Chapter 14: The Money Supply Process

Question 1

Monetary base

Answer 1

the Feds balance sheet

Question 2

money supply process

Answer 2

the mechanism that determines the level of money supply

Question 3

three players in the money supply process

Answer 3

1. central banks
2. banks
3. depositors

Question 4

central bank

Answer 4

the government agency that oversees the banking system and is responsible for the conduct of monetary policy

Question 5

monetary liabilities of the Fed

Answer 5

currency in circulation and reserves

Question 6

currency in circulation

Answer 6

the amount of currency in the hands of the public

Question 7

reserves

Answer 7

deposits at the Fed plus currency that is physically held by banks

Question 8

assets on the Fed’s balance sheet

Answer 8

securities and loans to financial institutions

Question 9

Why are the Fed’s liabilities important?

Answer 9

increases in either or both currency in circulation and reserves lead to an increase in money supply

Question 10

Why are the Fed’s assets important?

Answer 10

lead to changes in reserves and the monetary base which affect the monetary base; also earn higher interest rates than liabilities

Question 11

Equation for monetary base

Answer 11

MB = C (currency in circulation) + R (total reserves) = Fed’s monetary liabilities + Treasury’s monetary liabilities = MB_N + BR

Question 12

open market operations

Answer 12

the Fed’s purchases or sales of securities in the open market

Question 13

open market purchase

Answer 13

a purchase of bonds by the Fed
- increases MB

Question 14

open market sales

Answer 14

a sale of bonds by the Fed
- decreases MB

Question 15

primary dealers

Answer 15

government securities dealers who operate out of private banking institutions

Question 16

Items that affect the monetary base, but are not controlled by the Fed

Answer 16

1. float
2. Treasury deposits at the Fed

Question 17

float

Answer 17

the temporary net increase in the total amount of reserves in the banking system caused by the Fed’s check clearing process

Question 18

Treasury deposits at the Fed

Answer 18

Monetary base can decrease when the Treasury moves deposits from commercial banks to the Fed
- increases Treasury deposits at the Fed
- causes a deposit outflow at the banks and causes reserves to fall

Question 19

what is the nonborrowed monetary base?

Answer 19

less tightly controlled component that is created by loans from the Fed

Question 20

equations for nonborrowed monetary base

Answer 20

MB_n = MB - BR(borrowed reserves from the Fed)

Question 21

Can the Fed still control MB with float and Treasury deposits?

Answer 21

Yes, float and Treasury deposits have short run fluctuations and are predictable

Question 22

multiple deposit creation

Answer 22

When the Fed supplies the banking system with $1 of additional reserves, deposits increase by a multiple of this amount

Question 23

simple deposit multiplier

Answer 23

the multiple increase in deposits generated from an increase in the banking system’s reserves

Question 24

formula for the multiple expansion of deposits

Answer 24

changeD = 1/rr x changeR

Question 25

Changes in the nonborrowed monetary base

Answer 25

the money supply is positively related to the nonborrowed monetary base - Fed - less multiple deposit expansion

Question 26

Changes in borrowed reserves from the Fed

Answer 26

the money supply is positively related to the level of borrowed reserves from the Fed - banks - more MB for deposit creation

Question 27

Changes in excess reserves

Answer 27

the money supply is negatively related to the amount of excess reserves - banks - less loans and deposit creation

Question 28

Changes in currency holdings

Answer 28

Hold excess reserves constant, the money supply is negatively related to currency holdings - depositors - less multiple deposit expansion

Question 29

Change in required reserve ratio

Answer 29

money supply is positively related to the required reserve ratio - Fed - more MB for deposit creation

Question 30

money multiplier

Answer 30

tells us how much the money supply changes for the given change in MB

Question 31

equation for money supply

Answer 31

MS = m x MB = C + D

Question 32

currency ratio

Answer 32

C/D

Question 33

excess reserve ratio

Answer 33

ER/D

Question 34

equation for money multiplier

Answer 34

m = (1 + c)/(rr +er + c)

Question 35

Does currency undergo multiple expansion?

Answer 35

No

Question 36

Do deposits undergo multiple expansion?

Answer 36

Yes

Question 37

What happens to excess reserves when MB and deposits increase?

Answer 37

Excess reserves increase

Question 38

simple money multiplier

Answer 38

m = 1/rr - no currency holding - no excess reserves

Question 39

monetary liabilities of the Treasury

Answer 39

Treasury currency in circulation and coins