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ECO102H1 Lecture Notes - Lecture 15: Monetarism, Money Creation, Open Market Operation

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erinlocust928
19 Aug 2016
School
UTSG
Department
Economics
Course
ECO102H1
Professor
Jessica Burley

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ECO102H1 Full Course Notes
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ECO102H1 Full Course Notes
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Document Summary

Demand deposits: money held at commercial banks. Reserves: fraction of deposits held at the bank (not loaned: reserve ratio (rr) = reserves/deposits. Money supply: currency in circulation + bank deposits: change in money supply = change in currency in circulation + change in deposits, change in deposits = initial change in reserves/reserve ratio = initial change in reserves. Decision in asset division comes from the price of bonds (versus cash: price of bonds = present value = rt/(1+i)^t, interest earned on bonds is the price of holding money. Interest rates are inversely related to real gdp and the price level. Monetary equilibrium: money supply = money demand: ms = currency + deposits, md = f(i, y, p) Money market deposits the relationship between the interest rate (price of money) and quantity of money. Changes to the interest rate leads to changes in desired investment and consumption: leads to change in ae and ad.

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Related Questions

Consider the following information about the banking system:

Reserves (R) = $500 billion

Currency (C) = $400 billion

Required Reserves (RR) = $80 billion

Required Reserve Ratio (r) = 0.1

a. What is the value of excess reserves in the banking system?

b. What is the value of deposits in the banking system?

c. What is the value of the money supply (M1)?

d. What is the size of the monetary base?

e. What is the value of the money multiplier? What does it tell us?

f. If the excess reserve ratio increases by 0.06, while the value of the required reserve ratio and currency to deposits ratio stay the same, what will be the value of the money multiplier? The value of the money supply?

g. If the Fed wishes to have the value of the money supply in the economy at the initial level (part c), how should it respond?

h. How much in government bonds should the Fed sell or buy?

i. If the Fed buys from Chase 10 million in government bonds, given the money multiplier in part f, what would be the change in the money supply?

QUESTION 46

When the Fed buys a U.S. bond in the open market

its action has no effect on the total reserves or the money supply because the check it writes increases reserves at one bank but they fall at another.

its action expands total reserves and the money supply.

its action contracts total reserves and the money supply.

total reserves increase by the amount of the purchase but the money supply stays the same.

1.11 points

QUESTION 47

When the Fed sells government securities,

reserves increase, leading to a decrease in the money supply by an amount more than the sale of the government securities.

reserves decrease, leading to a decrease in the money supply by an amount more than the sale of the government securities.

reserves increase, leading to a increase in the money supply by an amount more than the sale of the government securities.

reserves decrease, leading to a increase in the money supply by an amount more than the sale of the government securities.

1.11 points

QUESTION 48

The maximum potential money multiplier is equal to

the reserve ratio.

one minus the reserve ratio

the inverse of the required reserve ratio.

the number of dollars on reserve.

1.11 points

QUESTION 49

The potential money multiplier gives us

the growth in the money supply when income increases.

the growth in real national income when the money supply increases.

the maximum potential change in the money supply due to a change in income.

the maximum potential change in the money supply due to a change in reserves.

1.11 points

QUESTION 50

An increase in the reserve ratio

increases the money multiplier.

will cause banks to make more loans.

has an expansionary effect on the money supply.

has a contractionary effect on the money supply.

1.11 points

QUESTION 51

The Federal Deposit Insurance Corporation insures

banks against lawsuits.

the deposits held in member banks.

the deposits held in the Fed.

the federal funds market.

1.11 points

QUESTION 52

Bank runs are a possibility because

in difficult times people want currency instead of demand deposits.

the FDIC is inefficient.

banks do not keep enough reserves to cover all their depository liabilities.

bankers are often poor businesspeople.

1.11 points

QUESTION 53

The manner in which FDIC deposit insurance is set up in the United States encourages banks to

make riskier loans than they otherwise would.

reject some loans that probably would be profitable.

maintain excess reserves that are too great.

be too conservative in their lending practices.

1.11 points

QUESTION 54

The Federal Deposit Insurance Corporation

discourages banks from engaging in excessive risk taking.

was established after the Panic of 1907.

only insures deposits in money-center banks.

increases the stability of the banking system by reducing the likelihood of bank runs.

1.11 points

QUESTION 55

What are the two features of money that distinguish it from all other goods in the economy?

Money is government issued and it is redeemable for gold or silver.

Money is part of every barter transaction and it is divisible.

Money is accepted as a medium of exchange and it is the common unit of account used to express prices.

Money is a common unit of account and it is also can be traded for other currencies at a guaranteed exchange rate.

1.11 points

QUESTION 56

Holding money to meet unplanned expenditures and emergencies is known as

asset demand.

precautionary demand.

aggregate demand.

transactions demand.

1.11 points

QUESTION 57

When people want to hold money to make regular planned expenditures, this is

the transaction demand for money.

the spending demand for money.

the asset demand for money.

the precautionary demand for money.

1.11 points

QUESTION 58

When interest rates rise, the transactions demand for money usually

decreases.

increases.

decreases initially and then increases to the original position.

does not change.

1.11 points

QUESTION 59

As nominal Gross Domestic Product (GDP) rises, the transactions demand for money

increases, and the money demand curve shifts to the right.

remains constant, and the money demand curve remains the same.

decreases, and the money demand curve shifts to the left.

increases, and the money demand curve shifts to the left.

1.11 points

QUESTION 60

One of the economic costs of holding currency is that

it fulfills no precautionary role.

it fulfills no transactions role.

it earns no interest income.

its real value always increases.
All of the following are part of the narrowest definition of moneysupply, M1, except:
A) Bill has $50 worth of pennies in a coffee jar
B) Mike has $600 in his checking account
C) Jill has $400 in traveler’s checks
D) Jules has $400 worth of $1 bills in the piggybank
E) John has $500 in his savings account
2. Which of the following make up the money supply as it is mostnarrowly defined?
A) coins and currency held by the nonbank public, traveler'schecks, and savings deposits
B) all coins and currency held by the nonbank public
C) coins and currency held by the nonbank public, checkingdeposits, and traveler's checks
D) coins and currency held by the nonbank public, checkingdeposits, and savings deposits
E) checking deposits, savings deposits, and money market mutualfund accounts
3. Which of the following are included in the narrowest definitionof the money supply?
A) cash in bank vaults
B) savings deposits
C) money market mutual fund accounts
D) negotiable certificates of deposit
E) checkable deposits
4. If you returned a $5 Federal Reserve note to the Fed, you couldreceive
A) $5 in silver
B) $5 in gold
C) 5 one-dollar bills
D) 10 one-dollar bills
E) a small gold bar
5. The Federal Reserve's narrowest definition of money is
A) M3
B) M2
C) M1
D) near money
E) money market mutual funds
6. As a lender, a bank holds an advantage over any individualperson because
A) individuals do not diversify their asset holdings
B) individuals are better at enforcing loan contracts
C) banks have to engage in extensive and costly searches forpotential borrowers
D) banks develop expertise in evaluating borrowers' loanapplications
E) individuals have extensive knowledge of and experience inwriting loan contracts
7. If a bank has $1 million in assets and $50,000 in net worth, itsliabilities must equal
A) $50,000
B) $1,050,000
C) $50 million
D) $1,000,000
E) $950,000
8. Suppose the required reserve ratio is 0.1 and Linda deposits$4,000 in cash at the College State Bank. If the bank held noexcess reserves before Linda's deposit and now increases itsreserves by $500, which of the following is true?
A) The bank must have lent out an additional $4,000.
B) The $500 are required reserves.
C) The bank has excess reserves of $100.
D) Both the bank's assets and its liabilities rise by $500.
E) The bank has $500 in excess reserves.
9. Suppose that the First National Bank acquires $500,000 in newdeposits and the required reserve ratio is 12 percent. Which of thefollowing is true?
A) The First National Bank can increase the money supply by$500,000.
B) The First National Bank can increase the money supply by$400,000.
C) The First National Bank can increase the money supply by$440,000.
D) The entire banking system can increase the money supply by nomore than $500,000 if the First National Bank lends out its excessreserves.
E) The entire banking system can increase the money supply by nomore than $440,000 if the First National Bank lends out its excessreserves.
10. The ability to convert a store of value into a medium ofexchange with little loss of value is known as
A) arbitrage
B) solvency
C) liquidity
D) liability
E) currency
11. Which of the following would likely increase the moneysupply?
A) One bank buys government securities from another bank.
B) The required reserve ratio increases.
C) The Fed increases the reserves of commercial banks and the bankshold these as excess reserves.
D) The discount rate increases.
E) A bank sells government securities to the Fed.
12. The simple money multiplier equals
A) the required reserve ratio
B) the reciprocal of the required reserve ratio
C) 1 minus the required reserve ratio
D) 1 minus the reciprocal of the required reserve ratio
E) the square of the required reserve ratio
13. If the simple money multiplier is 5, the required reserve ratiomust be
A) 5 percent
B) 0
C) 10 percent
D) 50 percent
E) 20 percent
14. If an increase in excess reserves of $10 million increasescheckable deposits in the banking system by a maximum of $200million, the required reserve ratio is
A) 0
B) 5 percent
C) 10 percent
D) 20 percent
E) 2 percent
15. Suppose the reserve requirement ratio is 20 percent. Assumingno bank holds excess reserves and nobody withdraws cash, a $10,000injection of new excess reserves by the Fed can create
A) $2,000 in new checkable deposits
B) $10,000 in new checkable deposits
C) $50,000 in new checkable deposits
D) $500,000 in new checkable deposits
E) $50,000 in cash
16. Which of the following is not one of the procedures the Feduses to change the money supply?
A) buying government securities
B) selling government securities
C) lending reserves through the discount window
D) changing the required reserve ratio
E) extending loans to the public
17. Which of the following statements is correct?
A) To control the money supply, the Fed relies primarily on thereserve requirement.
B) The discount rate is the rate of interest banks charge to theirbest customers.
C) The Fed changes the reserve requirement frequently.
D) Because the Fed has no way to earn income, it is dependent uponCongress for appropriations.
E) Banks can turn a borrower's IOU into money--i.e., they cancreate money.
18. Lowering the discount rate is a way to expand the money supplybecause
A) it encourages banks to borrow from the Fed so they can moreeasily accommodate their customers' needs for loans
B) it encourages business customers to borrow directly from theFed
C) a lower discount rate reduces the amount of reserves banks arerequired to keep
D) a lower discount rate automatically reduces excessreserves
E) it encourages banks to sell U.S. government securities andincrease their cash reserves
19. The Fed operates
A) on a balanced budget
B) at a loss, since Federal Reserve notes and member bank depositsearn no interest
C) at a profit, since Federal Reserve notes and bank deposits earnno interest, but government securities and loans to commercialbanks do
D) at a profit, since Federal Reserve notes and member bankdeposits earn interest
E) at a loss, since Federal Reserve notes and member bank depositsearn interest, but government securities and loans to commercialbanks do not
20. Katie Sierra is willing to pay a higher interest rate. With noincome verification, she can apply for a type of loan commonlycalled
A) lion loans
B) liars loans
C) phantom loans
D) vaporware loans
E) prime-rate loans