2022.11.1 EC112 Ch16

A bank which must hold 100 percent reserves opens in an economy that had no banks and a total initial money supply (currency) of $1,000. If customers deposit $87 into the bank, what is the value of the money supply?

$1,000

If the reserve ratio is 5 percent, then $500 of new reserves can generate

$10,000 of new money in the economy.

The manager of the bank where you work tells you that the bank has $500 million in deposits and $350 million dollars in loans. If the reserve requirement is 5 percent, how much is the bank holding in excess reserves?

$125 million

A bank's reserve ratio is 20 percent and the bank has $1,000 in deposits. Its reserves amount to

$200.

Refer to the Table. What is the M2 money supply?

$440 billion

Under what reserve ratio is a bank unable to create money?

100%

If the reserve ratio is 20 percent, the money multiplier is

5.

Which of the following is not an example of currency?

A $1,000 balance stored in a checking account

The banking system currently has $200 billion of reserves, none of which are excess. People hold only deposits and no currency, and the reserve requirement is 20 percent. If the Fed lowers the reserve requirement to 10 percent and at the same time buys $20 billion worth of bonds, then by how much does the money supply change?

Feedback: Incorrect. Under these assumptions, if the banking system holds $200 billion in reserves, then a reserve requirement of 20 percent implies that the banking system has had $1,000 billion in deposits. If the fed lowers the reserve requirement to 10 percent, then banking system is only required to hold 0.1 X $1,000 billion = $100 billion in deposits, and can thus lend out the remaining $100 billion of the original $200 billion. Meanwhile, if the Fed buys $20 billion worth of bonds, this will result in another $20 billion in new money. The money multiplier is 1/0.1 = 10. This means the money supply will increase by 10 X ($100 billion + $20 billion) = $1,200 billion. 다시볼것

Which type of money has no intrinsic value?

Fiat money

Under what system do banks generally lend out the majority of the funds deposited?

Fractional reserve banking

Which of the following is not true regarding the Federal Reserve?

The Fed was created to facilitate the federal government's collection of taxes as well as its expenditures.

Which of the following is not correct about the Fed?

The Federal Reserve Chair is appointed by the speaker of the house to a four-year term.

Which of the following best defines liquidity?

The ease with which an asset is converted to the medium of exchange.

Which of the following scenarios does not involve the use of commodity money?

The government of the fictional country of Owana orders the use of paper dollars as money.

Which of the following most closely fits an economist's definition of "money"?

The set of assets in an economy that people regularly use to buy goods and services

When the Fed purchases government bonds the money supply increases and the federal funds rate decreases.

True

Which scenario is the best example of the unit of account function of money?

You have a yard sale, and you put a price tag of $50 on your old television and $10 for your old pots.

A store of value is

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

Jerome Powell was

appointed Chair of the Board of Governors in 2017 by President Donald Trump.

The members of the Federal Reserve's Board of Governors

are appointed by the president of the U.S. and confirmed by the U.S. Senate.

Stocks and bonds

are examples of stores of value, but not units of account nor medium of exchange.

First Bank of Zogua, a fictional bank, has made a $1 million loan. This loan appears on what part of T-account of the First Bank of Zogua?

assets.

All else equal, which of the following will cause the money supply to fall?

banks decide to hold more excess reserves relative to deposits.

Banks can borrow money from the Fed's discount window. Alternatively banks can

borrow money from the Fed's Term Auction Facility.

If the money multiplier is 5 and the Fed wants to increase the money supply by $100,000, it could

buy $20,000 worth of bonds.

In order to ensure banks can pay back depositors, Bank regulators impose

capital requirements.

The Fed conducts open market operations that cause bank withdrawals and lending to decrease. The Fed has

conducted open market sales.

When it buys government bonds to increase the money supply, the Fed is

conducting an open-market purchase.

When it sells government bonds to decrease the money supply, the Fed is

conducting an open-market sale.

Suppose that in a country people lose confidence in the banking system and so hold relatively more currency and less deposits. As a result, bank reserves will

decrease and the money supply will eventually decrease.

As the reserve ratio increases, the money multiplier

decreases.

Funds in an account where you can access by writing a check or through your debit card are best described as

demand deposits.

One of the key differences between a fractional-reserve banking system and a 100-percent-reserve banking system is that

in a fractional reserve banking system, banks only keep a fraction of deposits as reserve, while banks in a 100-percent-reserve banking system keep all deposits as reserves.

Refer to the Table. The required reserve ratio is 10 percent and First National Bank sells $200 of its short-term securities to the Federal Reserve. This action will initially

increase First National's reserves by $200. Its excess reserves are $1,200.

Suppose the Fed purchases $50,000 worth of government bonds from the public. You know that eventually the money supply will

increase by more than $50,000.

First Bank of Zogua, a fictional bank, has just received a $100 deposit from an individual. This deposit appears on what part of T-account of the First Bank of Zogua?

liabilities.

The Fed has decreased the money supply through open market operations. Which of the following has occurred?

open market sales, and bank reserves decrease.

When the Fed sells U.S. government bonds, it has conducted

open market sales, which decrease the money supply.

The New York Federal Reserve Bank

president always gets to vote at the FOMC meetings.

In response to the credit crunch in 2008 and 2009, the U.S. Treasury ____

put public funds into the banking system to increase the amount of bank capital.

The amount of reserves banks must hold against deposits is known as

reserve requirement.

One reason that the Fed's control of the money supply is not precise is because ____

the Fed does not control the amount that banks choose to lend.

The rate charged at the Fed's "discount window" is known as the

the discount rate.

Bank assets divided by bank capital is known as

the leverage ratio

Suppose the money multiplier has increased. Which of the following is the most likely cause?

the reserve ratio decreases.

If 1/R is the money multiplier in an economy, what must R represent?

the reserve ratio for all banks in the economy

If a bank has just enough reserves to meet the required reserve ratio of 25 percent, and receives a deposit of $800, it has initially experienced a

$600 increase in excess reserves and a $200 increase in required reserves.

If the reserve ratio is 20 percent, then $150 of new reserves can generate

$750 of new money in the economy.

Suppose the banking system currently has $100 billion in reserves, the reserve requirement is 10 percent, and excess reserves amount to $5 billion. What is the level of deposits?

$950 billion Since $5 billion, of the $100 billion of reserves, are excess reserves, the required reserves are only $95 billion. $95 billion * (1/10% required reserves) = $950 billion in deposits. In other words, if $950 billion are deposited, a 10% reserve requirement requires the bank to keep at least $95 billion. If they hold an extra $5 billion, reserves will equal $100 billion.

Suppose a bank has total assets of $1,000, capital of $50, and liabilities of $950; the leverage ratio for this bank is ____. a.20

20 = $1,000/$50 or 20.

If $200 of new reserves generates $1,000 of new money in the economy, then the reserve ratio is

20 percent.

Refer to the Table. This bank's leverage ratio is

24. The leverage ratio of a bank is the ratio of its assets to bank capital. In this case, bank capital is $500 and assets amount to $12,000. Therefore, the leverage ratio is $12,000/$500 = 24.

The manager of the bank where you work tells you that your bank has $10 million in excess reserves. She also tells you that the bank has $200 million in deposits and $165 million in loans. Given this information you find that the reserve requirement must be

25/200. Feedback: Incorrect. If a bank has $200 million in deposits, and has loaned out $165 million of those deposits, then it has kept $200 million -$165 million = $35 million as reserves. Of those $35 million in reserves, $10 million are excess reserves. This means that the bank was only required to keep $35 million -$10 million = $25 million in reserves. This means that of $200 million deposited, the bank is only required to keep $25 million in reserves. This equates to a 25/200, or 12.5%

Which of the following does the Federal Reserve do?

Act as a lender of last resort to banks

Which of the following is not true in a system of 100-percent-reserve banking?

Banks influence the supply of money.

Which of the following are used to defer payments and are therefore not money?

Credit cards

Which of the following lists accurately describes M1?

Demand deposits, traveler's checks, other checkable deposits and currency

Ashley owns a home worth $500,000 and owes $100,000 in student loans. If you asked an economist, she would say Ashley has $400,000 worth of money.

False

The Fed most often influences the money supply by changing reserve requirements for banks.

False

The Federal Open Market Committee (FOMC) is responsible for carrying out the Fed's tasks of regulating banks and ensuring the health of the financial system.

False

The agency responsible for regulating the money supply in the United States is U.S. Treasury.

False

When the Fed sells government bonds the money supply increases and the federal funds rate decreases.

False

Given the following information, what are the values of M1 and M2?

M1 : Demand deposits and other checkable deposits + Traveler's checks + Currency M2 : M1 + Savings deposits + Small time deposits + Money Market Mutual Funds + Miscellaneous Categories in M2

You purchase a beer at a bar using cash. The fact that the bar accepts your cash for the beer beUt illustrates which function of money?

Medium of exchange

Which of the following assets is most liquid?

Money

Which of the following is not included in M1?

Money market mutual funds

Which of the following best defines commodity money?

Money that takes the form of a commodity with intrinsic value

Suppose the money multiplier is equal to 1 in the economy of the fictional country of Opria. What does this indicate about the type of banking system in Opria?

Opria uses a 100-percent reserve system and banks do not create money.

If R represents the reserve ratio for all banks in the economy, then the money multiplier must be equal to 1 divided by what?

R

Suppose the Fed wishes to decrease the money supply, which of the following open market operations will the Fed conduct to accomplish this goal?

Sells bonds to the public.

Which of the following best describes what occurs under the Fed's Term Auction Facility?

The Fed auctions a set amount of funds, and the bank that offers to pay the highest rate for the funds will get to borrow from the Fed.

Which of the following will make banks want to hold more reserves at the Fed, causing the money multiplier to decrease?

The Fed increases the interest rate on bank deposits held at the Fed.

Refer to the Table. The required reserve ratio is 10 percent. Which of the following is true?

This banks reserve ratio is 20 percent. Its excess reserves are $1,000. The required reserve ratio is 10 percent, which means that of the $10,000 in deposits the bank is only required to hold $1,000 in reserves. Since it is now holding $2,000 in reserves the bank's excess reserves amount to $1,000 and its reserves ratio is $2,000/$10,000 = 20 percent.

Raymond works as a valuation expert. His job is to look at companies, assess how much their assets and liabilities are worth, and place a dollar valuation on the company that other companies must pay in an acquisition. Raymond's company valuations are an example of the unit of account function of money.

True

Which of the following best illustrates the concept of a store of value?

You purchase a home in anticipation of selling it in 2 years when the real estate market "heats up."

As a result of sizable losses in 2008 and 2009, banks experienced a shortage of capital, which induced them to ____

decrease lending because they had to meet capital requirements.

To increase the money supply the Fed can conduct open-market purchases. Alternatively, the Fed can

decrease the discount rate.

In a 100-percent-reserve banking system, if an individual deposits money in their checking account, currency would

decrease, but demand deposits would increase by the same amount and M1 would not change.

The Fed changes the discount rate and, as a direct result, reserves have increased. The Fed has most likely

decreased the discount rate.

Assume banks hold no excess reserves. If the Fed increases the reserve ratio from 5 percent to 10 percent, then the money multiplier

decreases from 20 to 10.

In a system of fractional-reserve banking, the amount of money in the economy depends on the behavior of ____

depositors and bankers, which prevents the Fed from perfectly controlling the money supply.

Central banks are institutions

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

The money supply increases if

households decide to hold relatively less currency and relatively more deposits and banks decide to hold relatively less excess reserves and make more loans.

One reason that the Fed's control of the money supply is not precise is because ____

households' decisions, which are out of the Fed's control, impact the money supply.

If the reserve ratio is 10 percent, banks do not hold excess reserves, and people do not hold currency, then when the Fed purchases $50 million worth of government bonds, bank reserves

increase by $50 million and the money supply eventually increases by $500 million.

To decrease the money supply the Fed can conduct open-market sales. Alternatively, the Fed can

increase the discount rate.

In a 100-percent-reserve banking system, if an individual withdraws money from their checking account, currency would

increase, but demand deposits would decrease by the same amount and M1 would not change.

The Fed changes the discount rate and, as a direct result, reserves have decreased. The Fed has most likely

increased the discount rate.

Assume banks hold no excess reserves. If the Fed decreases the reserve ratio from 20 percent to 10 percent, then the money multiplier

increases from 5 to 10.

The two primary tasks of the Federal Reserve are

monetary policy and bank regulation.

Which of the following decrease when the Fed makes open market purchases?

neither currency nor reserves

When the Fed buys U.S. government bonds, it has conducted

open market purchases, which increase the money supply.

The interest rate at which banks lend reserves to each other overnight is known as

the federal funds rate.

Suppose a bank is operating with a leverage rate of 20. A 4 percent increase in the value of assets

will result in an 80 percent increase in owner's equity.