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ECON 1BB3 Study Guide - Openmarket, Prime Rate, Financial System

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pinkantelope674
7 Dec 2013
School
McMaster University
Department
Economics
Course
ECON 1BB3
Professor
Hannah Holmes

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ECON 1BB3 Full Course Notes
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ECON 1BB3 Full Course Notes
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Document Summary

Fractional-reserve banking: a banking system in which a bank holds only a fraction of deposits as reserves. Creates money that otherwise would not exist. Banks can make loans to other people from your money (charge interest rate) But don"t give all money in loans incase of withdrawals. Reserve ratio: the fraction of total deposits that a bank holds as reserves. Reserves are the cash they keep in the vault, in the drawers and in the bank machines. I have in currency and there is no banking system. Now, i deposit my ,000 into a bank. = + + + + (putting in bank, bank giving loan, person buying something, seller get money and puts in bank, etc) *money allows us to take advantage of specialization and trade. What happens after all adjustments have taken place? initially full amount then only need 20%

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Related Questions

6. we noted that in ancient times money was normally created by government. However, under the modern banking system in the U.S. and other developed countries, money is normally created by Banks. The process begins when a depositor brings, let’s say, $100 in M1 into the bank for deposit. The bank accepts the deposit and creates a Demand Deposit (DD) for the customer in the amount of $100. The bank now has $100 in liquid funds it did not have before. As discussed in class, there are three things the bank can do with this new money: 1) It can keep the money as Vault Cash (a lot of it inside of ATM machines), 2) It can place the money on deposit at the Federal Reserve Bank (Fed) to be held as Reserves, 3) It can purchase securities for the bank’s securities portfolio. The contents of the bank’s security portfolio will not be included in M1. What is it about the definition of M1 that precludes the inclusion of the bank’s securities portfolio?

7. As discussed in class, all bank deposits at the Federal Reserve Bank (Fed) qualify as Reserves. However, not all Reserves are the same. The Fed makes a distinction between Required Reserves, and Excess Reserves. What is the difference between Required Reserves and 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.

1.11 points

QUESTION 34

The Federal Reserve System was established in which year?

1913.

1929.

1865.

1941.

1.11 points

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.

1.11 points

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.

1.11 points

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.

1.11 points

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.

1.11 points

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.

1.11 points

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.

1.11 points

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.
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