ECON 1120 Lecture Notes - Lecture 13: Federal Reserve System, Money Supply, Money Multiplier

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27 Jun 2016

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Founded to provided a more flexible and more stable monetary and financial system. Maintaining the stability of the financial system. Providing certain financial services to the us government. Assets - liabilities = net worth, or assets = liabilities + net worth. A bank"s most important assets are its loans. Other assets include cash on hand (vault cash), the bank"s deposits with the fed, and its securities. A bank"s liabilities are its debts - what it owes. Deposits are debts owed to bank"s depositors. Total reserves (tr): balances that a bank has deposited at its fed bank plus the bank"s cash on hand. Required reserve ratio (rrr): the percentage of total deposits at the bank that the bank must keep as reserves. Required reserves (rr) = rrr x ddp (demand deposits) Excess reserves (er): tr - rr, balances that a bank has over and above what is required.

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QUESTION 31

The Board of Governors of the Federal Reserve System is

		composed of seven members who are appointed by the President and approved by the Senate.
		composed of 12 members of the Senate and the U.S. House of Representatives.
		elected by the general public.
		composed of representatives from the country's 12 largest commercial banks.

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QUESTION 32

The Fed is said to be the "lender of last resort" in that

		it charges a higher interest rate to borrowers than does any other bank.
		it functions as the government's bank only when commercial banks fail to do so.
		it makes loans to individuals whom commercial banks do not believe are credit-worthy.
		it stands ready to lend to any depository institution that it has decided should not fail.

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QUESTION 33

The Federal Reserve System acts as the government's fiscal agent by

		providing checking account services for the government.
		preparing the budget the President presents to Congress every year.
		determining how to finance a deficit.
		auditing taxpayers.

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QUESTION 34

The Federal Reserve System was established in which year?

		1913.
		1929.
		1865.
		1941.

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QUESTION 35

By serving as the lender of last resort,

		the Fed provides check clearing services.
		the Fed aids in the sale of government securities.
		the Fed supervises depository institutions.
		the Fed can prevent bank failures.

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QUESTION 36

Depository institutions must

		use and pay for the services of the Federal Reserve System.
		set their interest rates according to schedules established by the Federal Reserve System.
		keep a certain percentage of their deposits as reserves.
		turn over a percentage of their profits to the Federal Reserve System as payment for services provided by the Fed.

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QUESTION 37

The Federal Reserve System has

		50 district banks.
		24 district banks.
		12 district banks.
		7 district banks.

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QUESTION 38

The part of the Federal Reserve System (the Fed) that holds the reserve balances of depository institutions is

		the Board of Governors.
		the Federal Advisory Committee.
		the Federal Open Market Committee.
		the Federal Reserve district banks.

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QUESTION 39

The potential for a financial breakdown at one financial institution to spread throughout the financial system is known as a

		systemic risk.
		liquidity risk.
		lending risk.
		moral hazard.

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QUESTION 40

A system in which depository institutions hold reserves that are less than the amount of total deposits is called

		fiat money banking.
		required reserve banking.
		fractional reserve banking.
		central banking system.

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QUESTION 41

Total reserves of private banks are

		all customer deposits.
		the minimum amount banks need to hold against time deposits.
		federal reserve notes.
		deposits held at the Fed and vault cash.

1.11 points

QUESTION 42

A statement of assets and liabilities of any business entity is called

		a cash flow statement.
		an income statement.
		a balance sheet.
		a statement of net worth.

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QUESTION 43

Which of the following actions has no effect on the total money supply?

		The Federal Open Market Committee buys government securities.
		There is a transfer of deposits from one bank to another bank.
		There is change in the money multiplier.
		The Federal Open Market Committee sells government securities.

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QUESTION 44

Given a required reserve ratio of 20 percent, a commercial bank that has received a new deposit of $100 can make additional loans of

		$80.
		$0.
		$400.
		$20.

1.11 points

QUESTION 45

The Federal Open Market Committee has responsibility for

		appointing members to the Board of Governors of the Federal Reserve system.
		issuing orders to buy or sell government securities for the Fed.
		advising the Treasury Department on monetary policy.
		printing money.

indigobutterfly708

Multiple choices

1. Banks face liquidity risk because

A) they can have difficulty meeting their depositor's demands to withdraw money.

B) they are unable to borrow from the Federal Reserve.

C) households and businesses may seek to borrow a large number of funds in a short period of time.

D) governments tend to run high budget deficits.

2. The original intention of the Fed's role as lender of last resort was to make loans to banks that were

A) not illiquid nor insolvent.

B) illiquid, but not insolvent.

C) insolvent, but not illiquid.

D) both illiquid and insolvent.

3. Why might a nation seek to maintain a pegged exchange rate?

A) It makes business planning easier for firms involved in the global economy.

B) It removes the need to intervene in the foreign exchange market.

C) It ensures that the exchange rate will remain at its equilibrium.

D) It makes their currency more attractive on the foreign exchange market.

4. Suppose a country pegs its currency. If investors start to believe the peg will collapse and the currency is going to depreciate, as the government defends the peg the interest rate will

A) Not move as interest rates must remain constant in a peg

B) Increase to maintain the peg

C) Decrease to maintain the peg

D) It depends on the inflation rate is low or high compared to the country to which the currency is pegged.

5. When the Fed extends loans to depository institutions

A) increases the level of reserves.

B) it decreases the level of reserves.

C) it reduces the total value of the assets on its balance sheet.

D) it reduces the total value of the liabilities on its balance sheet.

6. If the Fed buys securities worth $10 million, then

A) bank reserves will increase by $10 million.

B) bank reserves will decrease by $10 million.

C) currency in circulation will increase by $10 million.

D) bank holdings of securities increased by $10 million.

7. If the Fed purchases $1 million in securities from the nonbank public, the monetary base will rise by $1 million

A) if the public holds the proceeds as currency.

B) if the public deposits the proceeds as checkable deposits.

C) if the public deposits the proceeds with the Treasury in a monetary base account.

D) whether the public holds the proceeds as currency or deposits them as checkable deposits.

8. The aggregate M1 consists of

A) currency plus all deposits in financial institutions.

B) currency plus savings deposits in financial institutions.

C) currency plus checkable deposits in financial institutions.

D) currency.

9. If the Fed purchases $1 million worth of securities and the required reserve ratio is 8%, by how much will deposits increase (assuming no change in excess reserves or the public's currency holdings)?

A) rise by $1 million

B) decline by $1 million

C) rise by $8 million

D) rise by $12.5 million

10. Suppose the required reserve ratio is 8% and the Fed purchases $100 million worth of Treasury bills from Wells Fargo. Suppose Wells Fargo didn't have excess reserves, then by how much is Wells Fargo able to increase its loans?

A) $8 million

B) $92 million

C) $100 million

D) $1.25 billion

11. If banks hold no excess reserves, checkable deposits total $1.5 billion, currency totals $400 million, and the required reserve ratio is 10%, then the monetary base equals

A) $550 million.

B) $1.54 billion.

C) $1.9 billion

D) $15 billion.

ultramarinehornet6

1. The money supply will be ____ than the monetary base when reserves are ___ than

deposits.

A) smaller; less

B) smaller; greater

C) bigger; less

D) There is not enough information provided to answer the question.

2. Which of the following include liabilities of the Fed?

A) bank reserves

B) loans to commercial banks in the 10th district

C) government bonds

D) loans to commercial banks in the 8th district

3. Which of the following are assets of the Fed?

A) bank reserves

B) coins

C) government bonds

4.Without a banking system, the monetary base and money supply are equal to:

A) deposits.

B) reserves.

C) currency in circulation.

D) None of the answers are correct.

D) federal reserve notes

5.M1 is:

A) currency + traveler's checks + checking deposits

B) currency +coins

C) currency + checking deposits

D) currency

6.If a bank's assets are $200 and the value of its weighted assets is $125, which is the

more restrictive capital requirement: the U.S. minimum equity ratio or the Basel Accord

requirement?

A) They are the same.

B) The United States ratio is the most restrictive.

C) The Basel Accord is the most restrictive.

D) There is not enough information provided to answer the question.

7. Which of the following includes consequences of the purchase and assumption method

of dealing with an insolvent bank?

A) The FDIC sells most of the assets and liabilities of the insolvent bank to another

bank.

B) Depositors lose their deposits and bank branches close.

C) The FDIC sells the insolvent bank's liabilities and earns a profit.

D) The bank keeps its original name.

8. Which of the following is a consequence of the payoff method of dealing with an

insolvent bank?

A) The FDIC sells the bank's assets for as much as it can get to pay off depositors.

B) The insolvent bank remains open under a new management.

C) The FDIC fund is not affected.

D) Small depositors lose 50 percent of their deposits.

9. Deposit insurance creates a moral hazard because it:

A) eliminates depositors' incentives to monitor banks.

B) reduces the cost of a bank failure for depositors.

C) encourages depositors to leave their funds in a weak bank.

D) All of the answers are correct.

10. The Basel Accord set international standards for:

A) interest rate volatility.

B) reserve ratios.

C) bank capital requirements.

D) loan risk.

11. U.S. capital requirements mandate a ________ minimum capitalâassets ratio.

A) 0 percent

B) 10 percent

C) 5 percent

D) 50 percent

12. Which of the following securities are banks not allowed to hold?

A) high-rated corporate bonds

B) stocks

C) municipal bonds

D) Treasury bonds

13. A bank run is an extreme form of:

A) credit risk.

B) interest rate risk.

C) low bank esteem.

D) liquidity risk.

14. One explanation for a bank run is:

A) adaptive expectations.

B) self-fulfilling expectations.

C) poor bank management.

D) that rising oil prices mean depositors require more cash.

ECON 1120 Lecture Notes - Lecture 13: Federal Reserve System, Money Supply, Money Multiplier

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