Question 1

For an individual bank, does it make a difference in terms of loan creation whether the Fed buys the government bond directly from the bank or from a private bond dealer who deposits the proceeds in the bank?

Accepted Answer

The answer of For an individual bank, does it make...

Question 2

Suppose the Fed purchases $100 million worth of government bonds from a bond dealer who then deposits the proceeds at Bank ABC.

Accepted Answer

The answer of Suppose the Fed purchases $100 million worth...

Question 3

The buying and selling of bonds by the Fed to change bank reserves is referred to as

Accepted Answer

Buying and selling of bonds by the Fed is referred to as open market operations. Through this process, the Fed seeks to change the level of bank reserves, which has an impact on the money supply and ultimately, the overall economy. Financial intermediation refers to the process of connecting savers and borrowers, while reserve accounting and asset and liability management are accounting terms that do not pertain specifically to the Fed's role in monetary policy. Speculation involves making investments in the hope of earning a profit, but is not directly related to the Fed's operations.

Question 4

Suppose the required reserve ratio is 10 percent, and banks hold no excess reserves. If the Fed purchases $10 million worth of government bonds from Bank C, the amount of loans held by Bank C will

Accepted Answer

When the Fed purchases $10 million worth of government bonds from Bank C, Bank C's reserves increase by $10 million. With a 10% reserve requirement, Bank C can lend out the remaining 90% of the $10 million, which is $9 million. However, the question asks about the immediate change in loans held by Bank C, which will initially increase by the full $10 million as the bank's reserves increase by that amount.

Question 5

Suppose the required reserve ratio is 10 percent, and banks hold no excess reserves. If the Fed purchases $10 million worth of government bonds from Bank INF, the amount of deposits held by the entire banking system will ultimately

Accepted Answer

When the Fed purchases $10 million worth of government bonds, the money supply increases because Bank INF now has an additional $10 million in reserves. With a 10 percent reserve requirement, this initial increase in reserves can support up to $100 million in new deposits across the banking system through the money multiplier effect (1/Reserve Requirement = 1/0.10 = 10, so $10 million * 10 = $100 million).

Question 6

An increase in reserves leads to an even larger increase in deposits because banks have an incentive to lend their excess reserves.

Accepted Answer

When banks have excess reserves, they are encouraged to lend them out in order to earn interest and generate profits. This lending leads to further deposits and a multiplier effect on the initial increase in reserves.

Question 7

To affect bank reserves and deposits, the Fed has to buy securities directly from a bank.

Accepted Answer

The Fed can affect bank reserves and deposits through open market operations by buying or selling securities to or from a wide range of financial institutions, not just banks. This indirectly influences the amount of reserves banks hold.

Question 8

Suppose the required reserve ratio is 10 percent, and banks hold no excess reserves. If the Fed purchases $10 million worth of government bonds from Bank INF, the amount of reserves held by Bank INF will

Accepted Answer

When the Fed purchases $10 million worth of government bonds from Bank INF, it pays for them by crediting Bank INF's account with the Fed. This increases Bank INF's reserves by $10 million. Since the required reserve ratio is 10 percent, this increase in reserves allows Bank INF to increase its loans by $90 million (the maximum amount of loans it can create is 10 times its increase in reserves). Therefore, Bank INF's reserves will increase by $10 million and its total deposits (and potential loans) will increase by $100 million.

Question 9

Is the Federal Reserve System a federal government agency? Explain.

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Question 10

If the Fed purchases $20 million worth of government bonds from Bank Zip, Bank Zip will be able to increase its loans as a result of the bond purchase.

Accepted Answer

When the Fed purchases government bonds from a bank, it injects additional cash into the bank's reserves, allowing the bank to have more money to lend out to customers. This can lead to an increase in loans and overall economic activity.

Question 11

Suppose banks desire to keep 5 percent of their deposits on reserve. If the Fed purchases $20 million worth of government bonds from Bank B, the amount of bonds and loans Bank B holds will

Accepted Answer

When the Fed purchases $20 million worth of government bonds from Bank B, the bank receives $20 million in reserves. This action does not decrease the amount of bonds and loans the bank holds; instead, it directly increases the bank's reserves by $20 million. The bank's assets shift from holding $20 million in bonds to having $20 million more in reserves.

Question 12

Suppose the required reserve ratio is 10 percent, and banks hold no excess reserves. If an individual withdraws $20 million from Bank Zip,

Accepted Answer

When an individual withdraws $20 million from Bank Zip and the required reserve ratio is 10 percent, the bank's reserves decrease by $20 million. Since banks hold no excess reserves, this withdrawal directly impacts the bank's ability to lend. For every dollar of reserves, banks can lend out $10 (given a 10% reserve ratio). Therefore, a $20 million reduction in reserves means the bank must decrease its lending by $200 million (10 times the withdrawn amount). However, the question seems to contain a mistake in its options, as none directly reflect this calculation. The closest option, suggesting a decrease in loans or bonds, is A) by $18 million, but this does not accurately represent the typical multiplier effect in banking. The correct theoretical decrease should be much larger, given the reserve ratio.

Question 13

Suppose banks desire to keep 5 percent of all deposits on reserve, and the Fed sells $10 billion of government securities to Bank A. As a result,

Accepted Answer

When the Fed sells $10 billion of government securities to Bank A, it reduces Bank A's reserves by $10 billion. With a 5% reserve requirement, banks can lend out 95% of their deposits. The decrease in reserves means banks can support $10 billion less in deposits. Using the money multiplier (1/reserve requirement), which is 1/0.05 = 20, the maximum decrease in deposits is $10 billion * 20 = $200 million.

Question 14

Suppose banks desire to keep 5 percent of all deposits on reserve, and the Fed purchases $10 million of government securities from a private securities dealer. Then,

Accepted Answer

When the Fed purchases $10 million of government securities, this injects $10 million into the banking system. With a reserve requirement of 5%, banks can lend out 95% of any new deposits. This creates a multiplier effect, where the initial $10 million can increase total deposits in the economy by up to $200 million ($10 million / 0.05 = $200 million), as banks lend out 95%, those funds are deposited, and the process repeats.

Question 15

Suppose Joe is digging around in his basement and he finds $1,000 hidden behind a wall. Assume that Joe takes the $1,000 and deposits it in his bank. Assume also that banks hold no excess reserves, people hold no currency, and the required reserve ratio is 5 percent.

Accepted Answer

The answer of Suppose Joe is digging around in his...

Question 16

What do commercial banks have in common with all other firms in a market economy?

Accepted Answer

The answer of What do commercial banks have in common...

Question 17

When the Fed sells government bonds to banks, reserves increase.

Accepted Answer

When the Fed sells government bonds to banks, reserves decrease as the banks pay the Fed for the bonds.

Question 18

If the Fed sells $1 million of government bonds to a bank, it has the same effect on deposits and reserves as if the Fed sold $1 million of government bonds to the general public.

Accepted Answer

When the Fed sells bonds to a bank, it directly reduces the bank's reserves, whereas selling to the public reduces reserves indirectly as the public withdraws deposits to pay for the bonds.

Question 19

Suppose the required reserve ratio is 10 percent, and banks hold no excess reserves. If an individual withdraws $20 million from Bank Y, then the amount of reserves held by Bank Y will

Accepted Answer

When an individual withdraws $20 million from Bank Y, Bank Y's required reserves decrease by $2 million (10% of $20 million). Since Bank Y currently has no excess reserves, it must adjust its reserves by reducing its deposits at the Federal Reserve or by borrowing from other banks in the federal funds market. Therefore, the amount of reserves held by Bank Y will decrease by $2 million.

Question 20

Which of the following statements is true when the Fed increases reserves by buying a government bond from a bank?

Accepted Answer

When the Fed increases reserves by buying a government bond from a bank, the bank's reserves increase by the amount of the bond purchase. Therefore, the amount of reserves in the banking system will increase by the amount of the bond purchase. Option A is incorrect because the increase in reserves is exactly the same as the amount of the bond purchase. Option B is incorrect because the amount of loans made by the bank will depend on several factors, including the bank's lending standards and the demand for loans. Option C is incorrect because the increase in reserves is exactly the same as the amount of the bond purchase. Option D is incorrect because the increase in deposits will depend on whether the bank holds onto the additional reserves or lends them out.

Quiz 22: Money and Inflation