Questions and Answers
What does fractional reserve banking refer to?
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?
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One major component of money supply M1 is part of a bank's?
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When cash is deposited in a checkable-deposit account at a bank, there is an increase in the bank's assets.
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If a commercial bank has required reserves of $60 million and the reserve ratio is 20 percent, how much are its checkable-deposit liabilities?
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A bank is positioned to make loans when required reserves are greater than actual reserves.
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Money is 'created' when a bank grants a loan to a customer.
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Why must commercial banks keep required reserves on deposit at the Fed?
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A bank can acquire additional excess reserves by buying Treasury securities from the Fed.
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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?
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Maximum checkable-deposit expansion in the banking system is equal to?
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When bankers hold excess reserves, the money-creating potential of the banking system increases.
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Which factors can contribute to a reduction in the money supply in addition to massive cash withdrawals?
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A consumer holds money to meet spending needs; what does this represent?
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The transactions demand for money is least likely to be influenced by the interest rate.
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When interest rates fall, what happens to the total amount of money demanded?
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The interest rate will fall when the quantity of money supplied exceeds the quantity of money demanded.
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Loans of the Federal Reserve Banks to commercial banks are classified as?
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U.S. Treasury deposits at the Federal Reserve Banks are classified as?
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The main tools the Fed can use to alter the reserves of commercial banks include the required-reserve ratio and the exchange rate.
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The lending ability of commercial banks increases when the Fed?
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How does the Federal Reserve alter the nation's money supply?
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Which of the following Fed actions increases the excess reserves of commercial banks?
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What is the major purpose of the Federal Reserve buying government securities in open market operations?
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Lowering the reserve ratio has what effect?
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If the Board of Governors of the Federal Reserve System increases the legal reserve ratio, what is the likely outcome?
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What is the interest rate that banks charge one another for the loan of excess reserves?
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An increase in the money supply usually has what effect, ceteris paribus?
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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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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.
