Money and Banking Hw #2

The monetary liabilities of the Federal Reserve include

currency in circulation and reserves

Total Reserves are equal to the sum of

required reserves and excess reserves.

The Fed uses three policy tools to manipulate the money supply: open market operations, which affect the ________; changes in borrowed reserves, which affect the ________; and changes in reserve requirements, which affect the ________.

monetary base; monetary base; money multiplier

The interest rate charged on overnight loans of reserves between banks is the

federal funds rate

The opportunity cost of holding excess reserves is the federal funds rate ________.

minus the interest rate paid on excess reserves

Using the Gordon growth model, a stock's current price will increase if

the dividend growth rate increases

Increased uncertainty resulting from the global financial crisis ________ the required return on investment in equity.

raised

Periodic payments of net earnings to shareholders are known as

dividends

According to PPP, the real exchange rate between two countries will always equal

1.0

When foreigners expect the return on dollar assets to be high relative to the return on foreign assets, there is a ________ demand for dollar assets and a correspondingly ________ demand for foreign assets.

higher; lower

An increase in the domestic interest rate causes the demand for domestic assets to shift to the ________ and the domestic currency to ________, everything else held constant.

right; appreciate

Suppose that the Federal Reserve enacts expansionary policy. Everything else held constant, this will cause the demand for U.S. assets to ________ and the U.S. dollar to ________.

decrease; depreciate

An increase in the foreign interest rate causes the demand for domestic assets to ________ and the domestic currency to ________, everything else held constant.

decrease; depreciate

Both ________ and ________ are Federal Reserve assets

securities; loans to financial institutions

The percentage of deposits that banks must hold in reserve is the

required reserve ratio

Everything else held constant, when the federal funds rate is ________ the interest rate paid on reserves, the quantity of reserves demanded rises when the federal funds rate ________.

above; falls

When the federal funds rate equals the interest rate paid on excess reserves

the demand curve for reserves is horizontal

In the market for reserves, if the federal funds rate is above the interest rate paid on excess reserves, an open market purchase ________ the supply of reserves and causes the federal funds interest rate to ________, everything else held constant.

increases; fall

Everything else held constant, in the market for reserves, when the federal funds rate is 5%, lowering the discount rate from 5% to 4%

lowers the federal funds rate

Purchases and sales of government securities by the Federal Reserve are called

open market operations

When the Federal Reserve purchases a government bond from a primary dealer, reserves in the banking system ________ and the monetary base ________, everything else held constant.

increase; increases

The Fed does not tightly control the monetary base because it does NOT completely control

borrowed reserves

Open market purchases ________ reserves and the monetary base thereby ________ the money supply.

raise; raising

How much would checkable deposits in the banking system increase when the Fed buys $2 million of government bonds from the First National Bank? Assume the required reserve ratio is 10%, banks do not hold any excess reserves and all loans are deposited in banks.

20 million

Calculate the price of a stock that pays $1 a share per year dividend and you expect to be able to sell in one year for $20, assuming you require a 20% return.

17.5