Money & Banking Test 2
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
A bank has excess reserves of $6000 and demand deposits liabilities of $100,000 when the required reserve ratio is 20%. If the reserve ratio is raised to 25%, the bank's excess reserves will be
$1000
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
$1200
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
$1400
If a bank has excess reserves of $20,000 and demand deposit liabilities of $80,000 and if the reserve requirement is 20 percent, then the bank has total reserves of
$36,000
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 reserves in the banking system increase by $100, then the 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 $400 in the simple model of deposit creation when the required reserve ratio is
0.25
If the required reserve ratio is one-third, currency in circulation is $300 billion, and checkable deposits are $900 billion, then the currency ratio is
0.33
The three largest Federal Reserve banks (New York, Chicago, and San Francisco) combined hold more than ______ percent of the assets of the Federal Reserve System
50%
The Federal Open Market consists of the
7 members of the Board of Governors and 5 presidents of the regional Fed banks
The relationship between borrowed reserves, the non borrowed monetary base, and the money base is
BR = MB -MBn
The Federal Reserve entity that makes decisions regarding the conduct of open market operations is the
Federal Open Market Committee
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 X D) - ER - C
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
New York
The Federal Reserve Bank of _____ plays a special role in the Federal Reserve System because it houses the open market desk.
New York
The president from which Federal Reserve Bank always has a vote in the Federal Open Market Committee?
New York
________ are the most important monetary policy tool b/c they are the primary determinant of changes in the ______, the main source of fluctuations in the money supply
Open market operations, monetary base
At its inception, the Federal Reserve was intended to be
a lender-of-last-resort
A nominal variable, such as the inflation rate or the money supply, which ties down the price level to achieve price stability is called _____ anchor
a nominal
The discount rate is kept _______ the FFR b/c the Fed prefers that ________
above, banks borrow reserves from each other
Lessons that economists and policy makers have learned from the recent global financial crisis include
all of the above
The "Greenspan doctrine" -central banks should not try to prick bubbles - was based on which of the following arguments
all of the above
A credit-driving bubble arises when _______ in lending causes _____ in asset prices which can cause _______ in lending
an increase; an increase; a further increase
_______ bubble is driven entirely by unrealistic optimistic expectiations
an irrational exuberance
Members of the Board of Governors are
appointed by the president of the US and confirmed by the Senate
When asset prices increase above their fundamental values it is called an
asset-price bubble
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 Fed prefers that _________ so that ______
banks borrow reserves from each other; banks can monitor each other for credit risk
The three players in the money supply process include
banks, depositors, and the central bank
If the central bank pursues a monetary policy that is more expansionary than what firms and people expect, then the central bank must be trying to
boost output in the short run
Discount policy affects the money supply by affecting the volume of _______ and the ________
borrowed reserves; monetary base
The formula for the simple deposit multipliers can be expressed as
change in D = 1/rr X change in R
The Fed's lender-of-last-resort function
creates a moral hazard problem
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
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 predict
currency; excess reserves
In the market for reserves, if the FFR is b/w the discount rate and the interest rate paid on excess reserves, a _______ in the reserve requirement decreases the demand for reserves, _______ the federal funds interest rate
decline; lowering
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
Assuming initatilly that rr=10%, c=40%, and e=0, an increase in rr to 15% causes the M1 money multiplier to _____, everything else constant
decrease from 2.8 to 2.55
Everything else 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 the Federal Reserve sells a government bond to a bank, reserves in the banking system ____ and the monetary base ______, everything else constant
decrease; decreases
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
The Federal Reserve will engage in a matched sale-purchase transaction when it wants to ________ reserves ________ in the banking system
decrease; temporarily
In the market for reserves, a lower interest rate paid on excess reserves
decreases the effective floor for the federal funds rate
Open market operations intended to offset movements in non controllable factors (such as float) that affect reserves and the monetary base are called
defensive open market operations
If float is predicted to decrease b/c of unseasonably good weather, the manager of the trading desk at the Federal Reserve Bank of New York will likely conduct a _____ open market ______ of securities
defensive; purchase
The interest rate the Fed charges banks borrowing from the Fed is the
discount rate
Everything else constant, the vertical section of the supply curve of reserves is shortened when the
discount rate decreases
The mandate for the monetary policy goals that has been given to the Federal Reserve System is an example of a ______ mandate
dual
There are two types of open market operations; _______ open market operations are intended to change the level of reserves and the monetary base, and the ______ open market operations are intended to offset movements in the other factors that affect the monetary base
dynamic; defensive
Total reserves are the sum ______ and ______
excess reserves; required reserves
The political business cycle refers to the phenomenon that just before elections, politicians enact _______ policies. After the elections, the bad effect of these policies (for example, ______) have to be counteracted with ______ policies.
expansionary; a higher inflation rate; contractionary
IF the banking system has a large amount of reserves, many banks will have excess reserves to lend and the FFR will probably _______; if the level of reserves is low, few banks will have excess reserves to lend and the FFR will probably ________
fall; rise
The interest rate charged on overnight loans of reserves between banks is the
federal funds rate
Everything else constant, when the supply for federal funds intersects the reserve demand curve on the downward sloping section, decreasing the interest rate paid on excess reserves
has no effect on the FFR
Everything else constant, in the market for reserves, when the federal funds rate is 3%, increasing the interest paid on excess reserves from 1% to 2%
has no effect on the federal funds rate
Everything else constant, in the market for reserves, when the federal funds rate is 3%, lowering the discount rate from 5% to 4%
has no effect on the federal funds rate
Which set of goals can, at times, conflict in the short run?
high employment and price level stability
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 (monetary base)
Assuming initially that rr=15%, c=40%, and e=5%, a decrease in e to 0% causes the M1 money multiplier to ______, everything else constant
increase from 2.33 to 2.55
If the Treasury deposits at the Fed are predicted to _____, the manager of the trading desk at the New York Fed bank will likely conduct _____ open market operations to ______ reserves
increase; defensive; inject
When bad storms slow the check-clearing process, float tends to ____ causing the Fed to initiate _____ open market ____
increase; defensive; sales
When the Federal Reserve purchases a government bond from a bank, reserves in the banking system _____ and the monetary base _____, everything else constant
increase; increase
Foreign exchange rate stability is important b/c a decline in the value of the domestic currency will ______ the inflation rate, and an increase in the value of the domestic currency makes domestic industries ______ competitive with competing foreign industries
increase; less
The Federal Reserve will engage in a repurchase agreement when it wants to ________ reserves ________ in the banking system
increase; temporarily
Everything else constant, when the FFR equals the interest rate paid on excess reserves, raising the interest rate paid on excess reserves
increases the FFR
In the market for reserves, if the FFR is b/w the discount rate and the interest rate paid on reserves, an increase in the reserve requirement ______ the demand for reserves, _______ the FFR, everything else constant
increases; raising
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
In the market for reserves, if the federal funds rate is above the interest rate paid on excess reserves, an open market purchase _________ the ________ of reserves which causes the federal funds rate to fall, everything else held constant
increases; supply
The most common definition that monetary policymakers use for price stability is
low and stable inflation
Everything else constant, in the market for reserves, when the FFR is 5%, lowering the discount rate from 5% to 4%
lowers the FFR
Everything else constant, when the FFR equals the discount rate, the discount rate
lowers the FFR
Everything else constant, when the supply for federal funds intersects the reserve demand curve along the horizontal section of the demand curve, lowering the interest rate paid on excess reserves
lowers the FFR
The opportunity cost of holding excess reserves is the federal funds rate
minus the interest rate paid on excess reserves
From before the financial crisis began in Septemeber of 2007 to when the crisis was over at the end of 2009, the huge expansion in the Fed's balance sheet and the monetary base did not result in a large increase in monetary supply because
most of it just flowed into holdings of excess reserve
Suppose that from a new checkable deposit, FNB holds two million dollars in vault cash, eight million on deposit with the Federal Reserve, and one million dollars in required reserves. Given this, FNB has ______ million dollars in excess reserves
nine
The policy tool of changing reserve requirements is
no longer used
The quantity of reserves supplied equals
non borrowed reserves plus borrowed reserves
Monetary policy is considered time-inconsistent because
policymakers are tempted to pursue discretionary policy that is more expansionary in the short run
Members of Congress are able to influence monetary policy, albeit indirectly, through their ability to
propose legislation that would force the Fed to submit budget requests to Congress, as must other government agencies
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
Suppose, at a given FFR, there is an excess demand for reserves in the federal funds market. If the Fed wants the FFR to stay at that level, then it should undertake an open market ______ of bonds. If the Fed does nothing the FFR will
purchase; increase
If the Fed expects currency holdings to rise; it conducts open market ______ to offset the expected ______ in reserves
purchases; decrease
Open market purchases _____ reserves and the monetary base thereby ______ the money supply
raise; raising
Everything else constant, in the market for reserves, when the FFR is 1%, increasing the interest rate paid on reserves from 1% to 2%
raises the FFR
The monetary base minus currency in circulation equals
reserves
Open market sales shrink _______ thereby lowering ________
reserves and the monetary base; the money supply
In the market for reserves, a lower discount rate
shortens the vertical section of the supply curve of reserves
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 is required in reserves. Given this, FNB faces a required reserve ratio of ____ percent.
ten
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
Goal independence is the ability of _____ to set monetary policy _______
the central bank; goals
Instrument independence is the ability of ______ to set monetary policy ______
the central bank; instruments
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 reserves
The primary indicator of the Fed's stance on monetary policy is
the federal funds rate
The discount rate is
the interest rate the Fed charges on loans to banks
Total reserves minus bank deposits with the Fed equals
vault cash
