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Exam 10: The Money Supply and the Federal Reserve System

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Question 21

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Provide three reasons why open market operations are the Federal Reserve's preferred means of controlling the money supply.

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First, open market operations can be use...

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Question 22

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Write a balance sheet for the Federal Reserve and list possible items on both sides. Do not worry about recording actual dollar figures.

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How the Federal Res...

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Question 23

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Assume the Fed must increase the money supply. Explain three ways that it may be able to accomplish this objective.

Explain how the existence of currency and excess reserves would affect the size of the money multiplier.

The early Romans used salt as money. Why do you think it served so readily as a medium of exchange then and why do you think that it is not useful for that purpose today.

Briefly discuss the structure of the Federal Reserve.

If China, who is a large holder of U.S. government debt were to suddenly sell large portions of it, how would this affect the Federal Reserve's ability to control interest rates?

Explain what currency debasement is.

Discuss the money multiplier. Assume that the banking system's total excess reserves total $20 million and that the required reserve ratio is 25%. Calculate the money multiplier and the total potential expansion of the nation's money supply.

Define a financial intermediary.

Explain why open market operations are the Fed's preferred means of controlling the money supply.

Explain why the discount rate would be considered and administratively-determined interest rate rather than a market interest rate.

Summarize the effect of an open market purchase of securities by the Fed.

If Bob withdraws $1000 in cash from his checking account at his bank, explain what happens to the value of M1.

Explain why a high discount rate might limit commercial bank borrowing from the Federal Reserve but very low discount rate may not encourage very much borrowing. What circumstances can you think of in which this would be true?

Assume that the Federal Reserve pursues a monetary policy that is directly related to the interest rate. Furthermore, assume that the Fed will still supply a positive amount of money even at an interest rate of zero. Draw a money supply curve that is consistent with these two conditions.

Using the balance sheet below for a commercial bank explain how much if any this bank can expand it's lending if the required reserve ratio is 20%.

Assume a bank receives large deposits of checks. This of course increases the amount of its reserves. However, why does this not increase its lending potential by the full amount of these deposits?

Explain what is meant by the money multiplier. Include in your answer a discussion of what variable (s) affects the size of the money multiplier.

Assume there is only one bank in Maldavia-The First National Bank. The required reserve ratio is 25%. The First National Bank is loaned up. Use a balance sheet for First National Bank to show the effect of a new deposit of $200 million. Assume there is no leakage from the banking system. What is the value of the money multiplier in Maldavia? By how much does the money supply increase in Maldavia?