ECO 316 Week 3 Chapter 17 The Money Supply Process

This file of ECO 316 Week 3 Chapter 17 The Money Supply Process shows the solutions to the following problems: 17.1 Multiple Choice Questions 1) The British central bank is known as 2) The Japanese central bank is known as 3) The central bank for the countries who have adopted the euro as their currency is known as 4) The aggregate M1 consists of 5) The monetary base is equal to 6) Which of the following is a liability of the Fed? 7) Which of the following is an asset of the Fed? 8) Which of the following is a liability of the Fed? 9) Most of the reserves of the banking system are held as 10) What do we need to add to Federal Reserve currency in circulation and bank reserves in order to arrive at the monetary base? 11) The currency of the United States is issued by 12) The difference between currency outstanding and currency in circulation is equal to 13) Vault cash is a(an) 14) The largest liability of the Fed is 15) As of July 2006, the value of currency in circulation was about 16) As of July 2006, which of the following was true? 17) Reserve deposits are 18) Reserves equal 19) The percentage of deposits that banks must hold as reserves is called the 20) The Fed pays interest on 21) Why do banks avoid holding excess reserves? 22) Banks prefer to hold their liquid balances as 23) The primary assets of the Fed are 24) The Fed’s portfolio of securities consists principally of 25) When the Fed holds U.S. government securities, it 26) Most of the earnings that the Fed receives on interest from government securities are 27) When the Fed extends loans to depository institutions 28) When the Fed lends to depository institutions, the loans are called 29) The interest rate the Fed charges on loans to depository institutions is known as 30) What is the most direct method the Fed uses to change the monetary base? 31) Open market operations involve 32) If the Fed buys securities worth $10 million, then 33) If the Fed purchases securities worth $10 million from a commercial bank, the banking system’s balance sheet will show 34) If the Fed purchases $1 million in securities from the nonbank public, the monetary base will rise by $1 million 35) A $10 million open market purchase will increase the monetary base by 36) A $10 million open market purchase will increase bank reserves by 37) A $10 million open market sale will decrease the monetary base by 38) A $10 million open market sale will decrease the reserves of the banking system by 39) If the Fed sells securities worth $10 million to a commercial bank, the Fed’s balance sheet will show 40) In managing the monetary base, the Fed most often uses 41) If the Fed makes a discount loan of $2 million to a commercial bank, the Fed’s balance sheet will show 42) Although open market operations and discount loans both change the monetary base, the Fed has 43) Which of the following statements is correct? 44) Which of the following statements is correct? 45) When banks borrow on the federal funds market 46) On the books of the Fed the difference between borrowed reserves and discount loans is equal to 47) Which of the following expressions is correct? 48) If the Fed purchases $50,000 in T-bills from a bank, by how much will the bank’s excess reserves increase? 49) What is the maximum amount a bank can lend? 50) Suppose that a bank with no excess reserves receives a deposit into a checking account of $10,000 in currency. If the required reserve ratio is 0.20, what is the maximum amount that the bank can lend out? 51) The earliest banks 52) Suppose that the banking system currency has no excess reserves and that a bank receives a deposit into a checking account of $10,000 in currency. If the required reserve ratio is 0.20, what is the maximum amount that the banking system can lend out? 53) If banks do not hold excess reserves, the multiple deposit expansion process ends when 54) The effect on multiple deposit expansion 55) Suppose a bank with no excess reserves buys Treasury securities from the Fed. In order to raise the additional funds necessary to meet its reserve requirements the bank may 56) Which of the following assumptions made in deriving the simple deposit multiplier is unrealistic? 57) Which of the following statements concerning movements in the currency-deposit ratio is NOT correct? 58) All of the following are likely to lead to a decrease in the currency-deposit ratio EXCEPT 59) Holding other things constant, the currency-deposit ratio will 60) During a banking panic 61) The anonymity premium refers to 62) The increase in the currency-to-deposit ratio during the 1960s was probably due to 63) The currency-to-deposit ratio will rise when 64) A good reason for suspecting the existence of a substantial underground economy is 65) When banks hold excess reserves, the size of the money multiplier 66) Which of the following is NOT true of bank holdings of excess reserves? 67) When deposit withdrawals exceed reserves, which of the following is NOT a way in which banks bear the cost? 68) A rise in market interest rates 69) When the spread between the T-bill rate and the discount rate increases 70) The money multiplier 71) Required reserves are equal to 72) The money supply process focuses on the monetary base rather than on bank reserves because 73) 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 74) During the early 1930s 75) Which of the following statements about the early 1930s is correct? 76) If currency outstanding equals $200 million, checkable deposits equal $1 billion, reserves equal $150 million, and the required reserve ratio is 0.10, the money multiplier equals 77) If currency outstanding equals $500 million, checkable deposits equal $2 billion, reserves equal $200 million, and the required reserve ratio is 0.10, the money multiplier equals 78) The size of the money multiplier depends upon all of the following EXCEPT 79) Which of the following equations is correct? 80) Which of the following equations is correct? 81) Which of the following equations is correct? 82) Fed watchers are 83) Over periods of several years, the primary determinant of changes in the money supply is changes in 84) Virtually all of the growth of the monetary base is caused by 85) During 1985 and 1986 the money multiplier 86) During the last 20 years, the M1 money multiplier 17.2 Essay Questions 1) Suppose the Federal Reserve decides to begin conducting open market operations by buying and selling Pokemon cards rather than Treasury securities. What would be the impact on the monetary base if the Fed purchased $100 million worth of Pokemon cards? 2) Evaluate the following argument: “If banks increase their excess reserves, the monetary base will increase. If the monetary base increases, the money supply will increase. Therefore, an increase in excess reserves increases the money supply.” 3) What is the most important factor accounting for changes in the money supply in the long run? 4) Suppose the banking system holds no excess reserves. If the required reserve ratio is 0.10 and the money multiplier is 2.5, what is the value of the currency-deposit ratio?