Macroeconomics Test 4 Flashcards
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Questions and Answers

What does fractional reserve banking refer to?

  • Issuing interest-free loans
  • Investing all deposits in stocks
  • Holding all deposits in reserves
  • Holding only a fraction of deposits in reserves (correct)
  • What did goldsmiths start doing that led to the fractional reserve system of banking?

    Issuing paper receipts in excess of the amount of gold held

    Banks are not vulnerable to 'panics' or 'bank runs' due to fractional reserve banking.

    False

    What is a bank's net worth equal to?

    <p>Assets minus liabilities</p> Signup and view all the answers

    One major component of money supply M1 is part of a bank's?

    <p>Liabilities</p> Signup and view all the answers

    When cash is deposited in a checkable-deposit account at a bank, there is an increase in the bank's assets.

    <p>False</p> Signup and view all the answers

    If a commercial bank has required reserves of $60 million and the reserve ratio is 20 percent, how much are its checkable-deposit liabilities?

    <p>$300 million</p> Signup and view all the answers

    A bank is positioned to make loans when required reserves are greater than actual reserves.

    <p>False</p> Signup and view all the answers

    Money is 'created' when a bank grants a loan to a customer.

    <p>True</p> Signup and view all the answers

    Why must commercial banks keep required reserves on deposit at the Fed?

    <p>To allow the Fed to control the amount of bank lending</p> Signup and view all the answers

    A bank can acquire additional excess reserves by buying Treasury securities from the Fed.

    <p>False</p> Signup and view all the answers

    If the required reserve ratio is 20 percent and bankers hold additional excess reserves equal to 5 percent of checkable deposits, what is the effective monetary multiplier?

    <p>4</p> Signup and view all the answers

    Maximum checkable-deposit expansion in the banking system is equal to?

    <p>Excess reserves times the monetary multiplier</p> Signup and view all the answers

    When bankers hold excess reserves, the money-creating potential of the banking system increases.

    <p>False</p> Signup and view all the answers

    Which factors can contribute to a reduction in the money supply in addition to massive cash withdrawals?

    <p>Bank purchases of Treasury bonds from the Fed</p> Signup and view all the answers

    A consumer holds money to meet spending needs; what does this represent?

    <p>Transactions demand for money</p> Signup and view all the answers

    The transactions demand for money is least likely to be influenced by the interest rate.

    <p>True</p> Signup and view all the answers

    When interest rates fall, what happens to the total amount of money demanded?

    <p>Increases</p> Signup and view all the answers

    The interest rate will fall when the quantity of money supplied exceeds the quantity of money demanded.

    <p>True</p> Signup and view all the answers

    Loans of the Federal Reserve Banks to commercial banks are classified as?

    <p>An asset of the Federal Reserve Banks and a liability for commercial banks</p> Signup and view all the answers

    U.S. Treasury deposits at the Federal Reserve Banks are classified as?

    <p>A liability of the Federal Reserve Banks and an asset for the U.S. Treasury</p> Signup and view all the answers

    The main tools the Fed can use to alter the reserves of commercial banks include the required-reserve ratio and the exchange rate.

    <p>False</p> Signup and view all the answers

    The lending ability of commercial banks increases when the Fed?

    <p>Buys securities in the open market</p> Signup and view all the answers

    How does the Federal Reserve alter the nation's money supply?

    <p>Manipulating the size of excess reserves held by commercial banks</p> Signup and view all the answers

    Which of the following Fed actions increases the excess reserves of commercial banks?

    <p>Lower the reserve ratio</p> Signup and view all the answers

    What is the major purpose of the Federal Reserve buying government securities in open market operations?

    <p>Allow banks to increase their lending</p> Signup and view all the answers

    Lowering the reserve ratio has what effect?

    <p>Turns required reserves into excess reserves</p> Signup and view all the answers

    If the Board of Governors of the Federal Reserve System increases the legal reserve ratio, what is the likely outcome?

    <p>Decrease the excess reserves of member banks and thus decrease the money supply</p> Signup and view all the answers

    What is the interest rate that banks charge one another for the loan of excess reserves?

    <p>Federal funds rate</p> Signup and view all the answers

    An increase in the money supply usually has what effect, ceteris paribus?

    <p>Decreases the interest rate and increases aggregate demand</p> Signup and view all the answers

    Study Notes

    Fractional Reserve Banking

    • Fractional reserve banking involves banks holding only a portion of deposits as reserves.
    • Originated with goldsmiths issuing paper receipts exceeding the gold held.

    Consequences of Fractional Reserve Banking

    • Banks are susceptible to panics or bank runs due to the fractional reserve system.

    Bank Financials

    • A bank's net worth is calculated as assets minus liabilities.
    • One key element of money supply M1 includes a bank's liabilities.

    Bank Deposits and Loans

    • Depositing cash into a checkable-deposit account increases the bank's liabilities.
    • When required reserves are less than actual reserves, banks can issue loans.
    • Money is "created" through bank loans to customers.

    Regulation and Reserves

    • Commercial banks are mandated to keep required reserves at the Fed to control lending.
    • Banks cannot obtain additional excess reserves by purchasing Treasury securities from the Fed.
    • Holding excess reserves decreases the money-creating potential of the banking system.

    Monetary Policy and Multiplier Effect

    • The effective monetary multiplier, when the reserve ratio is 20% and banks hold 5% in excess, is 4.
    • Maximum expansion of checkable deposits equals excess reserves multiplied by the monetary multiplier.

    Demand for Money

    • Consumers hold money to satisfy spending needs, demonstrating transactions demand for money.
    • Transactions demand is generally not influenced by interest rates.
    • A fall in interest rates leads to an increase in the total amount of money demanded.

    Money Supply and Interest Rates

    • Interest rates decrease when the quantity of money supplied exceeds the quantity demanded.
    • Loans to commercial banks by the Federal Reserve are assets for the Fed and liabilities for banks.

    Federal Reserve Operations

    • U.S. Treasury deposits are liabilities for the Fed and assets for the U.S. Treasury.
    • The Fed manipulates reserves primarily through required-reserve ratios and not through exchange rates.
    • The Fed enhances the lending ability of banks by purchasing securities in open markets.

    Impact of Fed Actions

    • The Fed alters the nation's money supply by changing the amount of excess reserves.
    • Lowering the reserve ratio increases banks' excess reserves.
    • The main intention behind the Fed buying government securities is to boost bank lending.

    Consequences of Reserve Changes

    • Lowering the reserve ratio converts required reserves into excess reserves.
    • Increasing the legal reserve ratio decreases excess reserves and contracts the money supply.
    • The Federal funds rate refers to the interest that banks charge for lending excess reserves to each other.

    Economic Effects of Money Supply

    • An increase in the money supply usually results in lower interest rates and higher aggregate demand.

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    Description

    These flashcards cover key concepts related to fractional reserve banking in macroeconomics. They provide definitions and explanations that help solidify understanding of this critical banking system. Ideal for students preparing for their macroeconomics tests.

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