Macroeconomics study ch14

If the required reserve ratio is 0.2, and the Fed buys $3,000 of U.S. government securities, the maximum amount by which the money supply can increase is

$15,000

The simple money multiplier is defined as

1/required reserve ratio

Which of the following would likely increase the money supply?

A bank sells government securities to the Fed.

A single bank can increase the money supply by the increase in its excess reserves times the simple money multiplier.

False

M1, the money supply narrowly defined, consists of coins, paper currency, checkable deposits, travelers checks, and certificates of deposit (CDs).

False

When the Fed buys U.S. government securities from a bank, that bank's excess reserves and required reserves increase but total reserves decrease.

False

When the Fed buys U.S. government securities from a bank, that bank's required reserves and total reserves increase but excess reserves decrease.

False

When the Fed buys U.S. government securities from a member bank, that bank's excess reserves, required reserves, and total reserves all increase.

False

The largest component of the Federal Reserve's liabilities is in the form of

Federal Reserve notes

Which of the following is not true of Federal Reserve notes?

They are redeemable for gold.

Banks create money when they make loans.

True

Banks in need of reserves can borrow from the Fed or in the federal funds market.

True

If the Fed buys a $1,000 U.S. government bond from a bank, it pays it by giving the bank $1,000 in reserves--reserves that it simply creates out of thin air.

True

If the Fed wishes to reduce the money supply, it can sell U.S. government securities to member banks.

True

If you know the required reserve ratio and the amount of a bank's deposits, then you know the minimum amount of reserves the bank is required to hold.

True

Coins in the United States are manufactured and distributed by the

U.S. Mint

The largest component of the Federal Reserve's asset portfolio is

U.S. government securities

A $20 Federal Reserve note is

an asset to a commercial bank if it is currently in the bank's vault

In order to meet a deficiency of excess reserves, a bank could

borrow from another bank in the federal funds market

The largest component of M1 is

checkable deposits

Which of the following make up the money supply as it is most narrowly defined?

coins and currency held by the nonbank public, checking deposits, and traveler's checks

To increase the money supply, the Fed might

decrease the reserve requirement and the discount rate

What essential factor enables commercial banks to create money?

excess reserves

The money expansion process continues until there are no more

excess reserves in the system that banks are willing to lend

Banks borrow excess reserves from each other on a day-to-day basis in the

federal funds market

Banks earn a profit on the difference between

interest charged on loans and interest paid on deposits

The Federal Reserve may increase the money supply by

lending reserves to banks

If the required reserve ratio is 20 percent and a bank has $100,000 in checkable deposits, then its

required reserves are $20,000

The appropriate open market operation for reducing the money supply is

selling U.S. government securities

When the Fed buys U.S. government securities from a member bank, the immediate effect on that member bank's balance sheet is

that there is no change in the total amount of assets or liabilities

If the Fed sells U.S. government securities to a member bank and debits that bank's reserve account,

the Fed's assets decrease

If the Fed buys U.S. government securities from a bank and credits the bank's reserve account,

the Fed's assets increase

If a bank sells a $1,000 security to the Fed and the required reserve ratio is 20 percent,

the bank has $1,000 in additional excess reserves, all of which it can lend out

The higher the required reserve ratio,

the smaller the money multiplier

A 2005 quarter is called token money because

there is less than a quarter's worth of metal in it

Suppose that a bank has $100 million in checkable deposits and the required reserve ratio is 0.1. Required reserves are

$10 million

If the required reserve ratio is 10 percent and a bank receives a new deposit for $100,000, then the

bank's liabilities increase by $100,000

Banks in need of reserves can borrow from the Fed or in the federal funds market.

banks make short-term loans to other banks

In the federal funds market,

banks make short-term loans to other banks

If the Fed purchases government securities on the open market, the money supply will

increase through the commercial banking system regardless of who the seller is

The Fed can reduce the money supply by

selling securities