Question 1

Use the information in this T-account to calculate this bank's reserve ratio. Assume that the reserve requirement is 25%. Is this bank meeting this reserve requirement? Calculate the new reserve ratio if the loan recipients convert their checking account balances to cash and take the cash out of this bank. Is the bank still meeting its reserve requirement?

Accepted Answer

The answer of Use the information in this T-account to...

Question 2

Jose's grandmother gave him a $50 bill for his birthday. Does it matter whether Jose holds it as cash or deposits it in his checking account?

Accepted Answer

The answer of Jose's grandmother gave him a $50 bill...

Question 3

In 2008 the Fed changed its long-standing law of not paying interest on reserves. How could the practice of paying interest on reserves contribute to a decline in lending?

Accepted Answer

The answer of In 2008 the Fed changed its long-standing...

Question 4

Alpha Bank's balance sheet is shown in the following table  If the bank is fully loaned-up, what is its required reserve ratio? Suppose a depositor adds $5,000 to her account with Alpha Bank. Alpha Bank uses the additional deposit to make a loan and the funds are deposited in Beta Bank, which then makes loans so as to be fully loaned-up. What does Beta Bank's balance sheet look like after the new borrowers spend the money they were loaned?

Accepted Answer

The answer of Alpha Bank's balance sheet is shown in...

Question 5

In September 2013, the Bank of India raised the rate at which it lends to commercial banks.
I. The Fed lends to commercial banks, just as India does. What is the name for the rate that the Fed charges commercial banks and other eligible institutions for loans?
II. Was the Bank of India attempting to increase or decrease the money supply by increasing the rate at which it lends to commercial banks?
III. The Bank of India has tools very similar to those of the Federal Reserve in the United States. How could the Bank of India have used its other tools to achieve the same result as raising the rate at which it lends to commercial banks?

Accepted Answer

The answer of In September 2013, the Bank of India...

Question 6

In September 2013, European Central Bank (ECB) council member Erkki Liikanen said, "Eurozone interest rates would remain at present levels or lower."
I. Would the ECB increase or decrease its money supply to lower interest rates?
II. The ECB has tools similar to the traditional tools of the Fed. How would the ECB use its tools to lower interest rates?

Accepted Answer

The answer of In September 2013, European Central Bank (ECB)...

Question 7

What is the structure of the Federal Reserve System in the United States?

Accepted Answer

The answer of What is the structure of the Federal...

Question 8

What are leakages in the context of money creation? What effect do they have on the money multiplier?

Accepted Answer

The answer of What are leakages in the context of...

Question 9

How do banks reduce the risk of a solvency crisis?

Accepted Answer

The answer of How do banks reduce the risk of...

Question 10

The Federal Reserve System has been characterized as "independent within government." Why is Fed independence important? What might happen if the Fed were under the direct control of Congress or the president?

Accepted Answer

The answer of The Federal Reserve System has been characterized...

Question 11

What will the Fed do if its target for the federal funds rate is 3% and the actual federal funds rate is 3.2%?

Accepted Answer

The answer of What will the Fed do if its...

Question 12

Suppose the Fed increases the required reserves from 15% to 20% of deposits. Assuming that banks are loaned-up, in which direction will the money supply change? What will happen to the value of the money multiplier?

Accepted Answer

The answer of Suppose the Fed increases the required reserves...

Question 13

What effect did the 2007 housing crisis have on the money multiplier?

Accepted Answer

The answer of What effect did the 2007 housing crisis...

Question 14

How do banks create money? Explain your response with an example.

Accepted Answer

The answer of How do banks create money? Explain your...

Question 15

Assume that the Fed announces a new higher target for the federal funds rate. How will it achieve this target?

Accepted Answer

The answer of Assume that the Fed announces a new...

Question 16

Briefly describe the Fed's tools for conducting monetary policy. Which tools are used more frequently, which less frequently, and why?

Accepted Answer

The answer of Briefly describe the Fed's tools for conducting...

Question 17

What was the evolution of the Federal Reserve System in the United States?

Accepted Answer

The answer of What was the evolution of the Federal...

Question 18

The drafters of the Federal Reserve Act and subsequent legislation dealing with the nation's central bank intended that the Fed be able to take the long view and do what is best for the country without being influenced by short-term political considerations. For example, the Fed is not dependent on Congress for its budget. Instead of going through the congressional appropriation process, the Fed's budget comes from its earnings on its open market operations. Congress cannot threaten the Fed with the loss of funds if the Fed does not take the action Congress deems appropriate. The chapter lists several other components of the act that were intended to preserve the Fed's independence. Look through the chapter for three factors regarding the organization of the Federal Reserve and explain how these provisions contribute to the Fed's independence.

Accepted Answer

The answer of The drafters of the Federal Reserve Act...

Question 19

What assumptions are made to make this statement true? "The formula 'money multiplier = 1/reserve requirement' computes the maximum value of the actual multiplier."

Accepted Answer

The answer of What assumptions are made to make this...

Question 20

Why is the money multiplier in the money creation process called the "potential" money multiplier? Use an example to support your response.

Accepted Answer

The answer of Why is the money multiplier in the...

Quiz 12: Money Creation and the Federal Reserve