Economics Chapter 14 Notes Money Multiplier – Flashcards
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Money Multiplier/Deposit Multiplier
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The ratio of the amount of deposits created by banks to the amount of new reserves. It is also the amount of money the banking system generates with each dollar of reserves.
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Reciprocal
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The money multiplier is the _ of the reserve ratio.
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less
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The higher the reserve ratio, the _ of each deposit banks loan out, and the smaller the money multiplier.
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Money Multipler
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Simple deposit multiplier (or money multiplier) = 1/RR where RR=required reserve ratio (or just reserve ratio)
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Money expansion
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Maximum checkable - deposit creation = excess reserves x 1/RR
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Higher
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_ reserve rations generate lower money multipliers.
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reversible
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Changing the money multiplier changes the money creation potential. Changing the reserve ratio changes the money multiplier but be careful; the process is _. Loan repayment destroys money, and the money multiplier increases the destruction.
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expands, contracts
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Assuming that banks do not keep any excess reserves and the whole amount of every check is deposited in a bank; no one takes any of it out as currency. We can summarize these important conclusions. 1. When banks gain reserves, they make new loans, and the money supply _. 2. When banks lose reserves, they reduce their loans, and the money supply _.
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Monetary policy
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The actions the Federal Reserve takes to manage the money supply and interest rates to pursue macroeconomic policy objectives.
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monetary policy tools
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To manage the money supply, the Fed uses three _: 1. Open market operations, 2. Discount policy, 3. Reserve requirements. All three of these are aimed at affecting the reserves of banks as a means of changing the volume of checking account deposits.
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indirect
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Because banks create money in a system of fractional-reserve banking, the Fed's control of the money supply is _.
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banking system
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When the Fed decides to change the money supply, it must consider how its actions will work through the banking system.
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1. Open Market Operations
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The buying and selling of Treasury securities (bills, notes, bonds) by the Federal Reserve in order to control the money supply.
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Federal Open Market Committee (FOMC)
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The Federal Reserve committee responsible for open market operations and managing the money supply in the United States.
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to buy U.S. Treasury securities
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To increase the money supply. FOMC directs the trading desk, located at the Federal Reserve Bank of New York, _ from the public.
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$1
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In open market operations, to increase dollars in the economies, the Fed uses held in currency and deposits. Each new $1 held in currency increases the money supply by _. Each new dollar deposited in a bank increases the money supply to an even greater extent because it increases reserves, thereby, the amount of money that the banking system can create. They also excess reserves and lending ability of banks.
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sell Treasury securities
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In open market operations, in order to decrease the money supply, the FOMC directs the trading desk to _; public pays with its holdings (currency and bank deposits). Excess reserves and lending abilities of banks.
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large/small
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By initiating open market operations, the Fed completely controls their volume, thus can make them both _ and _ and implement them quickly without administrative delay or required changes in regulations.
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2. Reserve Requirments
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Regulation on the minimum amount of reserves that banks must hold against deposits.
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increases, lowers, decreases
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Increase in reserve requirements: banks can loan less of each dollar that is deposited. _ reserve ratio, _ the money multiplier, _ the money supply
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lower, increases, increases
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Decrease in reserve requirements: _ reserve ratio, _ the money multiplier, _ the money supply
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reduces
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So when the Fed _ the required reserve ratio, it converts required reserves into excess reserves.
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raises
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If the Fed _ the required reserve ratio, it will have the reserve effect.
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3. Discount Rate
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The interest rate the Federal Reserve charges on loans the Federal Reserve makes to banks.
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discourages, increases, reduces, reduces
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Higher discount rate _ banks from borrowing reserves from the Fed. -_ in the discount rate -_ quantity of reserves in the banking system -_ the money supply
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encourages, lower, increases, increases
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Lower discount rate _ banks from borrowing reserves from the Fed (i.e. take more loans from the Fed). -_ discount rate -_ quantity of reserves in the banking system -_ the money supply (by increasing checking account deposits)
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commercial
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The banks we have been discussing in this chapter are _ banks, whose most important economic role is to accept funds from depositors and lend those funds to borrowers.
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resell, credit
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In the past 20 years, two important developments have occurred in the financial system: 1. Banks have begun to _ many of their loans rather than keep them until they are paid off. 2. Financial firms other than commercial banks have become sources of _ to businesses.
