ECON 1012 Lecture Notes - Lecture 8: Nominal Interest Rate, Opportunity Cost, Money Multiplier

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lilachare194

28 Feb 2017

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Last resort loans: the fed is the lender of last resort, which means the fed stands ready to lend reserves to depository institutions that are short of reserves. The federal reserve essentially purchases assets fro(cid:373) (cid:271)a(cid:374)ks i(cid:374) e(cid:454)(cid:272)ha(cid:374)ge for i(cid:374)(cid:272)reasi(cid:374)g the (cid:271)a(cid:374)ks" reserves. Required reserve ratio: the fed sets the required reserve ratio, which is the minimum percentage of deposits that a depository institution must hold as reserves, the fed rarely changes the required reserve ratio. Banks create deposits when they make loans and the new deposits created are new money. The quantity of deposits that banks can create is limited by three factors: The monetary base is the su(cid:373) of federal reserve (cid:374)otes, (cid:272)oi(cid:374)s, a(cid:374)d (cid:271)a(cid:374)ks" deposits at the fed. The size of the monetary base limits the total quantity of money that the banking system can create because. And both these desired holdings of monetary base depend on the quantity of money.

Related Questions

QUESTION 31

The Board of Governors of the Federal Reserve System is

		composed of seven members who are appointed by the President and approved by the Senate.
		composed of 12 members of the Senate and the U.S. House of Representatives.
		elected by the general public.
		composed of representatives from the country's 12 largest commercial banks.

1.11 points

QUESTION 32

The Fed is said to be the "lender of last resort" in that

		it charges a higher interest rate to borrowers than does any other bank.
		it functions as the government's bank only when commercial banks fail to do so.
		it makes loans to individuals whom commercial banks do not believe are credit-worthy.
		it stands ready to lend to any depository institution that it has decided should not fail.

1.11 points

QUESTION 33

The Federal Reserve System acts as the government's fiscal agent by

		providing checking account services for the government.
		preparing the budget the President presents to Congress every year.
		determining how to finance a deficit.
		auditing taxpayers.

1.11 points

QUESTION 34

The Federal Reserve System was established in which year?

		1913.
		1929.
		1865.
		1941.

1.11 points

QUESTION 35

By serving as the lender of last resort,

		the Fed provides check clearing services.
		the Fed aids in the sale of government securities.
		the Fed supervises depository institutions.
		the Fed can prevent bank failures.

1.11 points

QUESTION 36

Depository institutions must

		use and pay for the services of the Federal Reserve System.
		set their interest rates according to schedules established by the Federal Reserve System.
		keep a certain percentage of their deposits as reserves.
		turn over a percentage of their profits to the Federal Reserve System as payment for services provided by the Fed.

1.11 points

QUESTION 37

The Federal Reserve System has

		50 district banks.
		24 district banks.
		12 district banks.
		7 district banks.

1.11 points

QUESTION 38

The part of the Federal Reserve System (the Fed) that holds the reserve balances of depository institutions is

		the Board of Governors.
		the Federal Advisory Committee.
		the Federal Open Market Committee.
		the Federal Reserve district banks.

1.11 points

QUESTION 39

The potential for a financial breakdown at one financial institution to spread throughout the financial system is known as a

		systemic risk.
		liquidity risk.
		lending risk.
		moral hazard.

1.11 points

QUESTION 40

A system in which depository institutions hold reserves that are less than the amount of total deposits is called

		fiat money banking.
		required reserve banking.
		fractional reserve banking.
		central banking system.

1.11 points

QUESTION 41

Total reserves of private banks are

		all customer deposits.
		the minimum amount banks need to hold against time deposits.
		federal reserve notes.
		deposits held at the Fed and vault cash.

1.11 points

QUESTION 42

A statement of assets and liabilities of any business entity is called

		a cash flow statement.
		an income statement.
		a balance sheet.
		a statement of net worth.

1.11 points

QUESTION 43

Which of the following actions has no effect on the total money supply?

		The Federal Open Market Committee buys government securities.
		There is a transfer of deposits from one bank to another bank.
		There is change in the money multiplier.
		The Federal Open Market Committee sells government securities.

1.11 points

QUESTION 44

Given a required reserve ratio of 20 percent, a commercial bank that has received a new deposit of $100 can make additional loans of

		$80.
		$0.
		$400.
		$20.

1.11 points

QUESTION 45

The Federal Open Market Committee has responsibility for

		appointing members to the Board of Governors of the Federal Reserve system.
		issuing orders to buy or sell government securities for the Fed.
		advising the Treasury Department on monetary policy.
		printing money.

indigobutterfly708

Multiple choices

1. Banks face liquidity risk because

A) they can have difficulty meeting their depositor's demands to withdraw money.

B) they are unable to borrow from the Federal Reserve.

C) households and businesses may seek to borrow a large number of funds in a short period of time.

D) governments tend to run high budget deficits.

2. The original intention of the Fed's role as lender of last resort was to make loans to banks that were

A) not illiquid nor insolvent.

B) illiquid, but not insolvent.

C) insolvent, but not illiquid.

D) both illiquid and insolvent.

3. Why might a nation seek to maintain a pegged exchange rate?

A) It makes business planning easier for firms involved in the global economy.

B) It removes the need to intervene in the foreign exchange market.

C) It ensures that the exchange rate will remain at its equilibrium.

D) It makes their currency more attractive on the foreign exchange market.

4. Suppose a country pegs its currency. If investors start to believe the peg will collapse and the currency is going to depreciate, as the government defends the peg the interest rate will

A) Not move as interest rates must remain constant in a peg

B) Increase to maintain the peg

C) Decrease to maintain the peg

D) It depends on the inflation rate is low or high compared to the country to which the currency is pegged.

5. When the Fed extends loans to depository institutions

A) increases the level of reserves.

B) it decreases the level of reserves.

C) it reduces the total value of the assets on its balance sheet.

D) it reduces the total value of the liabilities on its balance sheet.

6. If the Fed buys securities worth $10 million, then

A) bank reserves will increase by $10 million.

B) bank reserves will decrease by $10 million.

C) currency in circulation will increase by $10 million.

D) bank holdings of securities increased by $10 million.

7. If the Fed purchases $1 million in securities from the nonbank public, the monetary base will rise by $1 million

A) if the public holds the proceeds as currency.

B) if the public deposits the proceeds as checkable deposits.

C) if the public deposits the proceeds with the Treasury in a monetary base account.

D) whether the public holds the proceeds as currency or deposits them as checkable deposits.

8. The aggregate M1 consists of

A) currency plus all deposits in financial institutions.

B) currency plus savings deposits in financial institutions.

C) currency plus checkable deposits in financial institutions.

D) currency.

9. If the Fed purchases $1 million worth of securities and the required reserve ratio is 8%, by how much will deposits increase (assuming no change in excess reserves or the public's currency holdings)?

A) rise by $1 million

B) decline by $1 million

C) rise by $8 million

D) rise by $12.5 million

10. Suppose the required reserve ratio is 8% and the Fed purchases $100 million worth of Treasury bills from Wells Fargo. Suppose Wells Fargo didn't have excess reserves, then by how much is Wells Fargo able to increase its loans?

A) $8 million

B) $92 million

C) $100 million

D) $1.25 billion

11. If banks hold no excess reserves, checkable deposits total $1.5 billion, currency totals $400 million, and the required reserve ratio is 10%, then the monetary base equals

A) $550 million.

B) $1.54 billion.

C) $1.9 billion

D) $15 billion.

ultramarinehornet6

Assets	Liabilities
Reserves $2,000	Deposits $10,000
Loans 8,000

Refer to Table.

Starting from the situation as depicted by the T-account, if someone deposits $500 into the First Bank of Fairfield, and if the bank makes new loans to keep its reserve ratio unchanged, then the number of new loans that it makes will be $320.

$400.
$680.
$750.

2.
Bank of Springfield

Assets		Liabilities
Reserves	$19,200	Deposits	$240,000
Loans	228,000

1. If the Bank of Springfield has lent out all the money it can given its level of deposits, then what is the reserve requirement?

5.00 per cent
8.00 per cent
8.42 per cent
95.00 per cent

2. Mia puts money into a piggy bank so she can spend it later. What function of money does this illustrate?

store of value
medium of exchange
unit of account
None of the above is correct.

3. Under a fractional-reserve banking system, banks

hold more reserves than deposits.
generally lend out a majority of the funds deposited.
cause the money supply to fall by lending out reserves.
All of the above are correct.

4. Over one-time horizon or another, Fed policy decisions influence

inflation and employment.
inflation but not employment.
employment but not inflation.
neither inflation nor employment.

5. If a bank desires to hold no excess reserves, the reserve requirement is 5 per cent, and it receives a new deposit of $1,000

its required reserves increase by $50.
its total reserves initially increase by $1,000.
it will be able to make a new loan of up to $950.
All of the above are correct.

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ECON 1012 Lecture Notes - Lecture 8: Nominal Interest Rate, Opportunity Cost, Money Multiplier

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