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Questions and Answers
The money supply in an economy equals:
The money supply in an economy equals:
The main asset on the Federal Reserve's balance sheet is:
The main asset on the Federal Reserve's balance sheet is:
The main liability on the Federal Reserve's balance sheet is:
The main liability on the Federal Reserve's balance sheet is:
Currency held by the nonbank public plus banks' vault cash plus banks' deposits at the Fed equals:
Currency held by the nonbank public plus banks' vault cash plus banks' deposits at the Fed equals:
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Green Bank has transaction accounts worth $200 million. If the required reserve ratio is 10%, how much does Green Bank hold as required reserves?:
Green Bank has transaction accounts worth $200 million. If the required reserve ratio is 10%, how much does Green Bank hold as required reserves?:
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Third Bank has reserves of $12.3 million and transaction accounts of $115 million. If required reserves are 10% of transaction accounts, how much excess reserves does Third Bank have?:
Third Bank has reserves of $12.3 million and transaction accounts of $115 million. If required reserves are 10% of transaction accounts, how much excess reserves does Third Bank have?:
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Consider a bank that has $10 million in reserves, $5 million in securities, and $100 million in transaction accounts. If a customer sells $2 million in securities to the Fed, how much do the bank's reserves increase to?:
Consider a bank that has $10 million in reserves, $5 million in securities, and $100 million in transaction accounts. If a customer sells $2 million in securities to the Fed, how much do the bank's reserves increase to?:
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The money multiplier equals:
The money multiplier equals:
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M1 money multiplier equals:
M1 money multiplier equals:
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M2 money multiplier equals:
M2 money multiplier equals:
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If a bank in the economy has excess reserves of $3 million, and required reserves are 10% of transaction accounts, how much will the money supply eventually increase by?:
If a bank in the economy has excess reserves of $3 million, and required reserves are 10% of transaction accounts, how much will the money supply eventually increase by?:
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If the M2 multiplier is 8.3, how much would the Fed need to add to the monetary base in order to increase the M2 measure of the money supply by $830 million?:
If the M2 multiplier is 8.3, how much would the Fed need to add to the monetary base in order to increase the M2 measure of the money supply by $830 million?:
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If the M1 multiplier is 3 and the Fed engages in open-market sales in the amount of $3 billion, then M1 will:
If the M1 multiplier is 3 and the Fed engages in open-market sales in the amount of $3 billion, then M1 will:
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Another name for the monetary base is:
Another name for the monetary base is:
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An increase in interest rates:
An increase in interest rates:
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If the excess reserves held by banks increase, the money multiplier is likely to:
If the excess reserves held by banks increase, the money multiplier is likely to:
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If the M2 multiplier is currently 8 and people decide to increase the ratio of currency they hold relative to the amount of transactions accounts they hold, the M2 multiplier will:
If the M2 multiplier is currently 8 and people decide to increase the ratio of currency they hold relative to the amount of transactions accounts they hold, the M2 multiplier will:
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Suppose the M1 multiplier is currently 1.95 and the M2 multiplier is currently 8.03. If the ratio of retail money-market mutual funds to transaction accounts increases, the M1 multiplier will _____ and the M2 multiplier will _____.
Suppose the M1 multiplier is currently 1.95 and the M2 multiplier is currently 8.03. If the ratio of retail money-market mutual funds to transaction accounts increases, the M1 multiplier will _____ and the M2 multiplier will _____.
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Suppose the M1 multiplier is currently 1.95 and the M2 multiplier is currently 8.03. If people decide to decrease the ratio of nontransaction accounts they hold relative to the amount of their transaction accounts, the M1 multiplier will and the M2 multiplier will:
Suppose the M1 multiplier is currently 1.95 and the M2 multiplier is currently 8.03. If people decide to decrease the ratio of nontransaction accounts they hold relative to the amount of their transaction accounts, the M1 multiplier will and the M2 multiplier will:
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If the ratio of currency to transaction accounts is 2, the ratio of nontransaction accounts to transaction accounts is 5, the ratio of retail money-market funds to transaction accounts is 1, the ratio of required reserves to transaction accounts is 0.08, and the ratio of excess reserves to transaction accounts is 0.02, the M1 multiplier is about:
If the ratio of currency to transaction accounts is 2, the ratio of nontransaction accounts to transaction accounts is 5, the ratio of retail money-market funds to transaction accounts is 1, the ratio of required reserves to transaction accounts is 0.08, and the ratio of excess reserves to transaction accounts is 0.02, the M1 multiplier is about:
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If the ratio of currency to transaction accounts is 2, the ratio of nontransaction accounts to transaction accounts is 5, the ratio of retail money-market funds to transaction accounts is 1, the ratio of required reserves to transaction accounts is 0.08, and the ratio of excess reserves to transaction accounts is 0.02, the M2 multiplier is about:
If the ratio of currency to transaction accounts is 2, the ratio of nontransaction accounts to transaction accounts is 5, the ratio of retail money-market funds to transaction accounts is 1, the ratio of required reserves to transaction accounts is 0.08, and the ratio of excess reserves to transaction accounts is 0.02, the M2 multiplier is about:
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If the Open-Market Desk at the Fed sells securities, the most likely effect is that the:
If the Open-Market Desk at the Fed sells securities, the most likely effect is that the:
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If the Open-Market Desk at the Fed buys securities, the most likely effect is that the:
If the Open-Market Desk at the Fed buys securities, the most likely effect is that the:
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During the holiday season in December, people use more currency than usual. To offset this increase in demand for money, the Fed increases the money supply through:
During the holiday season in December, people use more currency than usual. To offset this increase in demand for money, the Fed increases the money supply through:
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The Fed undertakes defensive open-market operations:
The Fed undertakes defensive open-market operations:
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If the Fed decides to tighten monetary policy, it uses __________ to the __________ money supply.
If the Fed decides to tighten monetary policy, it uses __________ to the __________ money supply.
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The Fed undertakes dynamic open-market operations:
The Fed undertakes dynamic open-market operations:
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The extra collateral the Fed requires above the value of a discount loan is known as:
The extra collateral the Fed requires above the value of a discount loan is known as:
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If the haircut charged by the Fed is very large:
If the haircut charged by the Fed is very large:
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A bank in good condition may take out a loan without the Fed questioning the purpose or nature of the loan. Such a loan is known as:
A bank in good condition may take out a loan without the Fed questioning the purpose or nature of the loan. Such a loan is known as:
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A bank in poor condition may take out a loan under close Fed scrutiny. Such a loan is known as:
A bank in poor condition may take out a loan under close Fed scrutiny. Such a loan is known as:
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A secondary credit discount loan has an interest rate that is __________ percentage point(s) higher than the interest rate on a primary credit discount loan:
A secondary credit discount loan has an interest rate that is __________ percentage point(s) higher than the interest rate on a primary credit discount loan:
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A _______ is a loan from the Fed to a small agricultural bank.
A _______ is a loan from the Fed to a small agricultural bank.
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Before 2008, an increase in reserve requirements by the Fed would:
Before 2008, an increase in reserve requirements by the Fed would:
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The amount of nonborrowed reserves equals:
The amount of nonborrowed reserves equals:
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Primary credit discount loans for profit will be zero when:
Primary credit discount loans for profit will be zero when:
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The supply curve of reserves in an economy is when the federal funds rate is less than the primary credit discount rate:
The supply curve of reserves in an economy is when the federal funds rate is less than the primary credit discount rate:
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The supply curve of reserves in an economy is horizontal when:
The supply curve of reserves in an economy is horizontal when:
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An increase in the amount of discount loans by the Fed:
An increase in the amount of discount loans by the Fed:
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The sum of seasonal credit discount loans, secondary credit discount loans, and primary credit discount loans that banks take out because of temporary problems are known as:
The sum of seasonal credit discount loans, secondary credit discount loans, and primary credit discount loans that banks take out because of temporary problems are known as:
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If the federal funds rate is below its target, the Fed is likely to __________ securities in the open market, which will cause the federal funds rate to __________.
If the federal funds rate is below its target, the Fed is likely to __________ securities in the open market, which will cause the federal funds rate to __________.
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If the federal funds rate equals the primary credit discount rate, the Fed is likely to _____________ securities in the open market, which will cause the federal funds rate to _________.
If the federal funds rate equals the primary credit discount rate, the Fed is likely to _____________ securities in the open market, which will cause the federal funds rate to _________.
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If the Open-Market Desk at the Fed buys securities when the federal funds rate is below the primary credit discount rate, the most likely effect is that the:
If the Open-Market Desk at the Fed buys securities when the federal funds rate is below the primary credit discount rate, the most likely effect is that the:
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A __________ is a situation in which additions to an economy's monetary base do not lead to an increase in the economy's money supply or decline the interest rate.
A __________ is a situation in which additions to an economy's monetary base do not lead to an increase in the economy's money supply or decline the interest rate.
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Which of the following is true of an economy in a liquidity trap?:
Which of the following is true of an economy in a liquidity trap?:
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Which of the following is true of an economy that has hit the zero lower bound?:
Which of the following is true of an economy that has hit the zero lower bound?:
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Study Notes
Money Supply and Multiplier
- Money supply in an economy is calculated as the money multiplier multiplied by the monetary base.
- Money multiplier equals the money supply divided by the monetary base.
Federal Reserve's Balance Sheet
- Main asset on the Federal Reserve's balance sheet: securities.
- Main liability: the monetary base.
- The monetary base comprises currency held by the public, banks' vault cash, and banks' deposits at the Fed.
Bank Reserves
- Required reserves for Green Bank with $200 million in transaction accounts at a 10% reserve ratio is $20 million.
- Third Bank with $12.3 million in reserves and $115 million in transaction accounts has $0.8 million in excess reserves, given a 10% reserve requirement.
Impact of Transactions
- A bank with $10 million in reserves and $100 million in transaction accounts can increase its reserves to $12 million if it sells $2 million in securities to the Fed.
M1 and M2 Money Multipliers
- M1 money multiplier formula: (transaction accounts + currency) ÷ monetary base.
- M2 money multiplier formula: (M1 + nontransaction accounts + money market funds) ÷ monetary base.
Changes in Money Supply
- An increase of $3 million in excess reserves can eventually raise the money supply by $30 million.
- An M2 multiplier of 8.3 requires the Fed to add $100 million to increase the M2 money supply by $830 million.
- If the M1 multiplier is 3 and the Fed sells $3 billion in securities, M1 will decline by $9 billion.
Open-Market Operations
- Open-market sales by the Fed likely result in an increase in the federal funds rate.
- Open-market purchases generally lead to a decrease in the federal funds rate.
Types of Open-Market Operations
- Defensive open-market operations address seasonal effects or temporary changes in money demand.
- Dynamic open-market operations are utilized to change monetary policy.
Discount Loans
- The extra collateral required by the Fed for a discount loan is known as a haircut.
- A primary credit discount loan permits banks in good standing to borrow without extensive inquiry.
- Secondary credit discount loans are closely scrutinized and have a 1/2 percentage point higher interest rate than primary loans.
Monetary Base and Reserve Requirements
- An increase in reserve requirements results in a decrease in the money multiplier.
- Nonborrowed reserves equal the monetary base minus the sum of discount loans and currency.
Market Supply Curves
- The supply curve of reserves is vertical when the federal funds rate is less than the primary credit discount rate.
- The curve is horizontal if the federal funds rate equals the primary credit discount rate.
Economic Conditions
- An increase in discount loans by the Fed directly increases the money supply.
- A liquidity trap occurs when increases in monetary base do not result in a higher money supply or lower interest rates.
Zero Lower Bound
- At the zero lower bound, increases in the monetary base do not yield increases in money supply, leading to a decline in money multipliers.
Studying That Suits You
Use AI to generate personalized quizzes and flashcards to suit your learning preferences.
Description
Test your knowledge with these flashcards focusing on key concepts from Economics Chapter 16. The quiz covers essential topics including the money supply and the Federal Reserve's balance sheet. Perfect for students looking to reinforce their understanding of economic principles.
