ECON206 Chapter Notes - Chapter 15: Payments Canada, Monetary Base, Excess Reserves

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lemonbeetle804

27 Dec 2019

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University of Waterloo

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Economics

Course

ECON206

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Derek Stacey

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ECON206 Full Course Notes

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Monetary base: base money, which is the sum of the bank of canada"s monetary liabilities (currency in circulation and reserves), and the canadian mint"s monetary liabilities (coins in circulation). Settlement balances: deposits held by directly clearing members of the canadian. Reserves: banks" settlement balances with the bank of canada plus currency that is physically held by banks (vault cash). Desired reserves: reserves that are held to meet the banks desire that for every dollar of deposits, a certain fraction should be kept as reserves. Desired reserve ratio: the fraction of deposits that banks desire to keep as reser ves. Excess reserves: reserves in excess of required reserves. Bank rate: the interest rate the bank of canada charges to members of the canadian. Open market operations: the central bank"s buying or selling of bonds in the open market. Open market purchase: a purchase of bonds by the central bank.

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Balance Sheet for Princeton Bank(amount in millions of dollars)
Assets---------------------Liabilities+capital
Reserve 30--------------Transactions 300
Securities 140-----------Deposit 0
Loans 280---------------Nontransacations 140
Total assets 450---------Deposits
Capital
Total liabilities+ Capital 450
Of Princeton Bank's reserves, $6million are required clearing balances held at the federal reserve bank of Philadelphia. Statistics for the economy as a whole are
D=$2,000 billion, R= $200 billion, C/D=0.2=ratio of nontransaction deposits to transaction deposits
N/D=2.0=ratio of non-transaction deposits to transaction deposits, MMF/D=1.6=ratio of retail money-market mutual funds to transaction deposits, Q=0.08=8%=required reserve ratio on transaction deposits=RR/D=ratio of the required reserve to transaction deposits, RCB/D=0.02=2%=ratio of required clearing balances to transaction deposits

C. Calculate the values of N, D, C, R, MMF, and RCB using the fact that C/D=0.2 and C+D=M1.
D. Suppose that the FED raises the reserve requirement on transaction deposit to 0.18=18%. What happens to Princeton Bank's balance Sheet? Does it has excess reserves or is it short of reserves? Calculate the new M1 and M2 multipliers. What happens to MB, M1,M2,N,D,C,MMF,RCB, and R?
E. Suppose that instead of raising the reserve requirement as in part C, the FED sells $150 billion of securities in the open market, including $30 million to a customer of Princeton Bank. What happens to Princeton Bank's balance sheet? Does it have an excess reserve, or is it short of reserves? Calculate the new M1, M2,N,D,C,MMF,RCB, and R?
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6. Other things beingâ equal, the M1 money supply varies in the same direction as the magnitude of

A.âk, theâ currency/DDO ratio

B.rrâ , the average required reserve ratio

C.âre, theâ banksâ desired excess reserves ratio

D.none of the above

7. Suppose that discounts and advancesâ (Fed loans of reserves toâ banks) increaseâ $200 million, Treasury deposits at the Fed increaseâ $500 million, and the Fed buysâ $700 million of Treasury bills from dealers. The net effect of these 3 transactions is to

A.increase bank reserves byâ $1,000 million

B.increase bank reserves byâ $1,400 million

C.increase bank reserves byâ $400 billion

D.leave bank reserves unchanged

8. Other things being equalâ (assuming the Fed takes noâ action), a sharp increase in interest rates caused by market forces in a strong economic recovery is likely to

A.increaseâ k, the currencyâ ratio, thus reducing the money supply

B.reduce the monetaryâ base, thus increasing the money supply

C.reduce reâ , the desired excess reserveâ ratio, thus increasing the money supply

D.do none of the above

9. The Federal Reserve is able to control most accurately in the short run

A.âB, the monetary base

B.âk, the currency ratio

C.reâ , theâ bankâs desired excess reserve ratio

D.M1, the U.S. money supply

10. The Federal Reserve implementedâ âoperation twistâ inâ 2011-2012 by

A.simultaneously buyingâ long-term and sellingâ short-term Treasury securities

B.heavy purchases of bothâ long-term andâ short-term Treasury securities

C.lowering the federal funds rate target and buyingâ long-term bonds

D.purchasingâ short-term securities and buyingâ mortgage-backed bonds

11. Duringâ 2008-2014, Fed Chairman Ben Bernanke drew a lot of criticism for

A.maintainingâ short-term interest rates at extremely low levels for an extended period

B.bailing out large banks that would otherwise have failed

C.conducting the quantitative easing policy for about six years

D.all of the above

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.

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ECON206 Chapter Notes - Chapter 15: Payments Canada, Monetary Base, Excess Reserves

ECON206 Full Course Notes

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