Money Creation & Federal Reserve

What are required reserves

The amount banks are required by law to hold on each deposit.

*(Regional Federal Reserve District Banks/ Board of Governors of the Federal Reserve System/ The Federal Open Market Committee)* Appointed by the president to serve 14 year terms

Board of Governors of the Federal Reserve System

*(Regional Federal Reserve District Banks/ Board of Governors of the Federal Reserve System/ The Federal Open Market Committee)* Oversees national banking and consumers credit regulation

Board of Governors of the Federal Reserve System

What does NOT represent a leakage from money multiplier process?

Cash held by the fed

*(Decision/Recognition/Info/Implementation)* Despite numerous data trends suggesting a recession, the FOMC waits until their monthly scheduled meeting to change the direction of current monetary policy.

Decision lag

If a financial crisis develops in Ruritania, with numerous loans going into default, the money multiplier will

Decrease

*(True/False)* Banks must lend out all their excess reserves in order to change the M1 money supply.

False

*(True/False)* The Federal Reserve (Fed) has very little effect on the money multiplier.

False

*(True/False) The fractional reserve banking system requires all banks to keep the total value of customer deposits in their vaults to prevent bank runs.

Falsee

*(Decision/Recognition/Info/Implementation)* Data on GDP is released quarterly, meaning that an economic downturn beginning in January may not be identified until more than three months later.

Information lag

*(Yes/No Task of Fed Reserve)* Creating federal budget

NOT task of Fed

*(Yes/No Task of Fed Reserve)* Engaging in fiscal policy

NOT task of Fed

*(Yes/No Task of Fed Reserve)* Managing India's money supply

NOT task of Fed

*(Yes/No Task of Fed Reserve)* Printing paper currency

NOT task of Fed

*(Decision/Recognition/Info/Implementation)* Significant revisions to quarterly GDP data and monthly unemployment data delay the identification of the start of a recession.

Recognition lag

*(Regional Federal Reserve District Banks/ Board of Governors of the Federal Reserve System/ The Federal Open Market Committee)* Distributes coin and currency

Regional Federal Reserve District Banks

*(Regional Federal Reserve District Banks/ Board of Governors of the Federal Reserve System/ The Federal Open Market Committee)* Provides info on regional economic conditions through the Beige Book report

Regional Federal Reserve District Banks

*(Regional Federal Reserve District Banks/ Board of Governors of the Federal Reserve System/ The Federal Open Market Committee)* Supervises and regulates member banks

Regional Federal Reserve District Banks

*(Yes/No Task of Fed Reserve)* Managing the US Money supply

Task of Fed

*(True/False) Banks typically loan out a portion of customer deposits.

True

The interest rate the Federal Reserve charges commercial banks for loans is the

discount rate

The interest rate banks charge each other for very short-term loans is the

federal funds rate

The share of deposits that banks must have in reserves is the

reserve requirement

1. Suppose that the required reserve ratio is 8.00%. What is the simple money (deposit) multiplier? 2.Increasing the reserve ratio will _____ the money multiplier.

1. 1/0/08=12.5 2. Decrease

Banks in Ruritania have required reserve ratio of 8%. What is the simple money multiplier?

1/0.08 = 12.5

Reserved ratio = 5% *Assets*-Reserves: 2525 *Liabilities* - Deposits: $2525

T2 -Loans: [2525]- [2525*0.05] = 2398.75 -Reserves: 2525.00 -Deposits: 2525+2398.75=493.75

*(Yes/No Task of Fed Reserve)* Acting as a lender of last resort

Task of Fed

*(Yes/No Task of Fed Reserve)* Engaging in monetary policy

Task of Fed

Money leakages are quite high. Required reserves and leakages amount to 20% of deposits. What is leakage-adjusted money multiplier

1/0.20 = 5.0

Which events could cause the increase in the money supply to be less than its potential?

-Banks decide to keep some excess reserves on hand -Some loan recipients choose to hold some cash instead of depositing all of it in banks

What represents a leakage from money multiplier

-Cash held by individuals/foreigners -Excess reserves

Suppose that the central bank has increased the money supply such that there is an additional $364839 in excess reserves. If the reserve ratio is 9% what is the max increase in money supply?

1/0.09 = 11 11*364839 = 4053767

*(Regional Federal Reserve District Banks/ Board of Governors of the Federal Reserve System/ The Federal Open Market Committee)* Comprised of the Board of Governors and five regional bank presidents

The Federal Open Market Committee

*(Regional Federal Reserve District Banks/ Board of Governors of the Federal Reserve System/ The Federal Open Market Committee)* Oversees the buying and selling of government securities as a form of monetary policy

The Federal Open Market Committee

Open market operation

The Federal Reserve sells bonds via the commercial banking system.

Discount rate

The interest rate that the Federal Reserve Bank (the Fed) charges member banks for loans

*1.* Suppose Robina Bank receives a deposit of $55,589 and the reserve requirement is 7%. *2.* What is the amount that Robina Bank must keep on hand as required by the Federal Reserve (Fed)? *3.* What is the amount that Robina Bank must have in excess reserves from this initial deposit? *4.* What is the total change in the M1 money supply from this one deposit?

*1.* 55,589*0.07=3891.23 *2.* 55,589-3891.23=51,697.77 *3.* 55,589/0.07=794,128.57

Suppose you win on a scratch‑off lottery ticket and you decide to put all of your $2,500 winnings in the bank. The reserve requirement is 5%. What is the maximum possible increase in the money supply as a result of your bank deposit?

2500*0.05 = 125 2500 - 125 = 2375 1/0.05 = 20 20*2375 = 47500

*(Decision/Recognition/Info/Implementation)* Once the Federal Reserve lowers interest rates, businesses and consumers are slow to increase borrowing as a result.

Implementation lag

The fed can _____ the money supply by lowering discount rate

Increase

*(True/False) In the United States, banks keep the entire value of all customer deposits in the bank vault to meet customer withdrawals.

False

*(True/False)* All Federal Reserve actions are subject to veto by the executive branch.

False

*(True/False)* The Federal Reserve was established by the U.S. Constitution in the late 1700s.

False

You are Chair of the Federal Reserve Board. In your meeting with the Federal Open Market Committee, the committee unanimously votes to increase the money supply using open market operations (OMOs). During the press conference after the meeting, a reporter asks you to explain what OMOs are and how you will use them to increase the money supply.

OMOs are the purchase and sale of government securities. To increase the money supply, we will buy government securities, which increases the amount of reserves in the banking system and fuels deposit expansion.

*(True/False) 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.

True

*(True/False) The Federal Deposit Insurance Corporation (FDIC) protects bank depositors from bank failure.

True

*(True/False)* The Federal Reserve was created by the Federal Reserve Act of 1913.

True

*(True/False)* The national objectives of the Federal Reserve include promoting economic growth, full employment, stable prices, and moderate interest rates.

True

*(True/False)* 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

*(True/False)* 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

Another potential role of central banks is to foster confidence in the banking system by making sure that people can retrieve their money even if a bank goes bankrupt. What is the term for this?

deposit insurance

In many countries, one of the roles of the central bank is to provide loans to distressed financial institutions. What is the term for this?

lender of last resort

What is the difference between reserves and excess reserves in terms of banking?

-Excess reserves refer to the reserves that the banks have beyond the legally required reserve amounts. -Reserves are the funds banks keep on hand to meet Federal Reserve requirements.

Phil Frugal has been saving his pennies since he was 5 years old. He is now 45 and deposits his savings in a bank. His pennies total $5000. Using this information and your knowledge of the banking system, place both the definition and dollar amounts below in their appropriate category. Assume a required reserve ratio of 10%. *Determine required/excess/reserves*

-Required:5000*0.10= $500 -Excess: 5000-500= $4500 -Reserves: $5000

The Fed __1__ controls the money supply through open market operations. For instance, when the Fed buys bonds, this __2__ in demand for bonds causes nominal interest rates to __3__ . When the Fed buys bonds, bank reserves __4__ , which reduces the need for banks to borrow. This causes the federal funds rate to __5__ .

1. indirectly 2. increase 3. decrease 4. increase 5. decrease