Macro chapter 12

federal funds rate

the interest rate financial institutions charge over each other for overnight loans used as reserves

the discount rate

the interest rate the Federal Reserve charges commercial banks and other depository institutions to borrow reserves from a regional Federal Reserve Bank

the amount banks are required by law to hold on each deposit

select the statement that best defines required reserves. the amount of reserves banks have on hand to handle litigation the amount banks are required by law to hold on each loan the amount banks are required by law to hold on each deposit the amount of reserves a bank has below the required amount

3.33

The required reserve ratio is 15%, banks are holding 10% of their deposits as excess reserves, and cash holdings are 5%. The value of the money multiplier is ____. (Round your answer to two decimal places.

The Federal Open Market Committee

Which group is responsible for setting monetary policy? the Board of Governors the Regional Reserve Banks the Federal Open Market Committee the Federal Advisory Committee

The Board of Governors

Which group is responsible for setting regulations such as the reserve requirement? The Board of Governors The Regional Reserve Banks The Congress The Federal Open Market Committee

regulate consumer credit The Board of Governors regulates consumer credit.

Which of the following functions do the Federal Reserve regional banks NOT perform? distribute coins and currency regulate consumer credit regulate and supervise member banks serve as the banker for the U.S. Treasury

1.

Which of the following would result in the largest amount of money creation? 1. depositing $1000 cash into a checking account 2. converting $1000 in coins into $1000 in bills 3. transferring $1000 from a checking account into a saving account 4. using a $1000 bond that matures to buy another $1000 bond

reserve requirements, discount rate, open market operations

what 3 tools does the Federal Reserve use for conducting monetary policy?

It was decreasing. (The money multiplier is determined by dividing 1 by the reserve requirement, so if the requirement is increasing, the multiplier must be decreasing.)

In May 2011, China ordered many of its banks to increase the amount they hold in reserves. It was the fifth increase that year. What would you expect to be true about the money multiplier as a result? It would first increase, then decrease, with each change. It was increasing. It was decreasing. It was not changing.

$51,445.44

Suppose Robina Bank receives a deposit of $53,589 and the reserve requirement is 4%. What is the amount that the bank must have in excess reserves from this initial deposit?

$1,286,136

Suppose Robina Bank receives a deposit of $53,589 and the reserve requirement is 4%. What is the total change in the M1 money supply from this one deposit?

Federal Open Market Committee

a 12-member committee that is composed of members of the Board of Governors of the Fed and selected presidents of the regional Federal Reserve Banks. It oversees open market operations (the buying and selling of government securities) , the main tool of monetary policy

leakages

a reduction in the amount of money that is used for lending that reduced the money multiplier. it is caused by banks choosing to hold excess reserves and from individuals, businesses, and foreigners choosing to hold more cash

fractional reserve banking system

describes a banking system in which a portion of bank deposits are held as vault cash or in an account with the regional Federal Reserve Bank, while the rest of the deposits are loaned out to generate the money creation process

2

if the Fed sells bonds in the open market, it is attempting to 1. lower interest rates, using expansionary monetary policy 2. raise interest rates, using contractionary monetary policy 3. raise interest rates, using expansionary monetary policy 4. lower interest rates, using contractionary monetary policy

decrease

increasing the reserve ratio will increase or decrease the money multiplier?

money multiplier

measures the potential / maximum amount the money supply can increase or decrease when a dollar of new deposits enters or exits the system. defined as 1 divided by the reserve requirement

excess reserves

reserves held by banks above the legally required amount

solvency crisis

situation in which a bank's liabilities exceed its assets

reserve ratio

the percentage of a bank's total deposits that are held in reserves, either as cash in the vault or as deposits at the regional Federal Reserve Bank

reserve requirement

the required ratio of funds that commercial banks and other depository institutions must hold in reserve against deposits

reserve requirements

the required ratio of funds that commercial banks and other depository institutions must hold in reserve against deposits

open market operations

what is the main tool of monetary policy?

1

which of the following actions by the Fed would be most likely to stimulate the economy? 1. purchasing bonds on the open market 2. raising the discount rate charged to commercial banks 3. increasing the required reserve ratio to ensure that banks stay solvent 4. increasing interest rates from 3% to 5% to encourage more savings

$10,000

if the reserve requirement is currently 20%, what is the maximum amount of money that could be generated from a $2000 bank deposit? $4000 $1600 $10000 $2000

$4,277,012.5

Suppose that the central bank has increased the money supply such that there is an additional $342,161 in excess reserves. If the reserve ratio is 8%, what is the maximum increase in money supply?

false

T/F? An increase in money market deposits in the banks will increase the M1 money supply.

false

T/F? First Bank of Buckeyeland is currently loaned up. If it receives a $5,000 deposit and the reserve ratio is 25%, First Bank can add $20,000 of new money to the money supply.

true

T/F? The total change in the M1 brought about by the money multiplier is affected by the amount of deposits made by households and businesses

true

T/F? bank runs occur when many customers attempt to withdraw deposits from a bank at the same time and the bank is unable to pay all customer withdrawals

false

T/F? banks must lend out all their excess reserves in order to change the M1 supply

true

T/F? banks typically loan out a portion of customer deposits

false

T/F? in the U.S., banks keep the entire value of all customer deposits in the bank vault to meet customer withdrawals

true

T/F? the Federal Deposit Insurance Corporation (FDIC) protects bank depositors from bank failure

false

T/F? the Federal Reserve (Fed) has very little effect on the money multiplier

false

T/F? the fractional reserve banking system requires all banks to keep the total value of customer deposits in their vaults to prevent bank runs

true

T/F? the state of the economy can affect the amount of excess reserves that banks keep on reserve, thereby affecting the impact of the money multiplier

true

T/T? A bank has repaid a $20,000 loan from the Federal Reserve. Its assets have just decreased by $20,000.

0

A bank has $35,000 of reserves and $700,000 in demand deposits. If the required reserve ratio is 5%, the bank can make $ ____ of new loans.

$5,000

A bond pays out $200 of interest every year. If the current interest rate is 4%, the bond has a price of $____. (Round your answer to two decimal places.)

Hawks

After an economy begins to recover, suppose that the Fed quickly raises interest rates back to the level seen before the recession in order to prevent inflation. Which type of Fed policymaker would be more likely to favor this action? doves hawks neither doves nor hawks both doves and hawks

is equal to the reserve ratio. (Excess reserves are equal to zero when the reserve ratio is equal to the reserve requirement.)

If excess reserves are equal to zero, the reserve requirement: is equal to the reserve ratio. is less than the total ratio. is less than the reserve ratio. is greater than the total ratio.

2

Gus takes his $15 in lemonade earnings and deposits it into his savings account. Meanwhile, Gus's dad borrows $20,000 to buy a new car. Gus's $15 represents a(n) _________ for the bank, while his dad's $20,000 loan represents a(n) __________ for the bank 1. asset; liability 2. liability; asset 3. liability; liability 4. asset; asset

$16,000

How much money can be created (plus the initial deposit) if the money multiplier is 4 and the initial deposit is $4,000? $4,000 $8,000 $12,000 $16,000

are greater than zero. (Excess reserves are greater than zero if banks are holding more money in reserves than is required.)

If the reserve requirement is less than the reserve ratio, excess reserves: are equal to total reserves. equal zero. are greater than zero. are greater than total reserves.

$2143.56

Suppose Robina Bank receives a deposit of $53,589 and the reserve requirement is 4%. What is the amount that the bank must keep on hand as required by the Federal Reserve?

open market operations

the buying and selling on the open market of U.S. government securities, such as Treasury bills and bonds, to adjust reserves in the banking system

Federal Reserve System

the central bank of the United States