ECON Chapter 14 and 15 quiz – Flashcards
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What will happen to the money supply if there is a sharp rise in the currency ratio
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the money supply will fall
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The ratio of the money supply to the monetary base is called
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The Money Mulitplier
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A purchase of government bonds from the public by the Federal Reserve Bank
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increases the monetary base directly and may increase reserves
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The M2 money multiplier increases in value when the
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required reserve ratio decreases
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Loans the the Fed makes to banks appear on the balance sheet as _________ and deposits made by banks on the Feds balance sheet as part as its __________.
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Assets; Liabilities
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What would you predict to the money supply if expected inflation suddenly increased?
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the money supply would increase
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The Federal Reserve System is the _________ for the U.S., which is defined as the government agency responsible for _________.
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Central bank; the conduct of monetary policy
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The interest rate charged to banks that borrow funds from the Fed is known as the
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Discount Rate
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If a bank decided that is wants to hold $1 million of excess reserves, what effect will this have on checkable deposits in the banking system?
-Required reserve ratio on checkable deposits= 10%
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checkable deposits decline by $10 million
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The M2 money multiplier increases in value when the
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time deposit ratio (t) increases
money market fund ratio (mm) increases
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Under 100% reserve banking, the money multiplier will be
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1
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The money multiplier when people hold currency and when banks hold excess reserves is _________ the simpler multiplier
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smaller than
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Two primary assets of the Federal Reserve System are
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government securities
loans to commercial banks
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If the economy starts to boom and loan demand picks up, what do you predict will happen to the money supply?
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money supply will increase
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If Jane Brown closes her account at First National Bank and uses the money instead to open a money market mutual fund account, what happens to M1? and Why?
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M1 does not change because the funds that go to the money market mutual fund are first deposited into the mutual funds bank account
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As financial intermediaries, banks:
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accept deposits; make loans
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The monetary base is affected by:
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The Federal Reserve through open market operations
The Federal Reserve through its extension of discount loans
Float and Treasury deposits at the Federal Reserve
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The Feds most commonly used means of changing the money supply is:
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open market operations
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The zero-lower-bound problem
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occurs because people can always earn more from holding bonds than holding cash
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Credit easing refers to
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altering the composition of the Feds balance sheet in order to improve the functioning of particular segments of the credit markets
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The Federal Funds Rate is determined by
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the equilibrium of supple and demand in the market for reserves
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When the Fed increase reserve requirements, it reduces the money supply by causing
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the money multiplier to fall
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The most important advantage of discount policy is that the Fed can use it to
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perform its role as lender-of-last-resort
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The management of expectations is a strategy best defined by
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keeping the federal funds rate at zero fro an extended period to lower the market's expectations of future short-term interest rates
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When the zero-lower-bound problem occurs, central banks can rely on
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the liquidity provision
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The Feds lender-of-last-resort function
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creates a moral hazard problem
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The graph shows a fall in the vertical section of the supply curve of reserves, The fall in the supply curve is caused by
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a decrease in the discount rate
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Reserves are
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-Assets for banks
-deposits at the Fed plus vault cash
-Liabilities for the Fed
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Suppose the Required Reserve Ratio is 8%, currency in circulation is $580 billion, checkable deposits is $950 billion, and excess reserves is 12 billion.
What is the money supply, currency ratio, and excess reserve ratio?
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Money Supply= C+D
$1530 billion=580+950
Currency Ratio= C/D
0.611= 580/950
Excess Reserve Ratio= XR/D
0.013=12/950
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Required Reserve Ratio= 1/3
Currency in circulation= $300 billion
Checkable deposits= $900 billion
no excess reserves
What is the monetary base?
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MB=C+R
900/3=300
300+300= $600 billion
