ECON 1010 Lecture Notes - Lecture 8: Nominal Interest Rate, Open Market Operation, Bank Reserves

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brownox746

13 Dec 2018

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Boc conducts open market operation in which it buys securities from banks. Boc pays for securities with newly created bank reserves. Banks have more reserves, same amount of deposits so they have excess. Excess reserves = actual reserves desired reserves. Is the ratio of the change in quantity of money to the change in the monetary base. Quantity of money created depends on the desired reserve ratio and the currency drain ratio. The quantity of money that people plan to hold depends on four main factors: the price level. Rise in the price level increases the quantity of nominal money but does not change the quantity of real money people plan to hold. Nominal money is the amount of money measured in dollars. Real money = nominal money price level: the nominal interest rate. Is the opportunity cost of holding wealth in the form of money rather than an interest-bearing asset.

Related Questions

Assume that banks do not hold excess reserves and that households do not hold currency, so the only form of money is demand deposits. To simplify the analysis, suppose the banking system has total reserves of $400. Determine the money multiplier and the money supply for each reserve requirement listed in the following table.

Reserve Requirement	Simple Money Multiplier	Money Supply
(Percent)	Simple Money Multiplier	(Dollars)
20
10

A higher reserve requirement is associated with a money supply.

Suppose the Federal Reserve wants to increase the money supply by $200. Again, you can assume that banks do not hold excess reserves and that households do not hold currency. If the reserve requirement is 10%, the Fed will use open-market operations to worth of U.S. government bonds.

Now, suppose that, rather than immediately lending out all excess reserves, banks begin holding some excess reserves due to uncertain economic conditions. Specifically, banks increase the percentage of deposits held as reserves from 10% to 25%. This increase in the reserve ratio causes the money multiplier to to . Under these conditions, the Fed would need to worth of U.S. government bonds in order to increase the money supply by $200.

Which of the following statements help to explain why, in the real world, the Fed cannot precisely control the money supply? Check all that apply.

The Fed cannot control the amount of money that households choose to hold as currency.
The Fed cannot prevent banks from lending out required reserves.
The Fed cannot control whether and to what extent banks hold excess reserves.

byzantiumarmadillo380

Assume that the banking system has total reserves of $100 million. Assume also that the reserve requirement for checking deposits is 10 percent and that banks do not hold any excess reserves. There is also no currency held by households.

a) What is the money multiplier? What is the money supply?

b) If the FED raises required reserves to 20 percent of deposits, what are the change in reserves and the change in money supply?

c) Now suppose the FED lowers the requirement from 10 percent to 5 percent, but banks choose to hold another 5 percent of deposits as excess reserves. Why might banks do so? What is the overall change in the money multiplier and the money supply as a result of these actions?

d) If the FED sells $1 million of government bonds, what is the effect on the economy's reserves and money supply? Use 10 percent required reserve ratio.

e) If the FED buys $5 million of government bonds, what is the effect on the economy's reserves and money supply? Use 10 percent required reserve ratio.

crimsonbadger400

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.

blacktrout920

ECON 1010 Lecture Notes - Lecture 8: Nominal Interest Rate, Open Market Operation, Bank Reserves

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