Question 1

Explain what near monies are.

Accepted Answer

Near monies are close substitutes for transactions money, such as savings accounts and money market accounts.

Question 2

Answer the questions below using the following information:
All figures are in billions of dollars.
   a. What is the value of M1?
b. What is the value of M2?

Accepted Answer

a. M1 = 800 + 1000 + 100 + 200 = $2100 billion. 
b.M2 = 2100 (M1) + 300 + 100 + 200 = $2700 billion.

Question 3

Assume there is an economy with a single bank, and the central bank sets the reserve requirement ratio at 10%. Assume also that the only bank had no transactions (i.e., no loans, reserves, or deposits) prior to an individual who deposits $1000 of currency with the bank.

Accepted Answer

(a) As a result of this deposit, calculate the amount of required reserves, actual reserves, and excess reserves.
(b) After the bank has issued the maximum amount of loans, what will be the total amount of loans, deposits, and money in the economy?
(c) What is the size of the money multiplier for this economy?
(d) If the central bank wants to increase the money supply by $500, should it buy or sell bonds? Also, how many bonds should it buy or sell?
(a) Total reserves will be $1,000. Required reserves will be 10% of the $1,000 deposit . Excess reserves will be $900.
(b) The total money supply will be $10,000. The bank will have issued $9,000 of new loans. Total deposits will equal $10,000.
(c) The money multiplier is 1/rr = 1/.1 = 10.
(d) The central bank will have to buy bonds. Given that the money multiplier is 10, it would have to purchase $50 worth of bonds.

Question 4

Assume the Bank of Smithville opens its doors to depositors and receives $100,000 in cash deposits. Assume furthermore that the bank has to abide by a 20% reserve ratio. Could this bank make a loan in the amount of $90,000?

Accepted Answer

The bank can only make loans in the amou

Question 5

Explain what bank runs are and why fear serves to reinforce them. Explain where the fear may originate.

Accepted Answer

Bank runs occur when many people present

Question 6

Discuss the process of open market operations.

Accepted Answer

Open market operations is the purchase a

Question 7

Write out in equation form the four major components of M1.

Accepted Answer

M1 = currency held o

Question 8

Why do you suppose that vault cash would not be considered as part of the money supply as defined by M1?

Accepted Answer

This is because vault cash is

Question 9

Why is it not sufficient for money to be considered as money merely by government fiat? Explain.

Accepted Answer

Money has a social dimension as well. Th

Question 10

Explain why the discount rate cannot be used to control the money supply with great precision.

Accepted Answer

The reason is that its effects on banks'

Question 11

Suppose that a group of farmers form a cooperative in which they deposit all of their grain in a common warehouse elevator and are given a receipt for their deposits. After a period of time the manager of the cooperative notices that very few farmers are returning to the warehouse to redeem their grain. What do you suppose is going on here? Furthermore, suppose that someone who is not a member of the cooperative decided to borrow some grain but was willing to take a receipt instead of the grain. How is this example similar to the story in the text about the goldsmiths? What would happen if everyone returned to the cooperative to demand their grain all at once.

Accepted Answer

It may be that few farmers are redeeming

Question 12

What are liabilities of commercial banks and why are they liabilities.

Accepted Answer

Deposits of all types are liabilities of

Question 13

The required reserve ratio is 10%. Dollar Bank has $50,000 in deposits and $10,000 in reserves. Assume all other commercial banks are loaned up.
(a) What is the value of this bank's excess reserves?
(b) What is the value of the additional loans that can be made by the commercial banking system?
(c) What is the money multiplier?
(d) How much in total deposits will be supported by Dollar Bank's reserves, if this bank lends all its excess reserves and there is no leakage from the banking system?

Accepted Answer

(a) Dollar Bank has $5,000 in excess re

Question 14

Explain the Fed's function as a lender of last resort.

Accepted Answer

The Fed serves as a lender of last resor

Question 15

Explain what happens to the value of M2 if the public withdraws $1 million worth of cash from the banking system.

Accepted Answer

The $1 million withdrawal will change th

Question 16

Discuss the role of financial intermediaries in the economy.

Accepted Answer

Financial intermediaries are b

Question 17

Prior to the passage of the Depository Institutions Deregulation and Monetary Control Act many banks used to offer toasters or blenders to prospective customers to encourage them to open checking accounts. Can you think of a reason why this practice was so prevalent prior to the passage of this law but has completely faded away since?

Accepted Answer

The law allowed banks for the first time

Question 18

Suppose there are $10 million in excess reserves in the banking system and the required reserve ratio is 10%. By how much could the money supply expand?

Accepted Answer

The money multiplier is equal

Question 19

Comment on the following statement. "The Treasury is able to print money to finance the deficit."

Accepted Answer

The Treasury borrows by issuing bills, b

Question 20

Assume that banks become more conservative and begin to hold excess reserves instead of lending them out. How would the money multiplier in this situation compare to the case where (an amount equivalent to) all excess reserves are lent out? How will this behavior affect the Fed's behavior.

Accepted Answer

The money multiplier is based on the ass

Explain what near monies are.

Answer the questions below using the following information: All figures are in billions of dollars. a. What is the value of M1? b. What is the value of M2?

Assume there is an economy with a single bank, and the central bank sets the reserve requirement ratio at 10%. Assume also that the only bank had no transactions (i.e., no loans, reserves, or deposits) prior to an individual who deposits $1000 of currency with the bank.

Assume the Bank of Smithville opens its doors to depositors and receives $100,000 in cash deposits. Assume furthermore that the bank has to abide by a 20% reserve ratio. Could this bank make a loan in the amount of $90,000?

Explain what bank runs are and why fear serves to reinforce them. Explain where the fear may originate.

Discuss the process of open market operations.

Write out in equation form the four major components of M1.

Why do you suppose that vault cash would not be considered as part of the money supply as defined by M1?

Why is it not sufficient for money to be considered as money merely by government fiat? Explain.

Explain why the discount rate cannot be used to control the money supply with great precision.

What are liabilities of commercial banks and why are they liabilities.

Explain the Fed's function as a lender of last resort.

Explain what happens to the value of M2 if the public withdraws $1 million worth of cash from the banking system.

Discuss the role of financial intermediaries in the economy.

Suppose there are $10 million in excess reserves in the banking system and the required reserve ratio is 10%. By how much could the money supply expand?

Comment on the following statement. "The Treasury is able to print money to finance the deficit."

Assume that banks become more conservative and begin to hold excess reserves instead of lending them out. How would the money multiplier in this situation compare to the case where (an amount equivalent to) all excess reserves are lent out? How will this behavior affect the Fed's behavior.

The Scope and Method of Economics

The Economic Problem: Scarcity and Choice

Demand, Supply, and Market Equilibrium

Demand and Supply Applications

Introduction to Macroeconomics

Measuring National Output and National Income

Unemployment, Inflation, and Long-Run Growth

Aggregate Expenditure and Equilibrium Output

The Government and Fiscal Policy

Money Demand and the Equilibrium Interest Rate

The Determination of Aggregate Output, the Price Level, and the Interest Rate

Policy Effects and Costs Shocks in the Asad Model

The Labor Market in the Macroeconomy

Financial Crises, Stabilization, and Deficits

Household and Firm Behavior in the Macroeconomy: a Further Look

Long-Run Growth

Alternative Views in Macroeconomics

International Trade, Comparative Advantage, and Protectionism

Open-Economy Macroeconomics: the Balance of Payments and Exchange Rates

Economic Growth in Developing and Transitional Economies

Filters

Exam 10: The Money Supply and the Federal Reserve System

Explain what near monies are.

Answer the questions below using the following information: All figures are in billions of dollars. a. What is the value of M1? b. What is the value of M2?

Assume there is an economy with a single bank, and the central bank sets the reserve requirement ratio at 10%. Assume also that the only bank had no transactions (i.e., no loans, reserves, or deposits) prior to an individual who deposits $1000 of currency with the bank.

Assume the Bank of Smithville opens its doors to depositors and receives $100,000 in cash deposits. Assume furthermore that the bank has to abide by a 20% reserve ratio. Could this bank make a loan in the amount of $90,000?

Explain what bank runs are and why fear serves to reinforce them. Explain where the fear may originate.

Discuss the process of open market operations.

Write out in equation form the four major components of M1.

Why do you suppose that vault cash would not be considered as part of the money supply as defined by M1?

Why is it not sufficient for money to be considered as money merely by government fiat? Explain.

Explain why the discount rate cannot be used to control the money supply with great precision.

What are liabilities of commercial banks and why are they liabilities.

Explain the Fed's function as a lender of last resort.

Explain what happens to the value of M2 if the public withdraws $1 million worth of cash from the banking system.

Discuss the role of financial intermediaries in the economy.

Suppose there are $10 million in excess reserves in the banking system and the required reserve ratio is 10%. By how much could the money supply expand?

Comment on the following statement. "The Treasury is able to print money to finance the deficit."

Assume that banks become more conservative and begin to hold excess reserves instead of lending them out. How would the money multiplier in this situation compare to the case where (an amount equivalent to) all excess reserves are lent out? How will this behavior affect the Fed's behavior.

The Scope and Method of Economics

The Economic Problem: Scarcity and Choice

Demand, Supply, and Market Equilibrium

Demand and Supply Applications

Introduction to Macroeconomics

Measuring National Output and National Income

Unemployment, Inflation, and Long-Run Growth

Aggregate Expenditure and Equilibrium Output

The Government and Fiscal Policy

Money Demand and the Equilibrium Interest Rate

The Determination of Aggregate Output, the Price Level, and the Interest Rate

Policy Effects and Costs Shocks in the Asad Model

The Labor Market in the Macroeconomy

Financial Crises, Stabilization, and Deficits

Household and Firm Behavior in the Macroeconomy: a Further Look

Long-Run Growth

Alternative Views in Macroeconomics

International Trade, Comparative Advantage, and Protectionism

Open-Economy Macroeconomics: the Balance of Payments and Exchange Rates

Economic Growth in Developing and Transitional Economies

Filters