Question 1

Does an open market operation in which the Fed buys securities from the general public decrease or increase the banking system's reserves?

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Question 2

What is a "currency drain"?
 How and why does it affect the money multiplier?

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 How and...

Question 3

"When the Fed makes an open market purchase of government securities, the quantity of money will eventually decrease by a fraction of the initial change in the monetary base." Is the previous statement correct or incorrect?
 Explain your answer.

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Question 4

A bank has reserves of $50, deposits of $100, loans of $20, and government securities of $30. Assume the desired reserve ratio is 20 percent.
a. What are the bank's assets and what are its liabilities?
b. How much does the bank have in excess reserves?
c. What can the bank do with its excess reserves that will affect the quantity of money?

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Question 5

If the currency drain ratio increases, how can the Fed adjust the monetary base to offset the effect on the quantity of money?

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Question 6

The Fed conducts an open market operation and increases a bank's excess reserves by $2,000. Explain the first five rounds of the money creation process if the desired reserve ratio is 25 percent and if people keep no currency outside of the banking system.

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Question 7

The Fed conducts an open market operation and buys $50,000 of government securities from Commerce Bank. The desired reserve ratio is 25 percent. What is the change in Commerce Bank's total reserves and its excess reserves?

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Question 8

"If the currency drain ratio increases, the monetary base decreases." Explain whether the previous statement is correct or incorrect.

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Question 9

How does a currency drain affect the money multiplier?

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Question 10

Explain how the currency drain ratio affects the size of the money multiplier. In your explanation, suppose that in one round of the money creation process a bank gains $1 million in new deposits and reserves. Further suppose that the desired reserve ratio is 10 percent and the currency drain ratio is 50 percent.

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Question 11

The desired reserve ratio is 10 percent. Fly By Night Bank has deposits of $250,000 and reserves of $25,000. What is the amount of its excess reserves?

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Question 12

The Fed purchases $100,000 of U.S. government securities from One Bank. Assuming the desired reserve ratio is 10 percent, banks loan all excess reserves, and the currency drain is 20 percent, how much does the quantity of money increase?

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Question 13

If the currency drain ratio is 40 percent and the desired reserve ratio is 15 percent, what does the money multiplier equal?

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Question 14

When the Fed buys a government security, what happens to the monetary base and the quantity of money?
 Which changes by more or do both change by the same amount?

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Question 15

If a bank receives an additional deposit of $50,000 and the desired reserve ratio is 20 percent, what is the amount of new loans the bank can make?

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Question 16

Suppose the currency drain is 20 ratio percent and the desired reserve ratio is 10 percent.
a. What does the money multiplier equal?
b. If the Fed purchases $10 million of U.S. government securities, by how much will the quantity of money increase or decrease?

Accepted Answer

The answer of Suppose the currency drain is 20 ratio...

Question 17

How can a new deposit of $10,000 at one bank create other new deposits at other banks?
 Suppose the desired reserve ratio is 10 percent and people keep no currency outside of the banks. What will be the new amount of deposits in the second and third rounds?

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Question 18

Explain the process by which the banking system creates money.

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Question 19

Suppose the Fed conducts an open market operation in which it buys government securities from a commercial bank. Why is there a multiplier effect on the quantity of money?

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Question 20

If the Fed sells $100 million of U.S. government securities, what happens to the quantity of money?

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Quiz 18: Money and the Monetary System