Ch. 17: The Central Bank Balance Sheet and the Money Supply Process

Liquidity

The financial system collapsed because Fed officials had failed to provide _________ that sound banks needed to stay in business.

Balance Sheet

The Central Bank's ___________ gives us a window through which we can study how the institution operates.

Publication

___________ of balance sheets is a critical part of the transparency that makes monetary policy effective.

- Securities

- Foreign Exchange Reserves

- Loans

What are the three basic assets that are shown on the central bank's balance sheet?

Securities

What is the primary asset of most central banks?

Open Market Operations

The quantity of securities it holds is controlled through purchases and sales known as ___________________.

Foreign Exchange Reserves

The central banks and government's balances of foreign currency.

Foreign Exchange Interventions

Situations in which officials attempt to change the market. value of various currencies.

Central Bank

Foreign Exchange Intervention is initiated by the __________.

Commercial

Loans are usually extended to __________________ banks.

Discount Loans

The loans that the Fed makes when commercial banks need short-term cash.

Fed

Through its liquid securities holdings, the _____ controls the federal funds rate and the availability of money and credit.

- Currency

- The Government's Deposit Account

- The Deposit Accounts of the Commercial Banks

What are the three major entries on the liabilities side of the central bank's balance sheet?

Monopoly

Nearly all central banks have a __________ on the issuance of the currency used in everyday transactions.

- Deposits at the central bank

- Cash in the bank's own vault

Commercial bank reserves are the sum of which two things?

Reserves

Vault cash is part of _______________. They are assets of the commercial bank and liabilities of the central bank.

Quantity, Credit

Bank reserves are the most important in determining the _________ of money and _______ in the economy.

- Required Reserves

- Excess Reserves

What are the two types of reserves?

Required Reserves

Reserves that the bank must hold.

Excess Reserves

Reserves that the bank holds voluntarily.

0

In 2020, the U.S. Federal Reserve set the reserve requirement to ______, so that all reserves today are excess.

Monetary Base

Currency in the hands of the public and reserves in the banking system make up the ___________________. Also referred to as high-powered money.

Size

The central bank can control the _______ of the monetary base.

- Open Market Operation

- Foreign Exchange Intervention

- Extend a Discount Loan

- Decision by an Individual to Withdraw Cash From Their Bank

What are the four types of transactions taken by the central bank?

Open Market Operation

The transaction that involves buying or selling a security initiated by the central bank.

Federal Reserve Bank of New York

Securities and Foreign Exchange transactions are managed by the _______________.

All 12 Reserve Banks

Discount loans are extended by ______________.

Minimal

The Fed should aim for a balance sheet that has ___________ liquidity, maturity, and credit risk.

T Account

The basic form of an account.

Reversed

If the Fed sells a U.S. Treasury bond through an open market sale, the impact on everyone's balance sheet is ____________.

Collateral

A borrowing bank must provide ___________.

Assets

The Fed can always shift its holdings of various __________.

- The Nonbank Public

- The Banking System

- The Central Bank

The transaction of cash withdrawal involves which three balance sheets?

Commercial Banks

The level of discount borrowing is decided by _______________.

M2

The category of money that involves currency plus demand deposits plus time deposits at banks.

Multiple Deposit Creation

The process whereby, when the Fed supplies the banking system with $1 of additional reserves, deposits increase by a multiple of this amount.

Fed

Only the _____ can create and destroy the Monetary Base.

10

On a base assumption, the reserve requirement ratio is ______%.

Deposit Expansion Multiplier

The multiple by which an increase in reserves will increase the money supply. It is inversely related to the required reserve ratio.

RR = rD (D)

What is the formula for the required reserve ratio?

Simple

The simple deposit expansion multiplier is too _______.

M = m x MB

What is the formula relating quantity of money (M), the monetary base (MB), and the money multiplier (m)?

Currency + Checkable Deposits

Money = _________________.

Currency + Reserves in the Banking System

Monetary Base = ______________________________.

Required Reserves + Excess Reserves

Reserves = ____________________.

Lower

The higher the interest rate on loans, the _______ the bank's excess reserves.

Higher

The greater the bank's concern over the possibility of deposit withdrawals, the _____ their excess reserves.

ER/D

What is the formula for the excess reserve to deposit ratio?

Currency to Deposit Ratio (C/D)

The fraction of deposits that people hold as currency.

- Required Reserves

- Excess Reserves

- Cash in the Hands of the Nonbank Public

What are the three uses on the monetary bank?

- The monetary base.

- The reserve requirement.

- The bank's desire to hold excess reserves.

- The nonbank public's demand for currency.

The quantity of money in the economy depends on which four things:

Cash

If the deposit rate gets too negative or goes below the effective lower bound, banks will switch to holding _________.

Fall

As interest rates increase, we expect to see the ER/D and C/D to ________

Variable

The money multiplier is too __________.

Interest Rates

___________ have become the monetary policy tool of choice.