Econ 135 Final (ch14 and past exam)
Which of the following are not assets on the Fedʹs balance sheet? A) Securities B) Discount loans C) Cash items in the process of collection D) Deferred availability cash items
D) Deferred availability cash items
The Federal Open Market Committee makes the Fed's decisions on the purchase or sale of government securities, but these purchases or sales are executed by the Federal Reserve Bank of A) Chicago B) Boston C) San Francisco D) New York
D) New York
The case for Federal Reserve independence includes the idea that A) political pressure would impart a political bias to monetary policy B) A politically insulated Fed would be more concerned with long-run objectives and thus be a defender of a sound dollar and a stable price level C) A Federal Reserve under control of Congress or the president might make the so-called political business cycle more pronounced D) all of the above
D) all of the above
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. A) deposits; required reserves B) deposits; excess reserves C) currency; required reserves D) currency; excess reserves
D) currency; excess reserves
When the Federal Reserve sells a government bond to a bank, reserves in the banking system ________ and the monetary base ________, everything else held constant. A) increase; increases B) increase; decreases C) decrease; increases D) decrease; decreases
D) decrease; decreases
An expansionary monetary policy lowers the real interest rate, causing the domestic currency to _____, thereby _____ net exports. A) appreciate; raising B) appreciate; lowering C) depreciate; lowing D) depreciate; raising
D) depreciate; raising
If the Fed injects reserves into the banking system and they are held as excess reserves, then the money supply A) increases by only the initial increase in reserves. B) increases by only one-half the initial increase in reserves. C) increases by a multiple of the initial increase in reserves. D) does not change.
D) does not change.
If the Fed injects reserves into the banking system and they are held as excess reserves, then the monetary base ________ and the money supply ________. A) remains unchanged; remains unchanged B) remains unchanged; increases C) increases; increases D) increases; remains unchanged
D) increases; remains unchanged
A decrease in ________ leads to an equal ________ in the monetary base in the long run. A) float; increase B) float; decrease C) securities; increase D) securities; decrease
D) securities; decrease
The monetary base declines when A) the Fed extends discount loans. B) Treasury deposits at the Fed decrease. C) float increases. D) the Fed sells securities.
D) the Fed sells securities.
The sum of the Fedʹs monetary liabilities and the U.S. Treasuryʹs monetary liabilities is called A) the money supply. B) currency in circulation. C) bank reserves. D) the monetary base.
D) the monetary base.
Models describing the determination of the money supply and the Fedʹs role in this process normally focus on ________ rather than ________, since Fed actions have a more predictable effect on the former. A) reserves; the monetary base B) reserves; high-powered money C) the monetary base; high-powered money D) the monetary base; reserves
D) the monetary base; reserves
According to the Taylor Rule, the Fed should raise the federal funds interest rate when inflation _____ the Fed's inflation target or when real GDP _____ the Fed's output target. A)drops below; rises above B)drops below; drops below C)rises above; drops below D)rises above; rises above
D)rises above; rises above
The money multiplier is inversely related to A) the required ratio on checkable deposits B) the excess reserve ratio C) the currency ratio D) all of the above E) both A and B
E) both A and B m= (1+C)/(rr+e+c)
Explain two ways by which the Federal Reserve System can increase the monetary base. Why is the effect of Federal Reserve actions on bank reserves less exact than the effect on the monetary base?
The Fed can increase the monetary base by purchasing government bonds and by extending discount loans. If the person selling the security chooses to keep the proceeds in currency, bank reserves do not increase. Because the Fed cannot control the distribution of the monetary base between reserves and currency, it has less control over reserves than the base.
Explain the complete formula for the M1 money supply, and explain how changes in required reserves, excess reserves, the currency ratio, the nonborrowed base, and borrowed reserves affect the money supply.
The formula is M = 1 + c × (MBn + BR). The formula indicates that the money supply r+c+e is the product of the multiplier times the base. Increases in any of the multiplier components, required reserves, r; excess reserves, e; or the currency ratio, c; reduce the multiplier and the money supply. Increases in the nonborrowed base and borrowed reserves both increase the base and the money supply.
Monetary Base
The sum of the Fed's monetary liabilities (currency in circulation and reserves) and the U.S. Treasury's monetary liabilities (Treasury currency in circulation, primarily coins) is called the monetary base
Float
When the Fed clears checks for banks, it often credits the amount of the check to a bank that has deposited it (increases the bank's reserves) before it debits (decreases the reserves of) the bank on which the check is drawn. The resulting temporary net increase in the total amount of reserves in the banking system (and hence in the mon- etary base) caused by the Fed's check-clearing process is called float.
Financial markets have the basic function of
getting people with funds to lend together with people who want to borrow funds
The money multiplier m is
m=( 1+c )/( rr + e + c )
Explain two reasons why the Fed does not have complete control over the level of bank deposits and loans. Explain how a change in either factor affects the deposit expansion process.
-Banks decide excess reserves -public decide amount of currency held The Fed does not completely control the level of bank deposits and loans because banks can hold excess reserves and the public can change its currency holdings. A change in either factor changes the deposit expansion process. An increase in either excess reserves or currency reduces the amount by which deposits and loans are increased.
A decrease in ________ leads to an equal ________ in the monetary base in the short run. A) float; increase B) float; decrease C) Treasury deposits at the Fed; decrease D) discount loans; increase
B) float; decrease
Special Drawing Rights (SDRs) are issued to governments by the ________ to settle international debts and have replaced ________ in international transactions. A) Federal Reserve System; gold B) Federal Reserve System; dollars C) International Monetary Fund; gold D) International Monetary Fund; dollars
C) International Monetary Fund; gold
The three players in the money supply process include A) banks, depositors, and the U.S. Treasury. B) banks, depositors, and borrowers. C) banks, depositors, and the central bank. D) banks, borrowers, and the central bank.
C) banks, depositors, and the central bank.
If a bank has excess reserves of $4,000 and demand deposit liabilities of $100,000, and if the reserve requirement is 10 percent, then the bank has actual reserves of A) $14,000. B) $19,000. C) $24,000. D) $29,000.
A) $14,000.
If the required reserve ratio is 15 percent, the simple deposit multiplier is A) 15.0. B) 1.5. C) 6.67. D) 3.33.
A) 15.0.
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 A) 2.5. B) 1.67. C) 2.0. D) 0.601.
A) 2.5.
Which is the most important category of Fed assets? A) Securities B) Discount loans C) Gold and SDR certificates D) Cash items in the process of collection
A) Securities
The monetary base consists of A) currency in circulation and reserves B) currency in circulation and discount loans C) reserves and government securities D) currency in circulation and Federal Reserve notes
A) currency in circulation and reserves
The monetary base minus reserves equals A) currency in circulation. B) the borrowed base. C) the nonborrowed base. D) discount loans.
A) currency in circulation.
When the Fed buys $100 worth of bonds from First National Bank, reserves in the banking system A) increase by $100. B) increase by more than $100. C) decrease by $100. D) decrease by more than $100.
A) increase by $100.
When the Fed extends a $100 discount loan to the First National Bank, reserves in the banking system A) increase by $100. B) increase by more than $100. C) decrease by $100. D) decrease by more than $100.
A) increase by $100.
When the Federal Reserve purchases a government bond from a bank, reserves in the banking system ________ and the monetary base ________, everything else held constant. A) increase; increases B) increase; decreases C) decrease; increases D) decrease; decreases
A) increase; increases
If the required reserve ratio is equal to 10 percent, a single bank can increase its loans up to a maximum amount equal to A) its excess reserves. B) 10 times its excess reserves. C) 10 percent of its excess reserves. D) its total reserves.
A) its excess reserves.
The ratio that relates the change in the money supply to a given change in the monetary base is called the A) money multiplier. B) required reserve ratio. C) deposit ratio. D) discount rate.
A) money multiplier.
The Fed uses three policy tools to manipulate the money supply; _____, which effects reserves and the monetary base; changes in _____, which affect reserves and the monetary base by influencing the quantity of discount loans; and changes in _____, which affect the money multiplier. A) open market operations; the discount rate; reserve requirements B) open market operations; the discount rate; margin requirements C) the discount rate; open market operations; reserve requirements D)the discount rate; open market operations; margin requirements
A) open market operations; the discount rate; reserve requirements
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. A) purchase; decrease B) purchase; increase C) sale; decrease D) sale; increase
A) purchase; decrease
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. A) ten B) twenty C) eighty D) ninety
A) ten
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. A) two B) eight C) nine D) ten
A) two
Total reserves minus bank deposits with the Fed equals A) vault cash. B) excess reserves. C) required reserves. D) currency in circulation.
A) vault cash.
n 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 A) $10. B) $100. C) $100 times the reciprocal of the required reserve ratio. D) $100 times the required reserve ratio.
B) $100.
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. A) $8000 B) $1200 C) $1200.8 D) $8400
B) $1200
If the required reserve ratio is one-third, currency in circulation is $300 billion, and checkable deposits are $900 billion, then the monetary base is A) $300 billion. B) $600 billion. C) $333 billion. D) $667 billion.
B) $600 billion
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 bankʹs excess reserves will be A) -$5,000. B) -$1,000. C) $1,000. D) $5,000.
B) -$1,000.
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 A) 0.01. B) 0.10. C) 0.05. D) 0.20.
B) 0.10
The formula linking the money supply to the monetary base is A) M = m/MB. B) M = m × MB. C) m=M×MB. D) MB = M × m.
B) M = m × MB
Everything else held constant, a decrease in the currency-checkable deposit ratio will mean A) an increase in currency in circulation and an increase in the money supply. B) an increase in money supply. C) a decrease in the money supply. D) an increase in currency in circulation but no change in the money supply.
B) an increase in money supply.
For a given level of the monetary base, a decrease in the required reserve ratio on checkable deposits will mean A) an increase in discount borrowing B) an increase in the money supply C) a decrease in the money supply D) a decrease in checkable deposits
B) an increase in the money supply
Everything else held constant, a decrease in holdings of excess reserves will mean A) a decrease in the money supply. B) an increase in the money supply. C) a decrease in checkable deposits. D) an increase in discount loans.
B) an increase in the money supply.
In the model of the money supply process, the bankʹs role in influencing the money supply process is represented by A) only the excess reserve ratio. B) both the excess reserve ratio and the market interest rate. C) only the currency ratio. D) only borrowed reserves.
B) both the excess reserve ratio and the market interest rate.
The primary assets of credit unions are A) business loans B) consumer loans C) mortgages D) municipal bonds
B) consumer loans
The monetary liabilities of the Federal Reserve include A) government securities and discount loans. B) currency in circulation and reserves. C) government securities and reserves. D) currency in circulation and discount loans.
B) currency in circulation and reserves.
High-powered money minus reserves equals A) reserves. B) currency in circulation. C) the monetary base. D) the nonborrowed base.
B) currency in circulation.
An assumption in the model of the money supply process is that the desired levels of currency and excess reserves A) are given as constants. B) grow proportionally with checkable deposits. C) grow proportionally with high-powered money. D) grow proportionally over time.
B) grow proportionally with checkable deposits.
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 A) reserves increase. B) high-powered money increases. C) reserves decrease. D) high-powered money decreases.
B) high-powered money increases. (monetary base)
When the Fed supplies the banking system with an extra dollar of reserves, deposits increase by more than one dollara process called A) extra deposit creation. B) multiple deposit creation. C) expansionary deposit creation. D) stimulative deposit creation.
B) multiple deposit creation.
The money supply is ________ related to expected deposit outflows, and is ________ related to the market interest rate. A) negatively; negatively B) negatively; positively C) positively; negatively D) positively; positively
B) negatively; positively
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 has ________ million dollars in excess reserves. A) three B) nine C) ten D) eleven
B) nine
An increase in the monetary base that goes into currency is ________, while an increase that goes into deposits is ________. A) multiplied; multiplied B) not multiplied; multiplied C) multiplied; not multiplied D) not multiplied; not multiplied
B) not multiplied; multiplied
If a person selling bonds to the Fed cashes the Fedʹs check, then reserves ________ and currency in circulation ________, everything else held constant. A) remain unchanged; declines B) remain unchanged; increases C) decline; remains unchanged D) increase; remains unchanged
B) remain unchanged; increases
When the Federal Reserve sells a government bond in the open market, A) reserves in the banking system increase B) reserves in the banking system decline C) Federal reserve liabilities remain unchanged
B) reserves in the banking system decline
When the Federal Reserve purchases a government bond from a bank, A) Federal reserve liabilities decline B) reserves in the banking system increase C) Federal reserve liabilities remain unchanged D) reserves in the banking system decline
B) reserves in the banking system increase
If a person selling bonds to the Fed cashes the Fed's check, A) currency in circulation remains unchanged, but reserves decline B) reserves remain unchanged, but currency in circulation increases C) reserves remain unchanged, but currency in circulation declines D) currency in circulation remains unchanged, but reserves increase
B) reserves remain unchanged, but currency in circulation increases ("cashes" does not mean "deposits")
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 excess reserves and the A) reciprocal of the excess reserve ratio. B) simple deposit expansion multiplier. C) reciprocal of the simple deposit multiplier. D) discount rate.
B) simple deposit expansion multiplier.
An increase in Treasury deposits at the Fed causes A) the monetary base to increase. B) the monetary base to decrease. C) Fed assets to increase but has no effect on the monetary base. D) Fed assets to decrease but has no effect on the monetary base.
B) the monetary base to decrease.
An increase in the nonborrowed monetary base, everything else held constant, will cause A) the money supply to fall. B) the money supply to rise. C) no change in the money supply. D) demand deposits to fall.
B) the money supply to rise.
The federal funds rate is important because it is A) the interest rate paid on federal debt B) the primary indicator of the Fed's stance on monetary policy C) the interest rate charged on government loans D) all of the above
B) the primary indicator of the Fed's stance on monetary policy
In the model of the money supply process, the Federal Reserveʹs role in influencing the money supply is represented by A) both the required reserve ratio and the market interest rate. B) the required reserve ratio, nonborrowed reserves, borrowed reserves, and the market interest rate. C) only borrowed reserves. D) only nonborrowed reserves.
B) the required reserve ratio, nonborrowed reserves, borrowed reserves, and the market interest rate.
The formula for the simple deposit multiplier can be expressed as A) △R = 1r × △T B) △D = 1r × △R C) △r = R1 × △T D) △R = 1r × △D
B) △D = 1r × △R
Assume that no banks hold excess reserves, and the public holds no currency. If a bank sells a $100 security to the Fed, explain what happens to this bank and two additional steps in the deposit expansion process, assuming a 10% reserve requirement. How much do deposits and loans increase for the banking system when the process is completed?
Bank A first changes a security for reserves, and then lends the reserves, creating loans. It receives $100 in reserves from the sale of securities. Since all of these reserve will be excess reserves (there was no change in checkable deposits), the bank will loan out all $100. The $100 will then be deposited into Bank B. This bank now has a change in reserves of $100, of which $90 is excess reserves. Bank B will loan out this $90, which will be deposited into Bank C. Bank C now has an increase in reserves of $90, $81 of which is excess reserves. Bank C will loan out this $81 dollars and the process will continue until there are no more excess reserves in the banking system. For the banking system, both loans and deposits increase by $1000.
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 A) $10. B) $100. C) $100 times the reciprocal of the required reserve ratio. D) $100 times the required reserve ratio.
C) $100 times the reciprocal of the required reserve ratio.
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 A) 0.01. B) 0.05. C) 0.15. D) 0.20.
C) 0.15
Which of the following can be described as involving indirect finance? A) a corporation issues new shares of stock B) people buy shares in a mutual fund C) A Pension fund manager buys a short-term corporate security in the secondary market
C) A Pension fund manager buys a short-term corporate security in the secondary market
For which of the following is the change in reserves necessarily different from the change in the monetary base? A) Open market purchases from a bank B) Open market purchases from an individual who deposits the check in a bank C) Open market purchases from an individual who cashes the check D) Open market sale to a bank
C) Open market purchases from an individual who cashes the check
The Fed does not tightly control the monetary base because it does not completely control A) open market purchases. B) open market sales. C) borrowed reserves. D) the discount rate.
C) borrowed reserves.
The monetary base consists of A) currency in circulation and Federal Reserve notes. B) currency in circulation and the U.S. Treasuryʹs monetary liabilities. C) currency in circulation and reserves. D) reserves and Federal Reserve Notes.
C) currency in circulation and reserves.
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. A) deposits; deposits B) deposits; currency C) currency; deposits D) currency; currency
C) currency; deposits
Everything else held constant, an increase in the currency ratio causes the M1 money multiplier to ________ and the money supply to ________. A) decrease; increase B) increase; decrease C) decrease; decrease D) increase; increase
C) decrease; decrease
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 ________. A) remain unchanged; increases B) decrease; increases C) decrease; remains unchanged D) decrease; decreases
C) decrease; remains unchanged
Suppose that from a new checkable deposit, First National Bank holds two million dollars in vault cash, nine million dollars in excess reserves, and faces a required reserve ratio of ten percent. Given this information, we can say First National Bank has ________ million dollars on deposit with the Federal Reserve. A) one B) two C) eight D) ten
C) eight
Both ________ and ________ are Federal Reserve assets. A) currency in circulation; reserves B) currency in circulation; government securities C) government securities; discount loans D) government securities; reserves
C) government securities; discount loans
When the Federal Reserve extends a discount loan to a bank, the monetary base _______ and reserves _______. A) remains unchanged; decrease B) remains unchanged; increase C) increases; increase D) increases; remain unchanged
C) increases; increase
When the Federal Reserve extends a discount loan to a bank, the monetary base ________ and reserves ________. A) remains unchanged; decrease B) remains unchanged; increase C) increases; increase D) increases; remain unchanged
C) increases; increase
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. A) two B) eight C) nine D) ten
C) nine
Purchases and sales of government securities by the Federal Reserve are called A) discount loans. B) federal fund transfers. C) open market operations. D) swap transactions.
C) open market operations.
The excess reserves ratio is ________ related to expected deposit outflows, and is ________ related to the market interest rate. A) negatively; negatively B) negatively; positively C) positively; negatively D) positively; positively
C) positively; negatively
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 A) sold $200 in government bonds. B) sold $500 in government bonds. C) purchased $200 in government bonds. D) purchased $500 in government bonds.
C) purchased $200 in government bonds.
An expansionary monetary policy causes a _____ in net worth, which _____ the adverse selection problem, thereby _____ increased lending to finance investment spending. A) decline; increases; encouraging B) rise; increase; discouraging C) rise; reduces; encouraging D) decline; reduces;discouraging
C) rise; reduces; encouraging
In the model of the money supply process, the depositorʹs role in influencing the money supply is represented by A) only the currency ratio. B) both the currency ratio and excess reserve ratio. C) the currency ratio, excess reserve ratio, and the market interest rate. D) only the market interest rate.
C) the currency ratio, excess reserve ratio, and the market interest rate.
Which of the following are entities of the Federal Reserve System? A) Federal Reserve Banks B) The FOMC C) The board of governors D) All of the above
D) All of the above