Econ Topic 8 FINAL EXAM

Assume there is no leakage in the banking system. The required reserve ratio is 25%. If the Fed sells $5 million worth of government securities to a commercial bank, the change in the money supply will be

-20 million

If the Fed decreases the required reserve ratio

banks will have more excess reserves and money supply will increase

Assume that there is no leakage in the banking system and the money supply decreases by $5 million due to an open market sale by the Fed. Instead, if there was currency drain or banks were not loaned up then the money supply would have

decreased by less than $5 million

The interest rate the Federal Reserve charges a bank when the bank borrows reserves from the Fed is called the

discount rate

The three main policy tools the Federal Reserve System uses to influence the money supply are setting the

discount rate, open market operations, and setting the required reserve ratio.

If the Fed increases the discount rate this will __________ banks to borrow from the Fed. As a result money supply will ___________.

discourage; decrease

When the Fed purchases government securities,

excess reserves in the banking system increase, leading to more loans being made.

When the Fed buys securities from the public, banks' reserves ________ and the quantity of money ________.

increase; increases

Banks create money by

making loans and creating deposits, a process that is limited by the size of banks' excess reserves

) Refer to question 4. Assume there is no leakage in the banking system. What is the value of the deposit multiplier?

10

The Fed purchases $1 million of U.S. government securities from First Bank. The required reserve ratio is 10% and there is no leakage in the banking system. The money multiplier is equal to

10.0

) Refer to question 2. If the required reserve ratio is 5% then Bank of America's excess reserves increases by

19,000

When Meg deposits $20,000 in her checking account at the Bank of America, Bank of America's reserves immediately increases by

20,000

Refer to question 17. What is the value of the deposit multiplier or money multiplier?

4

Assume that there is no leakage in the banking system and the money supply increases by $1 million due to an open market purchase by the Fed. Instead, if there was currency drain or banks were not loaned up then the money supply would have

B) increased by less than $1 million.

Assume there is no leakage in the banking system. The Fed buys $50,000 of government securities. The required reserve ratio is 10%. What will be the change in total deposits?

It will increase $500,000

Refer to question 14. What will be the change in money supply?

It will increase $500,000

Which of the following is a tool the Fed uses to adjust the quantity of money?

The Fed can change the interest rate on loans to bank customers. The Fed can buy or sell government securities.

The money supply has increased from $1 trillion to $1.1 trillion. Which of the following could have caused this increase (assuming no leakages in the banking system)?

The Fed decreased the discount rate

Open market operations are the

buying and selling of government securities by the Fed

Open market purchase refers to the action when the Fed

buys government securities from banks and the non-bank public.

If the Fed increases the required reserve ratio this will __________ the amount of loans that banks can make and thus ___________ money supply.

decrease; decrease

Refer to question 4. Assume there is no leakage in the banking system. By how much will total deposits change in this case? (Hint: Apply the formula for deposit multiplier)

increase by $50,000

When the Fed makes an open market sale

it receives payment from banks or non-bank public. Thus money supply decreases.

Bobby deposits $5,000 in his checking account at the Bank of America. If the required reserve ratio is 10%, Bank of America's

required reserves increase by $500 and its excess reserves increase by 4,500