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Exam 25: Money,banks,and the Federal Reserve System

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Question 111

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Describe the structure of the Fed's Open Market Committee (FOMC).What is this committee's primary responsibility?

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The FOMC is comprised of the seven membe...

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Question 112

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If you liquidate $3,000 of your mutual fund and transfer the funds to your checking account,then initially,M1 will ________ and M2 will ________.

A) not change;decrease
B) increase;decrease
C) increase;not change
D) not change;not change

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Question 113

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Following the 2007-2009 financial crisis,many people feared that Greece might leave the euro and resume using the drachma.If that happened,the drachma might be worth less than the euro.When using fiat money like the drachma,the key to acceptance is that households and firms have confidence that if they accept drachma in exchange for goods and services,the drachma will not lose much value during the time they hold them.If sellers were not willing to accept the drachma in exchange for goods and services,the drachma would not serve as

Suppose you deposit $4,000 in currency into your checking account at Bank of America.Assume that Bank of America has no excess reserves at the time you make your deposit and that the required reserve ratio is 10 percent. a.Use a T-account to show the initial effect of this transaction on Bank of America's balance sheet. b.Suppose that Bank of America makes the maximum loan they can from the funds you deposited.Use a T-account to show the initial effect on Bank of America's balance sheet from granting the loan.Also include in this T-account the transaction from question (a. ). c.Now suppose that whoever took out the loan in question (b)writes a check for this amount and that the person receiving the check deposits it in Bank of Boston.Show the effect of these transactions on the balance sheet of Bank of America and Bank of Boston,after the check has been cleared.On the T-account for Bank of America,include the transactions from questions (a)and (b). d.What is the maximum increase in checking account deposits that can result from your $4,000 deposit? What is the maximum increase in the money supply? Explain.

Consider the following T-account for a bank: $\begin{array}{|ll|ll|}\hline\text { Assets } && \text { Liabilities } \\\hline \text { Reserves } & \$ 1,000 & \text { Deposits }& \$ 5,000 \\\hline \text { Loans } & \$ 4,000 & & \\\hline\end{array}$ If the required reserve ratio is 10 percent,the bank at this point can make no more loans.

Suppose the Federal Reserve purchases $10,000 of Treasury bonds from you and that you deposit the $10,000 into your checking account deposit at Bank Y.Assume that Bank Y has no excess reserves at the time you make your deposit and that the required reserve ratio is 20 percent. a.Use a T-account to show the initial effect of this transaction on Bank Y's balance sheet. b.Suppose that Bank Y makes the maximum loan they can from the funds you deposited.Use a T-account to show the initial effect on Bank Y's balance sheet from granting the loan.Also include in this T-account the transaction from question (a. ). c.Now suppose that whoever took out the loan in question (b)writes a check for this amount and that the person receiving the check deposits it in Bank Z.Show the effect of these transactions on the balance sheet of Bank Y and Bank Z,after the check has been cleared.On the T-account for Bank Y,include the transactions from questions (a)and (b). d.What is the maximum increase in checking account deposits that can result from your $10,000 deposit? What is the maximum increase in the money supply? Explain.

If households in the economy decide to take money out of checking account deposits and put this money into savings accounts,this will initially

Hyperinflations occur because governments want to spend more than they raise in taxes,and they pay for the extra purchases by printing money.

Banks can continue to make loans until their

To decrease the money supply,the Federal Reserve could

Suppose a transaction changes a bank's balance sheet as indicated in the following T-account,and the required reserve ratio is 10 percent. $\begin{array} { | c | c | } \hline \text { Assets } & \text { Liabilities } \\\hline \text { Reserves } + \$ 2,000 & \text { Deposits } + \$ 2,000 \\\hline\end{array}$ As a result of the transaction,the bank can make a maximum loan of

If the Fed wishes to decrease the supply of money and credit,it may sell government securities,raise the discount rate,or lower required reserve ratios.

What are the implications of the quantity theory of money for monetary policy and price stability?

If whole tomatoes were money,which of the following functions of money would be the hardest for tomatoes to satisfy?

To decrease the money supply,the Federal Reserve could

Gold is an example of

Suppose Bill Gates deposits $20 million into his checking account at Wells Fargo Bank.If the required reserve ratio is 10 percent,what is the maximum change in money supply?

Money cannot serve as a medium of exchange unless it also serves as a store of value.Is this statement true or false? Explain.

The ________ the reserve ratio,the ________ the money multiplier.

The portion of ________ that a bank does not loan out or spend on securities is known as ________.