Chapter 14 The Money Supply Process
In the simple deposit expansion model, if the required reserve ratio is 10 percent and the Fed increases reserves by $100, checkable deposits can potentially expand by
$1,000
If the required reserve ratio is 10 percent, currency in circulation is $400 billion, checkable deposits are $800 billion, and excess reserves total $0.8 billion, then the money supply is ________ billion.
$1,200
If the required reserve ratio is 10 percent, currency in circulation is $400 billion, checkable deposits are $1000 billion, and excess reserves total $1 billion, then the money supply is ________ billion.
$1,400
In the simple deposit expansion model, if the Fed extends a $100 discount loan to a bank that previously had no excess reserves, the bank can now increase its loans by
$100
In the simple deposit expansion model, if the Fed purchases $100 worth of bonds from a bank that previously had no excess reserves, the bank can now increase its loans by
$100
In the simple deposit expansion model, if the Fed extends a $100 discount loan to a bank that previously had no excess reserves, deposits in the banking system can potentially increase by
$100 times the reciprocal of the required reserve ratio
In the simple deposit expansion model, if the Fed purchases $100 worth of bonds from a bank that previously had no excess reserves, deposits in the banking system can potentially increase by
$100 times the reciprocal of the required reserve ratio
If a bank has excess reserves of $4,000 and demand deposit liabilities of $100,000, and if the reserve requirement is 15 percent, then the bank has actual reserves of
$19,000
If a bank has excess reserves of $10,000 and demand deposit liabilities of $80,000, and if the reserve requirement is 20 percent, then the bank has actual reserves of
$26,000
In the simple deposit expansion model, if the banking system has excess reserves of $75, and the required reserve ratio is 20%, the potential expansion of checkable deposits is
$375
If the required reserve ratio is 10 percent, currency in circulation is $400 billion, checkable deposits are $800 billion, and excess reserves total $0.8 billion, then the monetary base is
$480.8 billion
A bank has excess reserves of $10,000 and demand deposit liabilities of $100,000 when the required reserve ratio is 20 percent. If the reserve ratio is raised to 25 percent, the bank's excess reserves will be
$5,000
In the simple deposit expansion model, if the required reserve ratio is 20 percent and the Fed increases reserves by $100, checkable deposits can potentially expand by
$500
A bank has excess reserves of $1,000 and demand deposit liabilities of $80,000 when the reserve requirement is 20 percent. If the reserve requirement is lowered to 10 percent, the bank's excess reserves will be
$9,000
A bank has excess reserves of $4,000 and demand deposit liabilities of $100,000 when the required reserve ratio is 20 percent. If the reserve ratio is raised to 25 percent, the bank's excess reserves will be
-$1,000
A bank has no excess reserves and demand deposit liabilities of $100,000 when the required reserve ratio is 20 percent. If the reserve ratio is raised to 25 percent, the bank's excess reserves will now be
-$5,000
If the required reserve ratio is 10 percent, currency in circulation is $400 billion, checkable deposits are $800 billion, and excess reserves total $0.8 billion, then the excess reserves-checkable deposit ratio is
.001
If reserves in the banking system increase by $100, then checkable deposits will increase by $667 in the simple model of deposit creation when the required reserve ratio is
.15
If reserves in the banking system increase by $100, then checkable deposits will increase by $400 in the simple model of deposit creation when the required reserve ratio is
.25
If reserves in the banking system increase by $100, then checkable deposits will increase by $1000 in the simple model of deposit creation when the required reserve ratio is
0.10
If reserves in the banking system increase by $100, then checkable deposits will increase by $500 in the simple model of deposit creation when the required reserve ratio is
0.20
If the required reserve ratio is 10 percent, the simple deposit multiplier is
10
A simple deposit multiplier equal to one implies a required reserve ratio equal to
100 percent
If the required reserve ratio is 15 percent, currency in circulation is $400 billion, checkable deposits are $800 billion, and excess reserves total $0.8 billion, then the M1 money multiplier is
2.3
If the required reserve ratio is 10 percent, currency in circulation is $400 billion, checkable deposits are $800 billion, and excess reserves total $0.8 billion, then the M1 money multiplier is
2.5
A simple deposit multiplier equal to four implies a required reserve ratio equal to
25 percent
If the required reserve ratio is 25 percent, the simple deposit multiplier is
4
If the required reserve ratio is 20 percent, the simple deposit multiplier is
5
A simple deposit multiplier equal to two implies a required reserve ratio equal to
50 percent
If the required reserve ratio is 15 percent, the simple deposit multiplier is
6.67
The government agency that oversees the banking system and is responsible for the conduct of monetary policy in the United States is
The Federal Reserve System
U.S. Treasury deposits at the Fed are ________ for the Fed but ________ for the Treasury. Thus an increase in U.S. Treasury deposits ________ the monetary base.
a liability; an asset; decreases
Factors causing an increase in currency holdings include
an increase in illegal activity
Everything else held constant, a decrease in the currency-checkable deposit ratio will mean
an increase in money supply
Everything else held constant, a decrease in holdings of excess reserves will mean
an increase in the money supply
Everything else held constant, a decrease in the required reserve ratio on checkable deposits will mean
an increase in the money supply
Everything else held constant, an increase in the excess reserve ratio will mean ________ in the M2 money multiplier and ________ in the M2 money supply.
an increase; a decrease
Everything else held constant, an increase in the interest rate paid on checkable deposits will cause ________ in the amount of checkable deposits held relative to currency holdings and ________ in the currency ratio.
an increase; a decrease
Everything else held constant, a decrease in the currency ratio will mean ________ in the M1 money multiplier and ________ in the M2 money multiplier.
an increase; an increase
Everything else held constant, an increase in the money market fund ratio will mean ________ in the M2 money multiplier and ________ in the M2 money supply.
an increase; an increase
Everything else held constant, an increase in the time deposit ratio will mean ________ in the M2 money multiplier and ________ in the M2 money supply.
an increase; an increase
Total Reserves minus vault cash equals
bank deposits with the Fed
The factor accounting for the steepest rise in the currency ratio since 1892 is
bank panics
When a member of the nonbank public withdraws currency from her bank account,
bank reserves fall, but the monetary base remains unchanged
When a member of the nonbank public deposits currency into her bank account,
bank reserves rise, but the monetary base remains unchanged
The three players in the money supply process include
banks, depositors, and the central bank
The Fed does not tightly control the monetary base because it does not completely control
borrowed reserves
Part of the increase in currency holdings in the 1960s and 1970s can be attributed to
bracket creep due to inflation and progressive income taxes
The simple deposit multiplier can be expressed as the ratio of the
change in deposits divided by the change in reserves in the banking system
High-powered money minus reserves equals
currency in circulation
The monetary base minus reserves equals
currency in circulation
The monetary base consists of
currency in circulation and reserves
The monetary liabilities of the Federal Reserve include
currency in circulation and reserves
Both ___ and ___ are monetary liabilities of the Fed.
currency in circulation; reserves
An increase in the monetary base that goes into ________ is not multiplied, while an increase that goes into ________ is multiplied.
currency; deposits
If the Fed injects reserves into the banking system and they are held as excess reserves, then the money supply
does not change
Total reserves are the sum of ___ and ___.
excess reserves; required reserves
If a member of the nonbank public purchases a government bond from the Federal Reserve in exchange for currency, the monetary base will ___, but reserves will ___.
fall; remain unchanged
In the early 1930s, the currency ratio rose, as did the level of excess reserves. Money supply analysis predicts that, everything else held constant, the money supply should have
fallen
A decrease in ___ leads to an equal ___ in the monetary base in the short run.
float; decreases
An increase in ___ leads to an equal ___ in the monetary base in the short run.
float; increase
An assumption in the model of the money supply process is that the desired levels of currency and excess reserves
grow proportionally with checkable deposits
The effect of an open market purchase on reserves differs depending on how the seller of the bonds keeps the proceeds. If the proceeds are kept in currency, the open market purchase ___ reserves; if the proceeds are kept as deposits, the open market purchase ___ reserves.
has no effect on; increases
The increase in the currency ratio during World War II was due to
high taxes and illegal activities
When an individual sells a $100 bond to the Fed, she may either deposit the check she receives or cash it for currency. In both cases
high-powered money increases
The Fed can exert more precise control over ________ than it can over ________.
high-powered money; reserves
When the Fed buys $100 worth of bonds from First National Bank, reserves in the banking system
increase by $100
When the Fed extends a $100 discount loan to the First National Bank, reserves in the banking system
increase by $100
Everything else held constant, an increase in wealth will cause the holdings of checkable deposits to the holdings of currency to ________ and the currency ratio will ________.
increase; decrease
Everything else held constant, a decrease in the currency ratio causes the M1 money multiplier to ________ and the money supply to ________.
increase; increase
Everything else held constant, a decrease in the excess reserves ratio causes the M1 money multiplier to ________ and the money supply to ________.
increase; increase
Everything else held constant, a decrease in the required reserve ratio on checkable deposits causes the M1 money multiplier to ________ and the money supply to ________.
increase; increase
When a bank sells a government bond to the Federal Reserve, reserves in the banking system ___ and the monetary base ___, everything else held constant.
increase; increases
When the Federal Reserve purchases a government bond from a bank, reserves in the banking system ___ and the monetary base ___, everything else held constant.
increase; increases
When the Fed supplies the banking system with an extra dollar of reserves, deposits ___ by ___ than one dollar—a process called multiple deposit creation.
increase; more
During the 2007-2009 financial crisis the excess reserve ratio
increased sharply
During the bank panics of the Great Depression the currency ratio
increased sharply
During the bank panics of the Great Depression the excess reserve ratio
increased sharply
When the Federal Reserve extends a discount loan to a bank, the monetary base ___ and reserves ___.
increases; increase
If the Fed injects reserves into the banking system and they are held as excess reserves, then the monetary base ________ and the money supply ________.
increases; remains unchanged
If the required reserve ratio is equal to 10 percent, a single bank can increase its loans up to a maximum amount equal to
its excess reserves
The ratio that relates the change in the money supply to a given change in the monetary base is called the
money multiplier
Since the Federal Reserve sets the required reserve ratio to less than one, one dollar of reserves can support ________ of checkable deposits.
more than one dollar
When the Fed supplies the banking system with an extra dollar of reserves, deposits increase by more than one dollar—a process called
multiple deposit creation
The money multiplier is
negatively related to the required reserve ratio
The amount of borrowed reserves is ________ related to the discount rate, and is ________ related to the market interest rate.
negatively; positively
The money supply is ________ related to expected deposit outflows, and is ________ related to the market interest rate.
negatively; positively
The relationship between borrowed reserves, the nonborrowed monetary base, and the monetary base is
BR = MB - MBn.
Everything else held constant, an increase in the required reserve ratio will result in ________ in M1 and ________ in M2.
a decrease; a decrease
Which of the following are not assets on the Fed's balance sheet?
Deferred availability cash items
When the Treasury acquires gold or SDRs, it issues certificates to the ________, which are a claim on the gold or SDRs, and in turn is credited with deposit balances at the ________.
Federal Reserve System; Fed
An increase in which of the following leads to a decline in the monetary base?
Foreign deposits at the Fed
Special Drawing Rights (SDRs) are issued to governments by the ________ to settle international debts and have replaced ________ in international transactions.
International Monetary Fund; gold
The formula linking the money supply to the monetary base is
M = m × MB.
The equation that shows the amount of the monetary base needed to support existing levels of checkable deposits, excess reserves, and currency is
MB = (rr × D) + ER + C
For which of the following is the change in reserves necessarily different from the change in the monetary base?
Open market purchases from an individual who cashes the check
The Fed's holdings of securities consist primarily of ________, but also in the past have included ________.
Treasury securities; bankers' acceptances
Which of the following are not assets on the Fed's balance sheet?
U.S. Treasury deposits
Everything else held constant, an increase in the currency-checkable deposit ratio will mean
a decrease in the money supply
Suppose, while cleaning out its closets, a worker at the Federal Reserve bank branch in Memphis discovers a painting of Elvis (medium: acrylic on velvet) that used to grace the walls of the conference room. Suppose further that, at a public auction, the bank sells the painting for $19.95. This sale will cause ________ in the monetary base, everything else held constant.
a decrease of $19.95
Everything else held constant, an increase in the currency ratio will mean ________ in the M2 money multiplier and ________ in the M2 money supply.
a decrease; a decrease
Everything else held constant, an increase in the excess reserve ratio will mean ________ in the M1 money multiplier and ________ in the M2 money multiplier.
a decrease; a decrease
Everything else held constant, an increase in the required reserve ratio will mean ________ in the M2 money multiplier and ________ in the M2 money supply.
a decrease; a decrease
The effect of an open market purchase on reserves differs depending on how the seller of the bonds keeps the proceeds. If the proceeds are kept in ___, the open market purchase has no effect on reserves; if the proceeds are kept as ___, reserves increase by the amount of the open market purchase.
currency; deposits
Decisions by depositors to increase their holdings of ________, or of banks to hold ________ will result in a smaller expansion of deposits than the simple model predicts.
currency; excess reserves
Decisions by depositors to increase their holdings of ________, or of banks to hold excess reserves will result in a ________ expansion of deposits than the simple model predicts.
currency; smaller
All else the same, when the Fed calls in a $100 discount loan previously extended to the First National Bank, reserves in the banking system
decrease by $100
When the Fed sells $100 worth of bonds to First National Bank, reserves in the banking system
decrease by $100
Assuming initially that rr = 10%, c = 40%, and e = 0, an increase in c to 50% causes the M1 money multiplier to ________, everything else held constant.
decrease from 2.8 to 2.5
Assuming initially that rr = 10%, c = 40%, and e = 0, an increase in rr to 15% causes the M1 money multiplier to ________, everything else held constant.
decrease from 2.8 to 2.55
Everything else held constant, an increase in the currency ratio causes the M1 money multiplier to ________ and the money supply to ________.
decrease; decrease
Everything else held constant, an increase in the excess reserves ratio causes the M1 money multiplier to ________ and the money supply to ________.
decrease; decrease
Everything else held constant, an increase in the required reserve ratio on checkable deposits causes the M1 money multiplier to ________ and the money supply to ________.
decrease; decrease
When a bank buys a government bond from the Federal Reserve, reserves in the banking system ___ and the monetary base ___, everything else held constant.
decrease; decreases
When the Federal Reserve sells a government bond to a bank, reserves in the banking system ___ and the monetary base ___, everything else held constant.
decrease; decreases
The increase in the availability of ATM's has caused the cost of acquiring currency to ________ which will cause the currency ratio to ________, everything else held constant.
decrease; increase
Suppose a person cashes his payroll check and holds all the funds in the form of currency. Everything else held constant, total reserves in the banking system ___ and the monetary base ___.
decrease; remains unchanged
During the 2007-2009 financial crisis the currency ratio
decreased sharply
When the Federal Reserve calls in a discount loan from a bank, the monetary base ____ and reserves ___.
decreases; decrease
Individuals that lend funds to a bank by opening a checking account are called
depositors
Decisions by ________ about their holdings of currency and by ________ about their holdings of excess reserves affect the money supply.
depositors; banks
When banks borrow money from the Federal Reserve, these funds are called
discount loans
Which of the following are not liabilities on the Fed's balance sheet?
discount loans
The interest rate the Fed charges banks borrowing from the Fed is the
discount rate
The volume of loans that the Fed makes to banks is affected by the Fed's setting of the interest rate on these loans, called the
discount rate
Suppose that from a new checkable deposit, First National Bank holds eight million dollars on deposit with the Federal Reserve, one million dollars in required reserves, and faces a required reserve ratio of ten percent. Given this information, we can say First National Bank has ___ million dollars in excess reserves.
nine
Everything else held constant, an increase in the money market fund ratio will result in ________ in the M1 money multiplier and ________ in the M2 money multiplier.
no change; an increase
Everything else held constant, an increase in the time deposit ratio will result in ________ in the M1 money multiplier and ________ in the M2 money multiplier.
no change; an increase
An increase in the monetary base that goes into currency is ________, while an increase that goes into deposits is ________.
not multiplied; multiplied
Suppose that from a new checkable deposit, First National Bank holds two million dollars in vault cash, eight million dollars on deposit with the Federal Reserve, and nine million dollars in excess reserves. Given this information, we can say First National Bank has ___ million dollars in required reserves.
one
Purchases and sales of government securities by the Federal Reserve are called
open market operations
The M2 money multiplier is
positively related to the time deposit ratio
The excess reserves ratio is ________ related to expected deposit outflows, and is ________ related to the market interest rate.
positively; negatively
The money supply is ________ related to the nonborrowed monetary base, and ________ related to the level of borrowed reserves.
positively; positively
The total amount of required reserves in the banking system is equal to the ________ the required reserve ratio and checkable deposits.
product of
A Fed purchase of gold, SDRs, a deposit denominated in a foreign currency or any other asset is just an open market ________ of these assets, ________ the monetary base.
purchase, raising
Suppose the Bank of China permanently decreases its purchases of U.S. government bonds and, instead, holds more dollars on deposit at the Federal Reserve. Everything else held constant, a open market ________ would be the appropriate monetary policy action for the Fed to take to offset the expected ________ in the monetary base in the United States.
purchase; decrease
There are two ways in which the Fed can provide additional reserves to the banking system: it can ___ government bonds or it can ___ discount loans to commercial banks.
purchase; extend
In the simple deposit expansion model, an expansion in checkable deposits of $1,000 when the required reserve ratio is equal to 10 percent implies that the Fed
purchased $100 in government bonds
In the simple deposit expansion model, an expansion in checkable deposits of $1,000 when the required reserve ratio is equal to 20 percent implies that the Fed
purchased $200 in government bonds
If a person selling bonds to the Fed cashes the Fed's check, then reserves ___ and currency in circulation ___, everything else held constant.
remain unchanged; increases
Suppose your payroll check is directly deposited to your checking account. Everything else held constant, total reserves in the banking system ___ and the monetary base ___.
remain unchanged; remains unchanged
The percentage of deposits that banks must hold in reserve is the
required reserve ratio
The amount of deposits that banks must hold in reserve is
required reserves
Reserves are equal to the sum of
required reserves and excess reserves
High-powered money minus currency in circulation equals
reserves
The monetary base minus currency in circulation equals
reserves
An increase in U.S. Treasury deposits at the Fed reduces both ________ and the ________.
reserves; monetary base
A ________ in market interest rates relative to the discount rate will cause discount borrowing to ________.
rise; increase
If a member of the nonbank public sells a government bond to the Federal Reserve in exchange for currency, the monetary base will ___, but ___.
rise; reserves will remain unchanged
Which is the most important category of Fed assets?
securities
The two most important categories of assets on the Fed's balance sheet are ________ and ________ because they earn interest.
securities; discount loans
Both ___ and ___ are Federal Reserve assets.
securities; loans to financial institutions
If the Fed decides to reduce bank reserves, it can
sell government bonds
In the simple model of multiple deposit creation in which banks do not hold excess reserves, the increase in checkable deposits equals the product of the change in reserves and the
simple deposit expansion multiplier
In the simple deposit expansion model, a decline in checkable deposits of $1,000 when the required reserve ratio is equal to 10 percent implies that the Fed
sold $100 in government bonds
In the simple deposit expansion model, a decline in checkable deposits of $1,000 when the required reserve ratio is equal to 20 percent implies that the Fed
sold $200 in government bonds
The total amount of reserves in the banking system is equal to the ________ required reserves and excess reserves.
sum of
Suppose that from a new checkable deposit, First National Bank holds two million dollars in vault cash, eight million dollars on deposit with the Federal Reserve, and one million dollars in required reserves. Given this information, we can say First National Bank faces a required reserve ratio of ___ percent.
ten
The monetary base declines when
the Fed sells securities
Of the three players in the money supply process, most observers agree that the most important player is
the Federal Reserve System
The steepest increase in the currency ratio since 1892 occurred during
the Great Depression
In the model of the money supply process, the depositor's role in influencing the money supply is represented by
the currency holdings
In the model of the money supply process, the bank's role in influencing the money supply process is represented by
the excess reserve
The sum of the Fed's monetary liabilities and the U.S. Treasury's monetary liabilities is called
the monetary base
When the Fed purchases artwork to decorate the conference room at the Federal Reserve Bank of Kansas City,
the monetary base rises
An increase in Treasury deposits at the Fed causes
the monetary base to decrease
Models describing the determination of the money supply and the Fed's role in this process normally focus on ________ rather than ________, since Fed actions have a more predictable effect on the former.
the monetary base; reserves
An increase in the nonborrowed monetary base, everything else held constant, will cause
the money supple to rise
Everything else held constant, an increase in currency holdings will cause
the money supply to fall
Everything else held constant, an increase in the required reserve ratio on checkable deposits will cause
the money supply to fall
Subtracting borrowed reserves from the monetary base obtains
the nonborrowed monetary base
In the model of the money supply process, the Federal Reserve's role in influencing the money supply is represented by
the required reserve ratio, nonborrowed reserves, and borrowed reserves
Suppose that from a new checkable deposit, First National Bank holds eight million dollars on deposit with the Federal Reserve, one million dollars in required reserves, and faces a required reserve ratio of ten percent. Given this information, we can say First National Bank has ___ million dollars in vault cash.
two
Total reserves minus bank deposits with the Fed equals
vault cash
Excess reserves are equal to
vault cash plus deposits with Federal Reserve banks minus required reserves
