Question 1

What is the effect of a Federal Reserve open market sale? What happens to interest rates in the money market and federal funds market as a result? Provide a graph of the money market and federal funds market to illustrate.

Accepted Answer

An open market sale reduces bank reserves,shifts the money supply curve to the left and increases interest rates.It also reduces the supply of reserves in the federal funds market,reducing the federal funds rate.

Question 2

Assume that banks hold no excess reserves and the public does not change their currency holdings.If currency is $800,total bank reserves are $2,000,and checkable deposits are $20,000,then
(a).what is the monetary base?

Accepted Answer

The monetary base totals $2,800. (b).what is the money supply? The money supply amounts to $20,800. (c).if the required reserve ratio is 10% and banks hold no more excess reserves,then what will the money supply be if the Fed increases total bank reserves by $100? The money supply will be $21,800.

Question 3

If commercial banks hold checkable deposits of $100,000,reserves of $30,000,and the required reserve ratio is 20 percent,what is the maximum additional amount by which the banking system can expand the money supply?

Accepted Answer

The maximum amount by which the banking system can expand the money supply is determined by the excess reserves that banks hold. The excess reserves are calculated as the reserves held minus the required reserves. In this case, the required reserves amount to 20% of $100,000, which is $20,000. Therefore, the excess reserves are $30,000 - $20,000 = $10,000. The money supply expansion multiplier is calculated as 1/required reserve ratio, which in this case is 1/0.20 = 5. Therefore, the maximum additional amount that the banking system can expand the money supply is $10,000 x 5 = $50,000. Hence, the correct answer is option C.

Question 4

If you write a check on your checking account to pay your rent which your landlord deposits in a bank,then

Accepted Answer

When you write a check from your checking account to pay your rent, and your landlord deposits that check in a bank, the money simply moves from your account to your landlord's account. This transaction does not change the total amount of money in the banking system, so both the monetary base and the money supply remain unchanged.

Question 5

If you write a check for $100 to your roommate who immediately deposits it,what is the maximum amount of change in the money supply?

Accepted Answer

The answer of If you write a check for $100...

Question 6

What tools can the Federal Reserve use to control the monetary base? Explain the way in which changes in each tool affect the level of bank reserves.Which tool do they choose to use on a day-to-day basis,and why?

Accepted Answer

The answer of What tools can the Federal Reserve use...

Question 7

Suppose that the balance sheet of Local State Bank is as follows:

Accepted Answer

The answer of Suppose that the balance sheet of Local...

Question 8

Who are the two monetary policymaking groups located in Washington? What are their functions?

Accepted Answer

The answer of Who are the two monetary policymaking groups...

Question 9

If the Federal Reserve were to simultaneously sell government bonds in the open market and decrease the discount rate,the

Accepted Answer

Selling government bonds in the open market typically reduces the money supply because it takes money out of circulation. Decreasing the discount rate encourages banks to borrow more from the Federal Reserve, increasing the money supply. These actions work in opposite directions, making the overall effect on the money supply uncertain.

Question 10

For these questions,suppose that the reserve requirement for checking deposits is 25%,that banks do not hold any excess reserves,and that the public does not change their holdings of currency.Total reserves already existing in the banking system are $300 million.
(a).What is the money supply in this economy?

Accepted Answer

The answer of For these questions,suppose that the reserve requirement...

Question 11

If the Federal Reserve increases the legal reserve requirement on deposits,

Accepted Answer

The answer of If the Federal Reserve increases the legal...

Question 12

What are the three functions of money? Which of these functions are emphasized in the classical and Keynesian models? Also,discuss how inflation reduces the efficiency by which money serves each of these functions.

Accepted Answer

The answer of What are the three functions of money?...

Question 13

The most commonly used tool by the Federal Reserve to control the monetary base is

Accepted Answer

Open market operations involve the buying and selling of government securities by the Federal Reserve to influence the monetary base. By buying securities, the Federal Reserve increases the monetary base, while selling securities decreases the monetary base. This tool is the most commonly used method by the Federal Reserve to control the monetary base. Changes in the discount rate and legal reserve ratios can also affect the monetary base, but they are used less frequently compared to open market operations. Tax rates on commercial banks do not directly affect the monetary base.

Question 14

The monetary base consists of

Accepted Answer

The monetary base is the sum of currency in circulation and bank reserves held by the central bank (in the United States, the Federal Reserve). Bank reserves consist of deposits at the central bank that can be used to satisfy reserve requirements, either as vault cash or as deposits held in accounts at the Federal Reserve. Therefore, choice D, "currency and bank reserve deposits at the Federal Reserve," is the correct answer.

Question 15

Which of the following functions express the money multiplier (m)for the narrowly defined money stock (M1)?

Accepted Answer

The money multiplier (m) for the narrowly defined money stock (M1) is expressed by the formula m = ΔM^s/Δ(MB). Option B is the only choice that provides the complete formula for m, including all relevant variables (rr_d, CU/D, and ER/D).

Question 16

If the Federal Reserve purchases $1 million in government securities in the open market,with a 25 percent required reserve ratio on deposits,the maximum increase in deposits would be

Accepted Answer

The maximum increase in deposits would be $4 million. This is because, with a 25 percent required reserve ratio, banks can lend out 75% of any new deposits. The money multiplier in this case is 1 / 0.25 = 4. Therefore, a $1 million increase in reserves can support a maximum increase in deposits of $1 million * 4 = $4 million.

Question 17

Assuming each policy is performed with the same magnitude,which of the following would be the most restrictive monetary policy action on the part of the Federal Reserve?

Accepted Answer

Selling government securities, raising reserve requirements, and raising the discount rate are all contractionary monetary policy actions. Out of the choices given, D is the only one that includes all three of these actions, making it the most restrictive monetary policy. Buying government securities and lowering reserve requirements are expansionary monetary policy actions and would not be considered the most restrictive.

Question 18

If the Federal Reserve sells $10 million in government securities in the open market,with a 10 percent required reserve ratio on deposits,the maximum increase in deposits would be

Accepted Answer

The answer of If the Federal Reserve sells $10 million...

Question 19

Assuming the required reserve ratio is 20 percent and total reserves are set at $20 billion,then the maximum amount of deposits would be

Accepted Answer

The maximum amount of deposits is calculated by dividing the total reserves by the required reserve ratio. With a 20 percent reserve ratio and $20 billion in reserves, the maximum amount of deposits would be $20 billion / 0.20 = $100 billion.

Question 20

Which of the following is the largest asset on a consolidated balance sheet for a commercial bank?

Accepted Answer

Loans are typically the largest asset on a commercial bank's consolidated balance sheet, as they represent the primary source of revenue for the bank.

Quiz 16: Money,the Banking System,and Interest Rates