Explain the following statement whether true or false.
1- Assume that when $80,000 cash enters the banking system, the money supply ultimately increases by $320,000. Assume also that all banks do not hold excess reserves and that the entire money supply consists of demand deposits. Then the total legal reserves for all banks will amount to $40,000, and total loans and investments for all banks will be equal to $ 280,000.
2- Banks cannot affect or contribute to changes in the money supply if they were required to hold all reserve deposits.
3-Nowadays, a credit card is similar to a check, in money definition, according to macroeconomics.
Explain the following statement whether true or false.
1- Assume that when $80,000 cash enters the banking system, the money supply ultimately increases by $320,000. Assume also that all banks do not hold excess reserves and that the entire money supply consists of demand deposits. Then the total legal reserves for all banks will amount to $40,000, and total loans and investments for all banks will be equal to $ 280,000.
2- Banks cannot affect or contribute to changes in the money supply if they were required to hold all reserve deposits.
3-Nowadays, a credit card is similar to a check, in money definition, according to macroeconomics.
Related textbook solutions
Related questions
Assume that banks do not hold excess reserves and that households do not hold currency, so the only form of money is demand deposits. To simplify the analysis, suppose the banking system has total reserves of $400. Determine the money multiplier and the money supply for each reserve requirement listed in the following table.
| Reserve Requirement | Simple Money Multiplier | Money Supply |
|---|---|---|
| (Percent) | (Dollars) | |
| 20 | ||
| 10 |
A higher reserve requirement is associated with a money supply.
Suppose the Federal Reserve wants to increase the money supply by $200. Again, you can assume that banks do not hold excess reserves and that households do not hold currency. If the reserve requirement is 10%, the Fed will use open-market operations to worth of U.S. government bonds.
Now, suppose that, rather than immediately lending out all excess reserves, banks begin holding some excess reserves due to uncertain economic conditions. Specifically, banks increase the percentage of deposits held as reserves from 10% to 25%. This increase in the reserve ratio causes the money multiplier to to . Under these conditions, the Fed would need to worth of U.S. government bonds in order to increase the money supply by $200.
Which of the following statements help to explain why, in the real world, the Fed cannot precisely control the money supply? Check all that apply.
- The Fed cannot control the amount of money that households choose to hold as currency.
- The Fed cannot prevent banks from lending out required reserves.
- The Fed cannot control whether and to what extent banks hold excess reserves.
QUESTION 46
When the Fed buys a U.S. bond in the open market
| its action has no effect on the total reserves or the money supply because the check it writes increases reserves at one bank but they fall at another. | ||
| its action expands total reserves and the money supply. | ||
| its action contracts total reserves and the money supply. | ||
| total reserves increase by the amount of the purchase but the money supply stays the same. |
1.11 points
QUESTION 47
When the Fed sells government securities,
| reserves increase, leading to a decrease in the money supply by an amount more than the sale of the government securities. | ||
| reserves decrease, leading to a decrease in the money supply by an amount more than the sale of the government securities. | ||
| reserves increase, leading to a increase in the money supply by an amount more than the sale of the government securities. | ||
| reserves decrease, leading to a increase in the money supply by an amount more than the sale of the government securities. |
1.11 points
QUESTION 48
The maximum potential money multiplier is equal to
| the reserve ratio. | ||
| one minus the reserve ratio | ||
| the inverse of the required reserve ratio. | ||
| the number of dollars on reserve. |
1.11 points
QUESTION 49
The potential money multiplier gives us
| the growth in the money supply when income increases. | ||
| the growth in real national income when the money supply increases. | ||
| the maximum potential change in the money supply due to a change in income. | ||
| the maximum potential change in the money supply due to a change in reserves. |
1.11 points
QUESTION 50
An increase in the reserve ratio
| increases the money multiplier. | ||
| will cause banks to make more loans. | ||
| has an expansionary effect on the money supply. | ||
| has a contractionary effect on the money supply. |
1.11 points
QUESTION 51
The Federal Deposit Insurance Corporation insures
| banks against lawsuits. | ||
| the deposits held in member banks. | ||
| the deposits held in the Fed. | ||
| the federal funds market. |
1.11 points
QUESTION 52
Bank runs are a possibility because
| in difficult times people want currency instead of demand deposits. | ||
| the FDIC is inefficient. | ||
| banks do not keep enough reserves to cover all their depository liabilities. | ||
| bankers are often poor businesspeople. |
1.11 points
QUESTION 53
The manner in which FDIC deposit insurance is set up in the United States encourages banks to
| make riskier loans than they otherwise would. | ||
| reject some loans that probably would be profitable. | ||
| maintain excess reserves that are too great. | ||
| be too conservative in their lending practices. |
1.11 points
QUESTION 54
The Federal Deposit Insurance Corporation
| discourages banks from engaging in excessive risk taking. | ||
| was established after the Panic of 1907. | ||
| only insures deposits in money-center banks. | ||
| increases the stability of the banking system by reducing the likelihood of bank runs. |
1.11 points
QUESTION 55
What are the two features of money that distinguish it from all other goods in the economy?
| Money is government issued and it is redeemable for gold or silver. | ||
| Money is part of every barter transaction and it is divisible. | ||
| Money is accepted as a medium of exchange and it is the common unit of account used to express prices. | ||
| Money is a common unit of account and it is also can be traded for other currencies at a guaranteed exchange rate. |
1.11 points
QUESTION 56
Holding money to meet unplanned expenditures and emergencies is known as
| asset demand. | ||
| precautionary demand. | ||
| aggregate demand. | ||
| transactions demand. |
1.11 points
QUESTION 57
When people want to hold money to make regular planned expenditures, this is
| the transaction demand for money. | ||
| the spending demand for money. | ||
| the asset demand for money. | ||
| the precautionary demand for money. |
1.11 points
QUESTION 58
When interest rates rise, the transactions demand for money usually
| decreases. | ||
| increases. | ||
| decreases initially and then increases to the original position. | ||
| does not change. |
1.11 points
QUESTION 59
As nominal Gross Domestic Product (GDP) rises, the transactions demand for money
| increases, and the money demand curve shifts to the right. | ||
| remains constant, and the money demand curve remains the same. | ||
| decreases, and the money demand curve shifts to the left. | ||
| increases, and the money demand curve shifts to the left. |
1.11 points
QUESTION 60
One of the economic costs of holding currency is that
| it fulfills no precautionary role. | ||
| it fulfills no transactions role. | ||
| it earns no interest income. | ||
| its real value always increases. |
