has excess reserves of $5,000. 4. has an insufficient deposit to loan ratio.
3. has excess reserves of $5,000. (The bank is actually keeping 25,000 in reserves (The bank is actually keeping 25,000 in reserves (sum of 10k and 15k). So the bank is keeping 5,000 beyond what is required of them.)
If the Federal Reserve buys $250 million worth of U.S. Treasury bills in the open market, and the reserve ratio is 10%, then the money supply will: 1. increase by only $25 million. 2. remain unchanged. 3. potentially increase by $2,500 million. 4. increase by only $250 million.
3. potentially increase by $2,500 million.
Bank reserves are: 1. gold kept in the bank's vault. 2. the deposits lent to finance illiquid investments. 3. the fraction of deposits kept in the form of very liquid assets. 4. the fraction of deposits kept in gold with the Federal Reserve
3. the fraction of deposits kept in the form of very liquid assets.
Banks can lend money because: 1. they have so much to lend. 2. they know how much cash they have in their vault. 3. they know not everyone wants their deposits back at the same time. 4. there is a high demand for loans.
3. they know not everyone wants their deposits back at the same time.
Which of the following is an asset that most people would consider money? 1. your house 2. your shares of stock in a company 3. your checking account balance 4. your car
3. your checking account balance
Suppose the reserve ratio is 20%. If Sam deposits $500 into his checking account, his bank can increase loans by: 1. $500. 2. $2,500. 3. $100. 4. $400.
4. $400. (take deposit (500) x rr (.20) THEN subtract from deposit)
The Federal Reserve System is the _______ for the United States. 1. government-owned bank 2. U.S. Treasury Bank 3. bank described in B and C 4. central bank
4. central bank
The fact that a larger number of stores in the United States have found it economical to accept credit cards has: 1. increased the demand for credit card transactions but has had no impact on the demand for money. 2. increased the demand for money. 3. decreased the demand for credit card transactions but has had no impact on the demand for money. 4. decreased the demand for money.
4. decreased the demand for money.
If Congress places a $5 tax on each ATM transaction, the real demand for money will likely: 1. be unaffected. 2. decrease initially, and then decrease. 3. decrease. 4. increase.
4. increase.
Among the factors that could cause money demand to shift are all of the following EXCEPT: 1. technology of transactions. 2. institutional constraints in the banking system. 3. real aggregate spending. 4. interest rates.
4. interest rates.
The slope of the demand curve for money is: 1. positive. 2. vertical. 3. horizontal. 4. negative
4. negative
An increase in the demand for money, with no change in the supply of money, will lead to _______ in the equilibrium quantity of money and _______ in the equilibrium interest rate. 1. no change; a decrease 2. an increase; a decrease 3. a decrease; an increase 4. no change; an increase
4. no change; an increase
Suppose you find a $50 bill that you put in a coat pocket last winter. If you deposit it in your checking account: 1. M2 increases by $50. 2. M1 and M2 both increase by $50. 3. M1 increases by $50. 4. there is no change in M1 or M2.
4. there is no change in M1 or M2.
certificate of deposit (CD)
a bank-issued asset in which customers deposit funds for a specified amount of time and earn a specified interest rate
excess reserves
a bank's reserves over and above its required reserves
commodity money
a good used as a medium of exchange that has intrinsic value in other uses
why the MD curve is downward sloping
a higher interest rate increases the opportunity cost of holding money, leading the public to reduce the quantity of money it demands
fiat money
a medium of exchange whose value derives entirely from its official status as a means of payment
commodity-backed money
a medium of exchange with no intrinsic value whose ultimate value is guaranteed by a promise that it can be converted into valuable goods
bank run
a phenomenon in which many of a bank's depositors try to withdraw their funds due to fears of a bank failure
open-market operation
a purchase or sale of government debt by the Fed
Taylor rule for monetary policy
a rule that sets the federal finds rate according to the level of the inflation rate and either the output gap or the unemployment rate
U.S treasury bill
a short-term bond with a maturity of less than one year issued by the U.S government
T-account
a tool for analyzing a business's financial position by showing, in a single table, the business's assets & abilities
federal funds market
allows banks that fall short of the reserve requirement to borrow funds from banks with excess reserves
discount window
an arrangement in which the federal reserve stands ready to lend money to banks in trouble
medium of exchange
an asset that individuals acquire for the purpose of trading goods and services rather than for their own consumption
central bank
an institution that oversees and regulates the banking system and controls the monetary base
monetary aggregates
an overall measure of the money supply
savings and loans (S&Ls or thrift)
another type of deposit-taking bank, usually specialized in issuing home loans
What is money? or what does it do?
any asset that can easily be used to purchase goods and services
checkable bank deposits
are bank accounts that can be accessed using checks, debit cards & digital payments (considered money)
near-moneys
are financial assets that can't be directly used as a medium of exchange but can be readily converted into cash or checkable bank deposits
shadow banking
bank-like activities undertaken by non-depository financial firms but without regulatory oversight or protection
store of value
means of holding purchasing power over time
unit of account
measure used to set prices and make economic calculations
deposit insurance
guarantees that a bank's depositors sill be paid even if the bank can't come up with the funds, up to a maximum amount per account
zero lower bound for interest rates
interest rates cannot fall much below zero without causing significant problems
long-term interest rates
interest rates on financial assets that mature a number of years in the future
currency in circulation
is cash held by the public (considered money)
contractionary monetary policy
monetary policy that decreases aggregate demand
expansionary monetary policy
monetary policy that increases aggregate demand
bank failure
occurs when a bank has insufficient funds to satisfy the withdrawals demanded by its depositors
inflation targeting
occurs when the central bank sets an explicit target for the inflation rate and sets monetary policy to hit that target
rightward shift of the MD
raising the quantity of money demanded at any given interest rate
leftward shift of the MD curve
reducing the quantity of money demanded at any given interest rate
reserve requirements
rules set by the federal reserve that determine the minimum reserve ratio for banks
money supply curve
shows how the quantity of money supplied varies with the interest rate
money demand curve
shows the relationship between the interest rate and the quantity of money demanded
bank reserves
the currency that banks hold in their vaults plus their deposits at the federal reserve (not part of currency in circulation)
bank's capital
the excess of its assets over its bank deposits
target federal funds rate
the federal reserve's desired federal funds rate
the opportunity cost of holding money
the higher the short-term interest rate, the higher the opportunity cost of holding money; the lower the short-term interest rate, the lower the opportunity cost of holding money
federal funds rate
the interest rate at which finds are borrowed and lent in the federal funds market
liquidity preference model of the interest rate
the interest rate is determined by the supply and demand for money
short-term interest rates
the interest rates on financial assets that mature within less than a year
discount rate
the rate of interest the Fed charges on loans to banks
money multiplier
the ratio of the money supply to the monetary base
monetary base
the sum of currency in circulation and bank reserves
money supply
the total value of financial assets in the economy that are considered money
investment banks
trades in financial assets and does not accept deposits, so it is not covered by deposit insurance
