ECO 1000 Lecture 57: ECO Chapter 57
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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.
Each Federal Reserve Bank is
Answer
| a corporation. | ||
| a government owned enterprise. | ||
| a government subsidized entity. | ||
| a government-sponsored enterprise. |
A transaction in which the Fed agrees to buy a security one day and sell it back the next day is
Answer
| an overnight securitization operation. | ||
| a repurchase agreement. | ||
| a legal tender. | ||
| a rebate sale. |
The Federal Reserve document that states the goals of the FOMC and the target for the federal funds rate is known as the
Answer
| Directive. | ||
| Beige book. | ||
| Bluebook. | ||
| Green book. |
How long is the normal term in office for a Governor of the Federal Reserve Board?
Answer
| Five years | ||
| Seven years | ||
| Fourteen years | ||
| Life |
The federal funds rate is the interest rate on
Answer
| loans to banks from the Fed. | ||
| loans by banks to the Fed. | ||
| short-term loans between banks. | ||
| Treasury bills. |
Expenditures of each Federal Reserve Bank are approved by
Answer
| the U.S. Senate. | ||
| the President of the United States. | ||
| the U.S. Treasury Department. | ||
| the Federal Reserve Board of Governors. |
Federal Reserve Banks pay for their central banking operations through
Answer
| government tax revenue. | ||
| interest on the securities they own. | ||
| fees charged to banks that use their services. | ||
| dividends paid by local banks. |
When the Fed engages in open-market operations, the transactions are conducted by
Answer
| the Open Market Desk at the Federal Reserve Bank of New York. | ||
| the Open Market Desk at the Federal Reserve Board in Washington, D.C. | ||
| the National Bureau of Economic Research. | ||
| the Federal Open Market Committee. |
In 2006, Chairman Greenspan left the Fed because
Answer
| President Bush wanted him to resign. | ||
| he reached mandatory retirement age. | ||
| his term as Governor expired. | ||
| his term as Chairman expired. |
The Federal Reserve publication that discusses forecasts for the economy is known as the
Answer
| Redbook. | ||
| Beigebook. | ||
| Bluebook. | ||
| Greenbook. |
The FOMC directive
Answer
| describes forecasts for the economy. | ||
| states the target for the federal funds rate. | ||
| discusses the regional economies around the country. | ||
| shows the Fed's balance sheet. |
The chairman of the Federal Reserve Board who reduced the inflation rate from over 10 percent to about 3 percent in the early 1980s was
Answer
| Arthur Burns. | ||
| G. William Miller. | ||
| Paul Volcker. | ||
| Alan Greenspan. |
Which Fed chairman ensured the independence of the Federal Reserve in the 1950s?
Answer
| William McChesney Martin | ||
| Arthur Burns | ||
| Paul Volcker | ||
| G. William Miller |
There are ____ Federal Reserve Banks.
Answer
| seven | ||
| ten | ||
| twelve | ||
| fifteen |
Purchases and sales of government securities in the secondary market are known as
Answer
| discount borrowing and lending. | ||
| federal funds purchases and sales. | ||
| discounting. | ||
| open-market operations. |
The monetary base can be divided into
Answer
| currency plus transactions deposits. | ||
| vault cash plus reserves held at the Fed. | ||
| required clearing balances plus currency. | ||
| reserves plus currency. |
The Fed does not generally change reserve requirements to affect the money supply because
Answer
| the impact is too large. | ||
| the Fed needs the approval of Congress to do so. | ||
| it's not legal for the Fed to do so. | ||
| the Fed needs the approval of the President of the United States to do so. |
The Fed has decided to tighten monetary policy, so it decreases the money supply through
Answer
| defensive open-market operations. | ||
| dynamic open-market operations. | ||
| reduced discount loans for profit. | ||
| reduced discount loans for business needs. |
A haircut is
Answer
| the extra collateral the Fed requires above the value of a discount loan. | ||
| the extra principal a commercial bank requires the Fed to pay when making a discount loan. | ||
| the difference between what an investor pays for a bond and what the investor sells the bond for. | ||
| expected personal grooming for a member of the Board of Governors. |
Currency held by the nonbank public plus banks' vault cash plus banks' deposits at the Fed equals
Answer
| the Fed's capital stock. | ||
| discount loans. | ||
| the monetary base. | ||
| required clearing balances. |
The extra collateral the Fed requires above the value of a discount loan is known as
Answer
| the term premium. | ||
| a haircut. | ||
| a covenant. | ||
| secondary credit. |
Currency held by the nonbank public plus banks' reserves equals
Answer
| the Fed's capital stock. | ||
| discount loans. | ||
| the monetary base. | ||
| required clearing balances. |
The money supply divided by the monetary base equals
Answer
| the reserve ratio. | ||
| velocity. | ||
| high-powered money. | ||
| the money multiplier. |
The main liability on the Federal Reserve's balance sheet is
Answer
| discount loans. | ||
| securities. | ||
| monetary base. | ||
| capital. |
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
Answer
| a no documentation discount loan. | ||
| a haircut. | ||
| a covenant. | ||
| a primary credit discount loan. |
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
Answer
| federal funds rate decreases. | ||
| primary credit discount rate decreases. | ||
| primary credit discount rate increases. | ||
| federal funds rate increases. |
In November and December, people use more currency than usual, so the Fed increases the money supply through
Answer
| defensive open-market operations. | ||
| dynamic open-market operations. | ||
| discount loans for profit. | ||
| discount loans for business needs. |
Reserves held by banks at the Fed that earn implicit interest payments in the form of earnings credits for Fed services are known as
Answer
| required clearing balances. | ||
| reserve requirements. | ||
| excess reserves. | ||
| non-transaction deposits. |
Required clearing balances
Answer
| pay interest in the form of earnings credits. | ||
| count as reserves and can be used to meet reserve requirements. | ||
| pay interest equal to the federal funds rate minus one percent. | ||
| are required to be held against transactions deposits. |