Exam 4: The U.S. Federal Reserve and the Creation of Money

Shifts in the dollar's exchange rates affects which of the below?

There is widespread agreement that the central bank should be independent of the government so that decisions of the central bank will not be influenced for long-term business purposes such as pursuing a monetary policy to expand the economy but at the expense of inflation.

Describe the meaning of the word money.

Which of the below statements is FALSE?

The United States has a ________, which means that a bank must hold or "reserve" some portion of the funds that savers deposit in a form approved by the Fed.

Describe the four monetary aggregates.

Suppose the Fed's required reserve ratio (REQ) is 20%. Further suppose that the Fed buys $100 million of U.S. Treasury securities from a dealer, Mary Jones, who deposits the check, which is drawn on the Fed, in her bank. This deposit increases her bank's reserve account (∆R) with the Fed by $100 million as well as its demand deposits, its total reserves, and the overall level of M₁. What is the money multiplier?

________ is that item which serves as a numeraire, or unit of account or the unit that is used to measure wealth.

Assume the Fed's required reserve ratio is 12%. Further assume that the Fed buys $10 million of U.S. Treasury securities from a dealer who deposits the check, which is drawn on the Fed, in his bank. His bank's reserve account with the Fed has increased by $10 million and so have its (demand) deposits, its total reserves, and the overall level of M₁. However, required reserves have risen only by $1.2 million. This leaves an additional $8.8 million that the bank is free and eager to invest in order to improve its income.

The Fed's most powerful instrument is its authority to conduct ________, which means that the Fed may buy and sell, in open debt markets, government securities for its own account.

The money multiplier is ________ when households and banks do not deposit or lend.

The level of interest rates ________ affects the size of the ________ and, hence, the amount of that any increase in reserves will produce.

Few central banks of large economies own, or stand ready to own, a large amount of each of the world's major currencies, which are considered international reserves.

Assume REQ is 0.15 and the behavior of banks and depositors responds to interest rates such that banks do not make all the loans they can but rather want to hold 1% of their deposits (TDD) in excess reserves (ER), with the result that the ratio, $\frac{\mathrm{ER}}{\mathrm{TDD}}$ , equals 0.01. Also assume that the interest rate is at the level where the public will hold only 75% in checkable deposits (rather than a 100% maximum) and thus 25% in cash or currency (C) such that the ratio $\frac{\mathrm{C}}{\mathrm{TDD}}$ = 0.33. With these assumptions, what is the money multiplier?

The Fed often employs variants of simple open market purchases and sales, and these are called ________.

Describe the Federal Reserve System and its important feature.

The process of creating a money supply, the ________, can be generalized to the monetary aggregates beyond M₁.

________ is oversight of the main payment and settlement systems in the U.K. that are used for many types of financial transaction - from paying wages and credit card bills to the settlement of transactions between financial institutions.

There is general agreement that the discount rate is the most effective tool at the Fed's disposal and its use in monetary policy has diminished over time.

If the Fed thinks the dollar's value is ________ and a foreign currency's is too low, it can purchase some of the foreign currency with its own supply of dollars.