Chap 13-14
Which of the following will decrease the supply of money?
Increasing reserve requirements
The most basic measure of money in the United States is called
M1 and is the sum of currency in the hands of the public, demand deposits, other checkable deposits, and traveler's checks.
If the reserve ratio is 0.05 and a deposit of $1000 is placed into a bank, that bank can lend out $950. (Enter your response rounded to two decimal places.)
Multiply 0.05*1000 THEN substract 1000-50= 950
Banks trade reserves with one another in the:
federal funds market
Banks create money by
making loans which increases deposits because the required reserve ratio is a fraction of deposits.
The Federal Open Market Committee (FOMC) votes on:
monetary policy
Lower U.S. interest rates brought on by the Fed will cause the exchange rate to
fall, decreasing the value of a dollar (which is called depreciation).
The Federal Reserve targets
short-term interest rates, such as the rate in the market at which banks trade reserves overnight, the federal funds rate.
Identify the term described by each definition. 1) The portion of banks' deposits set aside in either vault cash or as deposits at the Federal Reserve. 2) The sources of funds for a bank, including deposits and owners' equity 3) Any additional reserves that a bank holds above required reserves. 4) The funds provided to a bank by its owners. 5) An account statement for a bank that shows the sources of its funds (liabilities) as well as the uses of its funds (assets). 6) The amount of their deposits that banks are required by law to hold as reserves. 7) The uses of the funds of a bank, including loans and reserves.
1. Reserves 2.Liabilities 3.Excess Reserves 4.Owner's Equity 5.Balance Sheet 6.Required Reserves 7.Assets
If the required reserve ratio is 0.25, and there is a cash withdrawal of $1,000, there would be a total decrease in checking account balances of $4000 throughout all of the banks. (Enter your response as a whole number.)
1000/0.25=4000
Interest rates typically fall in booms because the demand for money decreases when real income rises
False
Side Effects of Supporting a Currency. Suppose United States' currency came under attack by speculators and to prevent the value of its currency from falling, the central bank needed to raise interest rates. What would be the side effect of such a policy?
Net exports will fall.
Consider the market for money. Suppose there is an increase in consumer demand. Based on this, which of the following statements is true? With this shift in demand, interest rates will
The money demand curve will shift to the right. Increase
Consider the market for money. Suppose there is an increase in consumer demand. Based on this, which of the following statements is true? With this shift in consumer demand, interest rates will....and investment spending will....
The money demand curve will shift to the right. increase; decrease
Which principle suggests that the demand for money should increase as prices increase?
The real-nominal principle
Bitcoins as Store of Value. Bitcoins are a new form of electronic, privately issued money that can potentially preserve the anonymity of transactions. In recent years, the prices of a single Bitcoin has varied between $400 and $19,000. From the point of view of money as a store of value, Bitcoins are
a poor store of value because their prices fluctuate too much.
Required Reserves During the Great Depression. During the Great Depression, banks held excess reserves because they were concerned that depositors might be more inclined to withdraw funds from their accounts. At one point, the Fed became concerned about the "excess" reserves and raised the reserve requirements for banks. a. Assuming that banks were holding excess reserves for precautionary purposes, would they continue to hold excess reserves even after reserve requirements were raised? b. After the Fed raised the reserve requirement, the money supply would
a. Yes b. decrease
Gift Cards. Gifts cards have grown in popularity as a mechanisms to give gifts. Cards are available for popular book stores and for coffee shops. Gift cards..... Traveler's checks are sold by....
are not considered part of the money supply since they have a fixed value paid for in advance. banks and non-banks and can be used for purchases in any enterprise.
If the Fed set an interest rate on reserves close to the market interest rate on commercial loans,
banks would have little incentive to make loans.
If the Federal Reserve wishes to increase the money supply to stimulate the economy, it
buys government bonds from the private sector in open market purchases.
The three functions of money do not include money as a
collectible
To decrease the level of output in the short run, the Fed should
conduct an open market sale
Auditing the Fed? In recent years, several members of Congress have sponsored bills that would subject the Fed to audits of its monetary policy. This is a form of intensive Congressional oversight. What are the pros and cons of more Congressional oversight of the Fed? Increased oversight can
create pressure to help finance a country's government deficit by creating money.
Inflation and Currency Held Abroad. Suppose inflation in the United States rose to around 7 percent a year; this would decrease the demand for U.S. currency by foreigners.
decrease
Money demand will ________ as the price level falls
decrease
The Treasury Secretary and the Fed. Occasionally, some economists or politicians suggest that the Secretary of the Treasury become a member of the Federal Open Market Committee. This would most likely decrease the independence of the Federal Reserve.
decrease
Recessions and Interest Rates. Consider an economy with a negatively sloped money demand curve and a vertical money supply curve. Suppose the economy starts to head into a recession. If the economy starts to head into a recession, the demand for money will....,shifting the money demand curve to the ... As a result. interest rates will ... When interest rates decrease, we know that the price of bonds will....
decrease; left; decrease; increase
The introduction of debit cards most likely decreased the amount of currency in the economy.
decreased
Open market purchases lead to rising bond prices, which cause interest rates to
decreases
Banks borrow from the Fed at the:
discount rate
In a financial crisis like those that occurred in 2001 and 2008, the Fed can
help stabilize the economy by adjusting its policies and relationships with banks.
An open market purchase will increase the supply of money, which will cause the interest rate to decrease, which will increase investment, which results in an increase in output.
increase ;decrease ;increase ;an increase
The types of lags in policy are
inside lags (the time it takes for policymakers to recognize and implement policy changes) and outside lags (the time it takes for policy to actually work).
Cash Withdrawals and Changes in the Money Supply. If a customer withdrew $1,000 in cash from a bank and the reserve ratio was 0.8, by how much could the supply of money eventually be reduced? $1250 (round your answer to the nearest penny).
money multiplier= 1/reserve ration ex. 1/0.8 = 1.25 1.25*1000= 1250
The demand for money depends negatively ... on the interest rate and ... positively... on the level of prices and real GDP
negatively positively
Which of the following is not a key function of the Federal Reserve?
printing currency
Pegging Interest Rates. Suppose the Federal Reserve wanted to fix, or peg, the level of interest rates. Assume the supply of money is a vertical line, suggesting that the quantity of money is fixed at a level largely determined by the Federal Reserve. An increase in money demand would shift the money demand curve to the... If the Fed pursued the policy of a fixed interest rate, it would need to.......the money supply to keep interest rates fixed. If the Federal Reserve pegs interest rates, it loses some of its control of the money supply....
right increase true
Rising Prices and the Money Market. Suppose the economy experiences an increase in prices. In this case, the money demand curve will shift to the.... As a result, the interest rate will...
right; increase
Decisions about the supply of money are made by
the Federal Open Market Committee which includes the seven members on the Board of Governors and the president of the New York Federal Reserve Bank.
We measure the opportunity cost of holding money with:
the interest rate
Which of the following is one way that the Fed cannot change the supply of money?
the process of printing money
Credit Cards. Credit cards are not considered part of the money supply because:
they are a loan which you have to use money to pay for later.
The Fed can supply funds to the markets in the case of a financial panic because
they are the lender of last resort.