Question 1

A change in reserve requirements may force depositories to borrow to cover any reserve deficiencies or may make depositories more willing to accelerate the growth of credit. Both of these will affect:

Accepted Answer

Changes in reserve requirements directly impact the amount of reserves banks must hold, influencing the mix of required and excess reserves. This, in turn, affects interest rates as banks may need to borrow to meet reserve requirements or may lend more freely, influencing the cost of borrowing. Both the money multiplier and the deposit multiplier are affected because these are determined by the reserve ratio; changes in reserve requirements alter this ratio, thus impacting how much banks can lend out based on their reserves.

Question 2

If the nation's money supply is $800 billion and the multiplier is 4, what is the monetary base?

Accepted Answer

The monetary base can be calculated by dividing the nation's money supply by the multiplier. Therefore, $800 billion / 4 = $200 billion.

Question 3

Suppose the monetary base is $300 billion, the money multiplier is 3. By how much must the Fed increase the monetary base to achieve a money supply of $1500 billion?

Accepted Answer

To achieve a money supply of $1500 billion with a money multiplier of 3, the monetary base needs to be $1500 billion / 3 = $500 billion. Since the current monetary base is $300 billion, the Fed must increase the monetary base by $500 billion - $300 billion = $200 billion.

Question 4

An increase in cash drain will cause a(n) ____ in the deposit multiplier and a(n) ____ in the money supply.

Accepted Answer

An increase in cash drain (people holding more cash relative to deposits) decreases the deposit multiplier because banks have less base money to support new loans. This, in turn, decreases the money supply as there is less money being created through the banking system's lending process.

Question 5

Which of the following roles of today's Federal Reserve System was proven effective following the terrorist attacks of September 2001?

Accepted Answer

The Federal Reserve played a crucial role in maintaining a sound banking and financial system by ensuring liquidity and stability in the financial markets following the September 2001 terrorist attacks.

Question 6

Which of the following actions does not improve the transparency of a central bank?

Accepted Answer

Conducting open market operations is a tool used to achieve monetary policy targets, but it does not directly relate to improving transparency, which involves clear communication and explanation of policies and decisions.

Question 7

The dollar volume of deposits that the banking system can create for each new dollar of excess legal reserves injected into the banking system is known as:

Accepted Answer

The deposit multiplier is the dollar volume of deposits that the banking system can create for each new dollar of excess legal reserves injected into the banking system.

Question 8

Banks will sometimes maintain excess reserves to meet unexpected withdrawals without falling below their required reserve holdings, which is referred to as:

Accepted Answer

Banks maintain excess reserves as a cushion to meet unexpected withdrawals without falling below their required reserve holdings. This practice ensures they have enough liquidity to cover sudden demands for cash without violating reserve requirements.

Question 9

By December of 2009, the assets recorded on the Fed's balance sheet was about:

Accepted Answer

By December of 2009, the Federal Reserve's balance sheet had expanded to about $2.2 trillion, largely due to its response to the financial crisis that began in 2007-2008, which included a variety of emergency lending programs and asset purchases.

Question 10

If the Federal Reserve requires a reserve requirement, RR, equal to 10% and the bank has found an excess of $1,000,000 in reserves, then the bank could absorb an additional deposits and loans equal to:

Accepted Answer

With a reserve requirement (RR) of 10%, the bank must keep 10% of deposits as reserves. If the bank has an excess of $1,000,000 in reserves, it can support additional deposits of $10,000,000, because 10% of $10,000,000 is $1,000,000, which is the amount of excess reserves available for lending.

Question 11

The most important measure of the money supply which includes transaction deposits, currency and coin and other liquid assets principally held by households is referred to as:

Accepted Answer

M2 is the correct answer because it includes all of M1 (currency and coin, demand deposits, and other liquid instruments) plus savings deposits, money market deposit accounts, and small-denomination time deposits (less than $100,000), which are principally held by households.

Question 12

Economists refer to the legal bank reserves plus the currency in the hands of the public as:

Accepted Answer

The monetary base and high-powered money are terms used interchangeably to refer to the sum of currency in circulation with the public and the reserves held by banks. This includes both the physical currency and the balances held in reserve accounts at the central bank.

Question 13

The link between the quantity of high-powered money that the Fed controls and the M2 measure of the money supply, which is an important factor in determining the rate at which the nominal GDP grows is referred to as:

Accepted Answer

The money multiplier refers to the process by which the banking system can expand the amount of money in the economy based on the reserves held by the central bank, linking high-powered money to broader money supply measures like M2.

Question 14

In what ways can the Federal Reserve System or any central bank influence the money and credit creation process?

Accepted Answer

The answer of In what ways can the Federal Reserve...

Question 15

Which channel of central bank policy does each of the following events or situations represent?
 a. Stock prices decline rapidly following an increase in market interest rates. 
b. Recent speeches by central bank officials have cautioned the public about an apparently excessive rise in debt-financed spending. 
c. Several major corporations were recently denied direct loans by their principal banks.
d. Following a heavy purchase of pounds by the Bank of England that bank moves to offset the domestic effects of the purchase by slightly tightening credit conditions.
e. Concerned about the recent increase in checkable deposits the central bank moves to increase the proportion of legal reserves depository institutions must post behind these deposits.

Accepted Answer

The answer of Which channel of central bank policy does...

Question 16

Which role(s) of central banks is/are described in each example below?
a. Shipments of currency are being made to banks in the region due to unusually heavy withdrawals by the public.
b. Several banks in the region are being subjected to a follow-up examination due to problems unearthed by central bank examiners on a visit last month.
c. Unexpectedly heavy demand for funds by the public associated with a decline in stock prices resulted in a significant increase in depository institutions' seeking funds from the central bank. 
d. Concerned over an apparent increase in the cost of living (consumer price index) and above-average rate of growth in transaction deposits the central bank moves to slow the latter through a combination of restrictive policy-directed actions in the financial markets. 
e. Dealers in government securities suddenly face a shortage of available loans and a rise in borrowing costs which the central bank moves to counteract immediately.

Accepted Answer

The answer of Which role(s) of central banks is/are described...

Question 17

Suppose that legal reserve requirements imposed on all public deposits held by depository institutions increase from 10 to 15 percent. What change occurs in the transactions deposit multiplier? How would this change affect the maximum volume of new deposits and loans the entire banking system could create? Would there be any impact on the money multiplier? Under what circumstances?

Accepted Answer

The answer of Suppose that legal reserve requirements imposed on...

Question 18

If the reserve requirement applicable to the deposits held by all depository institutions in the financial system is reduced from 10 percent to 5 percent, how does the transactions deposit multiplier change? Would there be a shift in the maximum volume of new deposits and loans that could be generated inside the banking system? How do you know?

Accepted Answer

The answer of If the reserve requirement applicable to the...

Question 19

Suppose the central bank injected $15 million in new reserves into the banking system and the current legal reserve requirement on deposits held by the banking system is 8 percent. Moreover, the banking system is perfectly efficient and there are no leakages of funds from that system except for the current legal reserve requirement. Please set up an EXCEL spreadsheet that shows how much in total required reserves and new deposits can be created in this banking system as a result of the injection of the $15 million in new legal reserves.
 Now suppose the central bank subsequently withdraws $20 million in legal reserves from this same banking system. What level of deposits and legal reserves would ultimately result? Please demonstrate on your Excel spreadsheet.

Accepted Answer

The answer of Suppose the central bank injected $15 million...

Question 20

Using the the description or the definition below, identify each of the terms and concepts from this chapter.
 a. An agency of government that controls money and credit growth and monitors the condition of the financial system. 
b. The central bank of the United States.
c. Chief policy-making and administrative body within the Federal Reserve System. 
d. Chief group within the Federal Reserve System for setting money and credit policy. 
e. One of 12 regional financial institutions chartered by the U.S. Congress.

Accepted Answer

The answer of Using the the description or the definition...

Quiz 12: Exploring Central Banks and Their Impact on the Economy and Financial System