Exam 15: The Federal Reserve System and Open Market Operations

Use the following to answer questions: Table: The Definition of the Money Supply Type of money Amount (millions) Currency and reserves held by banks at the Fed \ 50 Currency held by the public \ 100 Checkable deposits \ 250 Savings deposits \ 150 Money market mutual funds \ 25 Small time deposits \ 10 -(Table: The Definition of the Money Supply) Refer to the table. What is the M1 money supply?

Very little U.S. currency is used outside the United States.

As market interest rates rise:

The Fed has the greatest influence over _____ interest rates. Investment spending depends on _____ interest rates.

Because the United States has a fractional reserve banking system, banks hold:

Which is an example of moral hazard?

Assume that all banks shown in the table below observe the same required reserve ratio. Also assume that the banks are listed in sequential order (thus the loans from The First National Bank become the deposits for the Second National Bank, and the loans from the Second National Bank become the deposits for the Third National Bank, and so on). Also, the banks' balance sheets must always be balanced. Table: National Banks First National Bank ASSETS LIABILITIES Required reserves \ 26,000 Deposits \ 520,000 Loans TOTAL TOTAL Second National Bank ASSETS LIABILITIES Required reserves Deposits Loans TOTAL TOTAL $\text { Third National Bank }$ ASSETS LIABILITIES Required reserves Deposits Loans TOTAL TOTAL Use the information in the table to answer the following questions: A) Fill in the balance sheets for all banks in the table. B) What is the initial money multiplier in this country? C) Now suppose that banks fear an increased demand for withdrawals so each bank maintains 3% extra deposits as excess reserves over and above required reserves. What is the effective money multiplier now? D) What difficulty associated with monetary policy is illustrated by this question?

In the United States, the amount of cash per capita is about $4,000. This figure:

The intended effect of an expansionary monetary policy is that aggregate demand:

In the United States, the largest category of means of payment is:

Figure: Fed Policy If an economy is operating below its long-run potential growth rate as shown in the graph, what can the Fed do to bring the economy back toward its long-run growth rate? Explain.

Which would result from open market purchases made by the Fed totaling $50,000?

The federal government has considerable control over policy actions of the Federal Reserve because the U.S. president appoints all Federal Reserve Bank presidents.

When banks borrow from the Fed:

U.S. currency is printed by the:

An illiquid bank is one that:

Use the following to answer questions: Table: Statistics for a Small Economy $\begin{array} { l c } \hline \text { Item } & \text { Value in dollars (\$) } \\\hline \text { Cash held by public } & 7 \text { million } \\\text { Small-time deposits } & 30 \text { million } \\\text { Money market mutual funds } & 18 \text { million } \\\text { Checkable deposits } & 36 \text { million } \\\text { Currency \& total reserves at the Fed } & 12 \text { million } \\\text { Large-time deposits } & 20 \text { million } \\\text { Demand deposits } & 14 \text { million } \\\hline\end{array}$ -(Table: Statistics for a Small Economy) Refer to the table. The table shows some statistics for a small economy. Using only the information provided, M1 in this country amounts to:

The Fed usually focuses on the Federal Funds rate because it is a convenient signal of monetary policy.

The Federal Reserve's major tool(s) to control the money supply is(are):

Which money supply component is the smallest?