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Exam 17: The Money Supply Process

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Question 21

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Assume that no banks hold excess reserves, and the public holds no currency. If a bank sells a $100 security to the Fed, explain what happens to this bank and two additional steps in the deposit expansion process, assuming a 10% reserve requirement. How much do deposits and loans increase for the banking system when the process is completed?

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Bank A first changes a security for rese...

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Question 22

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Both ________ and ________ are Federal Reserve assets.

A) currency in circulation; reserves
B) currency in circulation; securities
C) securities; loans to financial institutions
D) securities; reserves

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Question 23

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Explain two reasons why the Fed does not have complete control over the level of bank deposits and loans. Explain how a change in either factor affects the deposit expansion process.

Of the three players in the money supply process, most observers agree that the most important player is

If the required reserve ratio is 10 percent, currency in circulation is $400 billion, checkable deposits are $800 billion, and excess reserves total $0.8 billion, then the money supply is ________ billion.

The formula for the M1 money multiplier is

The Fed does not tightly control the monetary base because it does not completely control

Everything else held constant, an increase in the time deposit ratio will result in ________ in the M1 money multiplier and ________ in the M2 money multiplier.

Everything else held constant, a decrease in the currency ratio causes the M1 money multiplier to ________ and the money supply to ________.

In the model of the money supply process, the Federal Reserve's role in influencing the money supply is represented by

If the required reserve ratio is 20 percent, the simple deposit multiplier is

Explain why the simple deposit multiplier overstates the true deposit multiplier.

Suppose that from a new checkable deposit, First National Bank holds eight million dollars on deposit with the Federal Reserve, nine million dollars in excess reserves, and faces a required reserve ratio of ten percent. Given this information, we can say First National Bank has ________ million dollars in required reserves.

If a bank has excess reserves of $15,000 and demand deposit liabilities of $80,000, and if the reserve requirement is 20 percent, then the bank has total reserves of

A ________ in market interest rates relative to the discount rate will cause discount borrowing to ________.

The effect of an open market purchase on reserves differs depending on how the seller of the bonds keeps the proceeds. If the proceeds are kept in ________, the open market purchase has no effect on reserves; if the proceeds are kept as ________, reserves increase by the amount of the open market purchase.

Assuming initially that rr = 10%, c = 40%, and e = 0, an increase in c to 50% causes the M1 money multiplier to ________, everything else held constant.

When a bank buys a government bond from the Federal Reserve, reserves in the banking system ________ and the monetary base ________, everything else held constant.

Suppose your payroll check is directly deposited to your checking account. Everything else held constant, total reserves in the banking system ________ and the monetary base ________.

Part of the increase in currency holdings in the 1960s and 1970s can be attributed to