Monetary policy

Question 1

open-market operations—

Answer 1

The primary way in which the Fed controls the supply of money is through the purchase and sale of government bonds.

Question 2

How is the Quantity of Money Measured?

Answer 2

1. Currency - the sum of outstanding paper money and coins

2. Demand deposits - the funds people hold in their checking accounts.

Question 3

different symbols are

Answer 3

C , M1, M2

Question 4

Money Supply =

Answer 4

Currency + Demand Deposits

Question 5

reserves

Answer 5

The deposits that banks have received but have not lent out

Question 6

If banks hold 100 percent of deposits in reserve,

Answer 6

the banking system does not affect the supply of money

Question 7

fractional–reserve

banking

Answer 7

a system under which banks keep only a fraction of their deposits
in reserve.

Question 8

reserve–deposit ratio

Answer 8

the fraction of deposits

kept in reserve

Question 9

in a system of fractional reserve banking, banks ____

Answer 9

create money

Question 10

Total Money Supply =

Answer 10

Original Deposit x (1/rr) where rr = reserve-deposit ratio

Question 11

Each $1 of reserves generates

Answer 11

$(1/rr) of money

Question 12

rr = 0.2, so the

original $1,000 generates

Answer 12

$5,000 of money

Question 13

bank capital

Answer 13

the equity of the

bank’s owners.

Question 14

leverage

Answer 14

is the

use of borrowed money to supplement existing funds for purposes of investment

Question 15

The leverage ratio

Answer 15

is the ratio of the bank’s total assets to bank capital

Question 16

In this example, the leverage ratio is $1000/$50,

or 20. This means that

Answer 16

for every dollar of capital that the bank owners have contributed, the bank has $20 of assets and, thus, $19 of deposits and debts

Question 17

Money Supply Model has

Answer 17

three exogenous variables

Question 18

Money supply model’s variables are

Answer 18

The monetary base , The reserve–deposit ratio , The currency–deposit ratio

Question 19

The monetary base B

Answer 19

is the sum
of currency and bank reserves.
. C + D

Question 20

The reserve–deposit ratio rr

Answer 20

is the fraction of deposits that banks hold

in reserve. R/D

Question 21

The currency–deposit ratio cr

Answer 21

is the amount of currency C people
hold as a fraction of their holdings of demand deposits D. It reflects
the preferences of households about the form of money they wish
to hold. C/D

Question 22

money multiplier

Answer 22

(cr + 1)/(cr + rr)

Question 23

the monetary base is

sometimes called high–powered money.

Answer 23

Because the

monetary base has a multiplied effect on the money supply

Question 24

The money supply is proportional to

Answer 24

the monetary base

Question 25

a decrease

in the reserve–deposit ratio

Answer 25

raises the money multiplier and the money

supply

Question 26

a decrease in the

currency–deposit ratio

Answer 26

raises the money multiplier and the money supply

Question 27

The Instruments of Monetary Policy

Answer 27

• those that influence the monetary base
• those that influence the reserve–deposit ratio and thereby the money
multiplier.

Question 28

How the Fed Changes the Monetary Base

Answer 28

• open–market operations- are the purchases and sales of government
bonds by the Fed
• lending reserves to banks- a reduction in the discount rate raises the monetary
base and the money supply. Also, Term Auction Facility

Question 29

How the Fed Changes the Reserve–Deposit Ratio

Answer 29

• Reserve requirements - An increase in reserve requirements tends
to raise the reserve–deposit ratio and thus lower the money multiplier and
the money supply
• interest on reserves - an increase in the interest rate on reserves will
tend to increase the reserve–deposit ratio, lower the money multiplier, and lower
the money supply.