ECO 1000 Lecture Notes - Lecture 43: Federal Funds Rate, Federal Reserve System, Loanable Funds

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olivecattle778

4 Apr 2018

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The growth of consumption is likely to remain sluggish even as the economy begins to recover. Additional government borrowing to finance a larger deficit will increase the demand for loanable funds, causing real interest rates to rise. The federal funds rate is the interest rate paid when one bank borrows reserves from another bank. The federal funds market is the market where commercial banks with excess reserves make loans to commercial banks seeking reserves. The conduct of monetary policy is the responsibility of the federal reserve system. Which one of the following is the largest component of the money supply (m1) in the united states? demand and other checking deposits. No, because they are merely means to transfer checking deposits. Stores need not accept your check but must accept currency because currency is legal tender; checks are not. Deposits of individuals that can either be withdrawn or made payable on demand to a third party by a check.

Related Questions

1)The market for immediately available reserve balances at the Federal Reserve is known as the:

money market.

long-term bond market.

short-term bond market.

Federal funds market.

2)The sale of government bonds by the Federal Reserve Banks to commercial banks will:

increase aggregate supply.

decrease aggregate supply.

increase aggregate demand.

decrease aggregate demand.

3) Which of the following is least likely to be a problem for monetary policy?

The recognition lag.

The operational lag.

The administrative lag.

Cyclical asymmetry.

4) The interest rate at which the Federal Reserve Banks lend to commercial banks is called the:

prime rate.

short-term rate.

discount rate.

Federal funds rate.

pinkgoat764

5. Fiscal policy is enacted through changes in

A. interest rates and the price level.

B. the supply of money and foreign exchange.

C. unemployment and inflation

D. taxation and government spending.

6. In an economy, the government wants to decrease aggregate demand by $48 billion at each price level to decrease real GDP and control demand-pull inflation. If the MPS is 0.25, then it could

A. increase taxes by $16 billion.

B. increase taxes by $24 billion.

C. decrease government spending by $10 billion.

D. decrease government spending by $16 billion.

7. If there is a constitutional requirement to maintain a balanced budget, then during a recession when tax revenues are shrinking, the government will have to implement

A. contractionary fiscal policy.

B. no change in fiscal policy.

C. expansionary fiscal policy.

D. countercyclical fiscal policy.

8. Most economists believe that fiscal policy is:

A. better than the monetary policy for "fine-tuning" the economy.

B. better than the monetary policy for month-to-month stabilization.

C. not as good as the monetary policy for month-to-month stabilization.

D. not very good at pushing the economy in a particular direction.

9. An increase in the legal reserve ratio

A. increases the money supply by increasing excess reserves

B. decreases the money supply by decreasing excess reserves

C. increases the money supply by decreasing excess reserves

D. decreases the money supply by increasing excess reserves

10. The discount rate is the rate of interest at which

A. Federal Reserve Banks lend to commercial banks

B. savings and loan associations lend to some builders

C. Federal Reserve Banks lend to large corporations.

D. commercial banks lend to large corporations

11. Which of the following actions by the Fed most likely increase commercial bank lending?

A. raising the reserve ratio

B. increasing the federal funds rate target

C. reducing the interest paid on excess reserves held at the Fed

D. selling bonds to commercial banks and the public

12. Assume the economy is operating at less than full employment. An expansionary monetary policy will cause interest rates to ______, which will ______ investment spending.

A. decrease; decrease

B. decrease; increase

C. increase; increase

D. increase; decrease

sapphirecrow883

Suppose First Main Street Bank, Second Republic Bank, and Third Fidelity Bank all have zero excess reserves. The required reserve ratio is 10%. The Federal Reserve buys a government bond worth $250,000 from Raphael, a client of First Main Street Bank. He deposits the money into his checking account at First Main Street Bank.

Complete the following table to reflect any changes in First Main Street Bank's T-account (before the bank makes any new loans).

Assets		Liabilities

Complete the following table to show the effect of a new deposit on excess and required reserves when the required reserve ratio is 10%.

Hint: If the change is negative, be sure to enter the value as negative number.

Amount Deposited	Change in Excess Reserves	Change in Required Reserves
(Dollars)	(Dollars)	(Dollars)
250,000

Now, suppose First Main Street Bank loans out all of its new excess reserves to Megan, who immediately uses the funds to write a check to Larry. Larry deposits the funds immediately into his checking account at Second Republic Bank. Then Second Republic Bank lends out all of its new excess reserves to Raphael, who writes a check to Susan, who deposits the money into her account at Third Fidelity Bank. Third Fidelity lends out all of its new excess reserves to Becky as well.

Fill in the following table to show the effect of this ongoing chain of events at each bank. Enter each answer to the nearest dollar.

	Increase in Deposits	Increase in Required Reserves	Increase in Loans
	(Dollars)	(Dollars)	(Dollars)
First Main Street Bank
Second Republic Bank
Third Fidelity Bank

Assume this process continues, with each successive loan deposited into a checking account and no banks keeping any excess reserves. Under these assumptions, the $250,000 injection into the money supply results in an overall increase of in demand deposits.

scarletyak936

ECO 1000 Lecture Notes - Lecture 43: Federal Funds Rate, Federal Reserve System, Loanable Funds

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