ECON 1012 Lecture Notes - Lecture 9: Potential Output, Disposable And Discretionary Income, Price Level
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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) | (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.
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. |
1.11 points
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. |
1.11 points
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. |
1.11 points
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. |
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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. |
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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. |