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Economics > Econ Test 3 - The Money Supply Process > Flashcards

Econ Test 3 - The Money Supply Process Flashcards

0
Q

What is the central bank called in the United States?

A

The Federal Reserve System

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1
Q

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

A

The central bank

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2
Q

Depository Institutions

A

Banks

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3
Q

Financial Intermeditaries that accept deposits from indiv. and instit. and make loans

A

Banks

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4
Q

What encompasses savings and loans associations, mutual savings, and credit unions?

A

banks

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5
Q

Individuals and instituttions that hold deposits in banks

A

Depositors

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6
Q

Which of the three players are most important?

A

The federal reserve system

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7
Q

What does a simplified balance sheet contain?

A

Assets - securities, loans to financial institutions

Liabilities - Currency in circulation, reserves

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8
Q

What is currency in circulation and reserves normally referred to as?

A

monetary liabilties of the fed

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9
Q

An increase in currency in circulation and reserves will lead to what?

A

increase in money supply

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10
Q

What is the sum of the Fed’s monetary liabilites and the US treasury’s liabilites?

A

Monetary base

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11
Q

The amount of currency in the hands of the public

A

currency in circulation

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12
Q

Currency held by depository institutions is counted as part of what?

A

the reserves

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13
Q

IOUs from the fed to bearer

A

Federal Reserve notes

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14
Q

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

A

Reserves

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15
Q

Are reserves assets or liabilties for banks?

A

assets

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16
Q

Are reserves assets or liabilties for the Fed?

A

liabilities

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17
Q

An increase in reserves leads to an increase in what?

A

level of deposits and the money supply

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18
Q

Reserves that the Fed require banks to hold

A

required reserves

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19
Q

Any additonal reserves the banks choose to hold

A

excess reserves

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20
Q

The fraction of money deposited that the Fed requires to be held in reserves

A

Required reserve ratio

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21
Q

Canges to the asset items lead to changes in?

A

Reserves, monetary base, money supply

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22
Q

Why are assets on the Fed’s balance sheet important?

A
  1. The assets earn higher interest than the liabilites and the Feds make billions off of this
  2. Changes in assets lead o changes in the money supply
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23
Q

The primary way the Fed provides reserves to the banking system

A

purchasing securities

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24
Q

An increase in government or other securities held by the Fed leads to an increase in?

A

money supply

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25
Q

Another way the Fed can provide reserves to the banking system besides securities?

A

making loans to banks and other financial institutions

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26
Q

Loans made by the Feds are referred to as?

A

Borrowed reserves

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27
Q

How do Fed loans appear on financial institution’s balance sheets?

A

liability

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28
Q

The interest rate charged to banks for the Fed loans is?

A

discount rate

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29
Q

The monetary base =

A

MB = C + R

Monetary Base = circulation + reservers

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30
Q

How does the Federal Reserve exercise control over the monetary base?

A

THrough its purchases or sales of securites called open market operations

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31
Q

A purchase of bonds by the Fed is called?

A

Open market purchase

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32
Q

A sale of bonds by the Fed is called?

A

Open market sal

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33
Q

What do T-accounts list?

A

Only the changes that occur in balance sheet items

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34
Q

Suppose the Fed purchases $100 million of bonds from banks with a check. How does this affect the Banking System and Fed T-account?

A

Banking: +100 mil Reserves, -100mil Securities under assets
Fed: +100mil Securities under assets
+100mil Reserves under liabilies

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35
Q

A person or corporation sells 100mil of bonds to the Fed and deposit the Fed’s check in their local banks. How are the T-accounts affected?

A

Nonbank public: -100mil in securities under assets
+100mil in checkable deposits under assets
Banking system:+100mil checkable deposits under liabil
+100mil reserves under assets
Fed Reserve: +100mil securities under assets
+100mil reserves under liabilties

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36
Q

When are the results of the Fed’s open market purchase from nonbank public and from a bank identical?

A

when the check is deposited in the bank

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37
Q

If the person or corporation selling the bonds to the Fed cash the Fed’s check at a bank for currency how are T-accounts affected?

A

Nonbank public: -100mil in securities under assets
+100mil in currency under assets
Federal Reserve: +100mil in securities under assets
+100mil in currency in circulation under liabilties

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38
Q

What does the effect of an open market purchase on reserves depend on?

A

whether the seller of the bonds keeps the proceeds from the sale or deposits the proceeds

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39
Q

If the proceeds are kept in the currency then how does the open market purchase affect reserves?

A

It has no effect.

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40
Q

If proceeds from an open market purchase are kept as deposits then how are reserves affected?

A

Reserves increase by the amount of the open market purchase

41
Q

The effect of an open market purchase on the monetary base is always what?

A

The same whether the seller of the bonds keeps or deposits the curency. The monetary base increases by the amount of the purchase.

42
Q

If the Fed sells 100mil of bonds to banks or the nonbank public, how will the monetary base be affected?

A

decrease by 100mil

43
Q

If the Fed sells bonds to individuals who pay for them with currency how are t-accounts affected?

A

Nonbank Public: +100mil to securities under assets
-100mil to currency under assets
Federal Reserve: -100mil to securities under assets
-100mil to currency in circ under liabilities

44
Q

When does the Fed monetary liability decrease?

A

When currency is accepted for bonds because currency is taken out of circulation

45
Q

What falls when buyers of the bonds pay for the bonds with checks?

A

The level of reserves

46
Q

Is the effect of open market operations more certain on the monetary base or the reserves?

A

monetary base

47
Q

A shift from deposits to currency will affect what?

A

reserves in the banking system

48
Q

Does the Fed have more control over reserves or the monetary base?

A

the monetary base because a shift from deposits to currency won’t affect the monetary base

49
Q

During the Christmas season, the public wants to hold more currency to buy gifts and so it withdraws $100mil in cash. How are t-accounts affected?

A

Nonbank public: -100mil checkable deposits in assets
+100mil currency in assets
Banking System:-100mil reserves in assets
-100mil checkable deposits in liabilities
Federal Reserve:+100mil currency in circ under liabilities
-100mil reserves in liabilties

50
Q

How are t-accounts affected when the Fed makes a 100mil loan to the First National Bank?

A

Banking System:+100mil Reserves under assets
+100mil Loans under liabilties
Federal Reserve:+100mil Loans under assets
+100mil Reserves under liabilties

51
Q

If a bank pays off a loan from the Fed, reducing its borrowings from the Fed by 100mil how are T-accounts affected?

A

Banking: -100mil Reserves under assets
-100mil Loans under liabilties
Federal Reserve: -100mil Loans under assets
-100mil Reserves under liabilities

52
Q

What two items affect the monetary base but aren’t controlled by the Fed?

A

Float

Treasury deposits at the Fed

53
Q

The temporary increase in the total amount of reserves in the banking system occuring from the Fed’s check-clearing process is?

A

float

54
Q

How does the Fed’s check clearing process work?

A

Credits the amount of the check to a bank that deposited it (inc reserve) before it debits (dec reserve)the bank that drew it.

55
Q

Is float affected by random events such as weather?

A

yes

56
Q

What leads to the increase in Treasury deposits at the Fed?

A

When the U.S. treasury moves deposits from commercial banks to its account at the Fed

57
Q

How does an increase in Treasury deposits at the Fed affect the monetary base?

A

Causes a deposit outflow and causes reserves and the monetary base to decrease

58
Q

The two primary features that determine monetary base?

A

Open market operations

Lending to financial institutions

59
Q

Who sets the discount rate?

A

The federal reserve

60
Q

The remainder of the base that is under the Fed’s control and results primarily from open market operations

A

Nonborrowed monetary base

61
Q

Nonborrowed monetary base =

A

MB - BR

Monetary base - Borrowed Reserves

62
Q

Do float and treasury deposits undergo long or short term fluctuations?

A

short

63
Q

The process when the Fed supplies the baking system with $1 of additional reserves and deposits increase by a multiple of that amount

A

Multiple deposit creation

64
Q

When the bank makes the loan, what does it do for the borrower and with the proceeds?

A

Sets up a checking account for the borrower

Puts the proceeds of the loan into this account

65
Q

How does setting up a checking account after a loan affect the banks t-account?

A

Liabilities increase with +100mil of checkable deposits

Assets increase with +100mil of loans

66
Q

Can a bank make a loan for an amount greater than the excess reserves it has before it makes the loan?

A

NO

67
Q

$100mil of deposits created by the First National Bank is deposited in Bank A. What does Bank A’s t-account look like?

A

Bank A: +100mil reserves in assets

+100mil checkable deposits in liabilities

68
Q

If reserves are $100mil and the required reserve ratio is 10%, how much will required reserves increase and what happens to the excess reserves?

A

10million, leaving 90million of excess reserves

69
Q

What will a bank do because it does not hold on to excess reserves of 90mil?

A

Make loans for the entire amount

70
Q

If the money spent by the borrowers to whom Bank A lent the $90 million is deposited in another bank, such as Bank B, then the T-account for Bank B will be?

A

Bank B: +90mil reserves in assets

+100mil checkable deposits in liabilities

71
Q

If Bank B must keep 10% of $90million as required reserves, what are the reserves and what is the excess? How much can the loan be?

A

$9mil in reserves
$81mil in excess
$81mil in loans

72
Q

A bank cannot make loans greater in amount than its excess reserves

A

A bank cannot make loans greater in amount than its excess reserves

73
Q

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

A

simple deposit multiplier

74
Q

If some proceeds from loans are not deposited in banks, but instead are used to raise the holdings of currency then what happens to the money supply?

A

Will not increase as much as our simple model of multiple deposit creation tells us

75
Q

One situation where the simple model doesn’t work as intended

A

When banks do not make loans or buy securities in the full amount of excess reserves

76
Q

The money supply is pos/neg related to the nonborrowed monetary base

A

positively

77
Q

The money supply is pos/neg related to the level of borrowed reserves

A

positively

78
Q

The money supply is pos/neg related to the required reserve ratio

A

negatively

79
Q

The money supply is pos/neg related to currency holdings

A

negatively

80
Q

The money supply is pos/neg related to the amount of excess reserves

A

negatively

81
Q

Nonborrowed monetary base of the Fed increases, how does the money supply respond?

A

increases

82
Q

Required reserve ratio of the Fed increases, how does the money supply respond?

A

decreases

83
Q

Borrowed reserves of the Banks increases, how does money supply respond

A

increases

84
Q

Excess reserves of the banks increase, how does the money supply respond?

A

decreases

85
Q

Currency holdings of the depositors increases, how does money supply respond?

A

decreases

86
Q

Nonborrowed monetary base of the fed decreases, how does money supply respond?

A

decrease

87
Q

Required reserve ratio of Fed decreases, how does money supply respond?

A

increases

88
Q

Borrowed reserves of the bank decreases, how does money supply respond?

A

decreases

89
Q

Excess reserves of the banks decreases, how does money supply respond?

A

increases

90
Q

Currency holdings of depositors decreases, how does money supply respond?

A

increases

91
Q

Money multiplier formula

A

M = m x MB

Money supply = money multiplier x monetary base

92
Q

The three players in the money supply process are?

A

central bank
banks
despositors

93
Q

Four items in the Fed’s balance sheet that are essential are

A

currency in circulation
reserves
securities
loans

94
Q

What two items make up liabilities

A

currency in ciruclation

reserves

95
Q

What two items make up the monetary base?

A

Currency in circulation

Reserves

96
Q

What two items make up assets?

A

Securities

Loans

97
Q

How does the banking system create a multiple expansion of deposits?

A

each bank makes a loan and creates a deposit, the reserves find their way to another bank which are used to make more loans

98
Q

Making a loan creates a?

A

deposit

99
Q

The monetary base is linked to the money supply using the concept of?

A

the money multiplier

100
Q

Loans from the Fed made directly to the banks?

A

discount loans

Economics (5 decks)

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