Chapter 14 Money, Banks, and the Federal Reserve System

Question 1

M1

Answer 1

the narrowest definition of money

currency in circulation + demand deposits

Question 2

another term for demand deposits

Answer 2

checking account deposits

Question 3

M1 in January

Answer 3

$3.4 Trillion

Question 4

medium of exchange to buy goods and services

Answer 4

money

Question 5

M2

Answer 5

M1 + savings deposits (largest component) + small time deposits + money market mutual fund shares

Question 6

M2 in January

Answer 6

$13.3 Trillion

Question 7

M1 + savings deposits + small time deposits + money market mutual fund shares

Answer 7

M2

Question 8

currency in circulation + demand deposits

Answer 8

M1

Question 9

largest component of M2

Answer 9

savings deposits

Question 10

What is the value of M1?

Answer 10

$3.4 Trillion

Question 11

What is the value of M2?

Answer 11

$13.3 Trillion

Question 12

What is the growth rate of M1?

Answer 12

9% M1 Growth Rate

Question 13

What is the growth rate of M2?

Answer 13

6.6% M2 Growth Rate

Question 14

What are money market mutual funds?

Answer 14

part of M2

investment/asset take funds buy short term investments

Question 15

M2 is a part of

Answer 15

Money Market Mutual Funds

Question 16

What is the largest asset on a commercial bank’s balance sheet?

Answer 16

loans

Question 17

What is the largest liability on a commercial bank’s balance sheet?

Answer 17

demand deposits

Question 18

What are “reserves”?

Answer 18

assets

Question 19

What are “excess reserves”?

Answer 19

amount the bank can lend

Question 20

True or False

Banks can lend 100% of their excess reserves

Answer 20

True

Banks can lend 100% of their EXCESS reserves

Question 21

If ABC Bank’s total reserves are $100 million, equity is $35 million, demand deposits are $80 million, bonds are $15 million, and RRR = 5%
What is the value of required reserve?

Answer 21

Required reserve is the % of deposits = $80 million * 0.05 = 4 million

Question 22

If ABC Bank’s total reserves are $100 million, equity is $35 million, demand deposits are $80 million, bonds are $15 million, and RRR = 5%
What is the value of excess reserves?
Knowing that required reserves is 4 million

Answer 22

Total reserves - required reserves = excess reserves

100 - 4 = 96 million

Question 23

What is the largest single loan this bank can make (Ignore Federal regulations)?

Answer 23

96 million

Question 24

If Jenny makes a $2000 checking account deposit and the RRR is 4%, what is the maximum loan from this one deposit that Jenny’s bank make?

Answer 24

pull out 4 % = $ 80

lend rest: 2000 - 80 = 1920

Question 25

How is most money in the US created?

Answer 25

through bank loans

Question 26

How does M1 increase after a new loan is made?

Answer 26

checking account increase
demand deposits increase
M1 increases
M1 = currency in circulation + demand deposits
Note: every new loan involves demand deposits which increases demand deposits and thus increases M1

Question 27

if the Fed buys $500,000 in 10 year bonds from Regions Bank, what is the most the money supply can increase from this one action if the RRR is 4%?

Answer 27

1/RRR = (1 / .04) * 500,000 
1/RRR = 25 * 500,000
1/RRR = 12,500,000

Question 28

What can prevent the money supply from reaching its maximum potential?

Answer 28

if households hold onto cash
don’t pull all they have into checking account
banks don’t lend 100% excess reserves

Question 29

When banks have more excess reserves, they tend to make blank loads and the money supply tends to grow blank

Answer 29

When banks have more excess reserves, they tend to make more loans and the money supply tends to grow more

Question 30

Sarah gets a new $50,000 loan.

What happens?

Answer 30

The bank’s assets rise by 50,000
The bank’s loan balance rises by 50,000
The bank’s liabilities rise by 50,000
The bank’s demand deposits rise by 50,000
The nation’s M1 balance rises by $50,000
The nation’s M2 balance rises by $50,000
In time, with a RRR of 10%, the nation’s money supply will rise by $500,000