Chapter 15 Econ Checklist

What are the 4 most important assets that serve as means of payment in the US today?

1. currency (paper bills and coins)
2. total reserves held by banks at the Federal Reserves
3. checkable deposits (your checking or debit account)
4. savings deposits, money market mutual funds, and small-time deposits

currency + total reserves held at the Federal Reserve

monetary base

currency + checkable deposits

M1

M1 + savings deposits, money market mutual funds, and small-time deposits

M2

Which money supply does the Federal Reserve have control over?

monetary base

Which money supplies have the most significant effect on aggregate demand?

M1 and M2

ratio of reserves to deposits

reserve ratio

Formula for the reserve ratio:

reserves/deposits

If a bank decides to put $100 in reserves for every $1000 of deposits, what is the bank reserve ratio?

10%

What is the amount the money supply expands with each dollar increase in reserves ?

money multiplier

Formula for the money multiplier:

deposits/ reserves

Change in money supply equation:

changes in reserves x money multiplier

What are the two major tools the Fed uses to control the money supply?

1. open market operations
2. paying interest on reserve held by banks at the Federal Reserve

the buying and selling of government bonds by the Federal Reserve

open market operations

What are the objectives of open market operations?

influence growth of money supply

influence interest rates

How can the Federal Reserve increase/decrease reserves at banks by doing what?

buying/selling short-term government bonds (T-Bills)

If the Federal Reserve buys government bonds, the money supply does what?

increases

How does the Federal Reserve pay for the T-bills?

they electronically increase the reserves of the seller

When the Federal Reserve buys or sells bonds, it changes what?

the monetary base and the interest rates

When the Federal Reserve buys bonds, it does what?

increases the money supply and lowers interest rates

When interest rates are lower, the quantity of loans demanded does what?

increases

When the Federal Reserve sells bonds, what happens to the money supply and interest rates?

money supply lowers and interest rates raise

Federal Reserve controls a real rate only in the long-term or short-run?

short-run

The Federal Reserve has the most influence over a short-term interest rate called whar?

Federal Funds Rate

the overnight lending rate from one major bank to another

federal funds rate

The federal funds rate is a convenient signal of what?

monetary policy

Why is the Federal Funds rate a convenient signal of monetary policy?

responds quickly to actions by the Federal Reserve

can be monitored on a day-to-day basis

Instead of increasing the money supply, the Federal Reserve can do what until the Federal Funds rate drops by the desired amount?

buy bonds

How can the Federal Reserve increase the Federal Funds rate?

by selling bonds

when the Federal Reserve buys longer-term government bonds or other securities

quantitative easing

when the Federal Reserve sells longer-term government bonds or other securities

quantitative tightening

Which of the following is NOT a function of the Federal Reserve?

a) maintaining the US treasury account

b) lending money to other banks

c) lending money to consumers

c

The largest means of payment in the US is…

a) currency

b) checkable deposits

c) savings deposits

The monetary base includes:

a) currency and reserves held by banks at the Federal Reserve

b) currency and checkable deposits

c) currency and savings deposits

a

If the reserve ratio is 5%, the money multiplier is equal to:

a) 2

b) 10

c) 20

c

If the Federal Reserve increases bank reserves by $10,000 and the banking system has a reserve ratio of 1/20, which is equal to the required reserve ratio the Fed has set, what’s the change in the money supply if people don’t hold on to any currency, and instead deposit it all?

a)$500

b)$20,000

c)$200,000

d)$200,500

c

When the Federal Reserve wants to increase interest rates it:

a) instructs banks across the nation that they must raise their rates

b) sells bonds in the open market

c) buys bonds in the open market

d) adjusts the fractional reserve ratio

b