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Exam 10: The Money Supply and the Federal Reserve System

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Question 1

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Explain what bank runs are and why fear serves to reinforce them. Explain where the fear may originate.

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Bank runs occur when many people present...

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Question 2

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Discuss the process of open market operations.

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Open market operations is the purchase a...

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Explain what near monies are.

Explain why the discount rate cannot be used to control the money supply with great precision.

Explain what happens to the value of M2 if the public withdraws $1 million worth of cash from the banking system.

Comment on the following statement. "The Treasury is able to print money to finance the deficit."

Why is it not sufficient for money to be considered as money merely by government fiat? Explain.

Answer the questions below using the following information: All figures are in billions of dollars. a. What is the value of M1? b. What is the value of M2?

The required reserve ratio is 10%. Dollar Bank has $50,000 in deposits and $10,000 in reserves. Assume all other commercial banks are loaned up. (a) What is the value of this bank's excess reserves? (b) What is the value of the additional loans that can be made by the commercial banking system? (c) What is the money multiplier? (d) How much in total deposits will be supported by Dollar Bank's reserves, if this bank lends all its excess reserves and there is no leakage from the banking system?

Why do you suppose that vault cash would not be considered as part of the money supply as defined by M1?

Suppose there are $10 million in excess reserves in the banking system and the required reserve ratio is 10%. By how much could the money supply expand?

Discuss the role of financial intermediaries in the economy.

Assume there is an economy with a single bank, and the central bank sets the reserve requirement ratio at 10%. Assume also that the only bank had no transactions (i.e., no loans, reserves, or deposits) prior to an individual who deposits $1000 of currency with the bank.

Explain the Fed's function as a lender of last resort.

What are liabilities of commercial banks and why are they liabilities.

Assume the Bank of Smithville opens its doors to depositors and receives $100,000 in cash deposits. Assume furthermore that the bank has to abide by a 20% reserve ratio. Could this bank make a loan in the amount of $90,000?

Suppose that a group of farmers form a cooperative in which they deposit all of their grain in a common warehouse elevator and are given a receipt for their deposits. After a period of time the manager of the cooperative notices that very few farmers are returning to the warehouse to redeem their grain. What do you suppose is going on here? Furthermore, suppose that someone who is not a member of the cooperative decided to borrow some grain but was willing to take a receipt instead of the grain. How is this example similar to the story in the text about the goldsmiths? What would happen if everyone returned to the cooperative to demand their grain all at once.

Write out in equation form the four major components of M1.

Assume that banks become more conservative and begin to hold excess reserves instead of lending them out. How would the money multiplier in this situation compare to the case where (an amount equivalent to) all excess reserves are lent out? How will this behavior affect the Fed's behavior.

Prior to the passage of the Depository Institutions Deregulation and Monetary Control Act many banks used to offer toasters or blenders to prospective customers to encourage them to open checking accounts. Can you think of a reason why this practice was so prevalent prior to the passage of this law but has completely faded away since?