ScienceEconomicsEcon ch29
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Econ ch29

Eliana Cook avatar Eliana Cook
3 December 2023
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29 test answers

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question
What is money multiplier?
answer
it is the reciprocal of the reserve ratio. the amount of money the banking system generates with each dollar of reserves. ( $100 of reserves generates $1,000 of money, the money multiplier is 10.)
question
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 buy _________________ worth of U.S. government bonds.
answer
buy/ 20.00
question
How does the Fed increase the money supply?
answer
the Fed buy government bonds. In order to pay for the bonds, the Fed creates money. Its purchase of bonds puts the new money in the hands of the public.
question
Why would banks hold excess reserves? What would Fed react on this?
answer
Uncertain economic conditions. When banks hold additional reserves, the Fed will have to buy more bonds in order to increase the money supply by a given amount.
question
Why the Fed cannot precisely control the money supply?
answer
1. The Fed cannot control the amount of money that households choose to hold as currency. 2. The Fed cannot control whether and to what extent bands hold excess reserves.
question
What are bank's assets?
answer
Reserves Loans Securities
question
What are bank's liabilities and owner's equity?
answer
Deposits Debt Capital (owner's equity)
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How to calculate leverage ratio?
answer
(Reserves+Loans+Securities)/Capital
question
Which of the following do bankers take into account when determining how to allocate their assets?
answer
1. The size of the monetary base 2. the riskiness of each asset 3. The total value of liabilities.
question
Which of the following is true of the capital requirement?
answer
1. Its intended goal is to protect the interests of those who hold equity in the bank. 2. Its intended goal is to protect the interests of the depositors. 3. It specifies a minimum leverage ratio for all banks.
question
fiat money
answer
money without intrinsic value
question
M1
answer
Currency Demand deposits Traveler's checks Other checkable deposits
question
M2
answer
Everything in M1 Savings deposits small time deposits Money market mutual funds A few minor categories
question
Monetary policy
answer
decisions by *policymakers* concerning the money supply.
question
Open-market operation
answer
Fed's primary tool: the purchase and sale of U.S government bonds. if decide to *increase* the money supply-->*buy* government bonds if decide to *decrease* the money supply--> *sell* government bonds
question
Open-market operation chain effect: if want to increase money supply
answer
buy bonds: hand out money *money supply increase*, interest rate decrease, investment increase, GDP increase
question
Open-market operation chain effect: if want to decrease money supply
answer
sell bonds: get money *money supply decrease*, interest rate increase, investment decrease, GDP decrease
question
Reserves (Bank's Assets or Liabilities?
answer
Deposits that banks have received but have not loaned out *Reserves is Assets* *Deposits is Liabilities*
question
Money Multiplier
answer
the amount of money the banking system generates with each dollar of reserves
question
Federal Reserve operation chain effect: if increase reserve
answer
multiplier decrease, money supply decrease, interest rate increase, investment decrease, GDP decrease
question
Federal Reserve operation chain effect: if decrease reserve
answer
multiplier increase, money supply increase, interest rate decrease, investment increase, GDP increase
question
bank capital
answer
the resources a bank's owners have put into the institution
question
Bank's Assets
answer
Reserves Loans Securities
question
Bank's Liabilities
answer
Deposits Debt Capital (owner's equity)
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Leverage
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the use of borrowed money to supplement existing funds for investment purposes.
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*Leverage ratio*
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the ratio of the bank's total assets to bank capital. (*assets/bank capital*)
question
capital requirement
answer
to ensure that banks will be able to pay off their depositors (without having to resort to gov-provided deposit insurance funds. the amount of capital required depends on the kind of assets a bank holds.
question
2 groups of the Fed's tools
answer
1. influence the *quantity of reserves* 2.influence the *reserve ratio and thereby the money multiplier*
question
Discount rate v. Fed Funds Rate
answer
Discount rate: the interest rate Fed charge commercial banks (discounted value of that portfolio) -------------------------------- Fed funds rate: market-determined interest rate that bank charges on loan that they make *to each other*. *not necessary set by the Fed*