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Exam 16: Monetary Control

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Question 1

Multiple Choice

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The sum of seasonal credit discount loans, secondary credit discount loans, and primary credit discount loans that banks take out because of temporary problems are known as

A) unsubstantiated discount loans.
B) discount loans for profit.
C) discount loans that arise for business needs.
D) inelastic discount loans.

E) C) and D)
F) None of the above

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Question 2

Multiple Choice

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M1 money multiplier equals

A) (transaction accounts + currency) ÷ monetary base
B) (transaction accounts ­ currency) ÷ monetary base
C) (transaction accounts + currency) × monetary base
D) (transaction accounts ­ currency) × monetary base

E) B) and D)
F) None of the above

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Question 3

Multiple Choice

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If the ratio of currency to transaction accounts is 2, the ratio of nontransaction accounts to transaction accounts is 5, the ratio of retail money-market funds to transaction accounts is 1, the ratio of required reserves to transaction accounts is 0.08, and the ratio of excess reserves to transaction accounts is 0.02, the M1 multiplier is about

Which of the following is true of an economy in a liquity trap?

A bank has reserves of $34.3 million, securities of $65.2 million, and loans of $287.5 million.It has transaction accounts totaling $357.7 million and capital of $29.3 million.The reserve requirement is 0 percent on the first $7 million of transaction accounts, 3 percent on transaction accounts from $7 million to $47 million, and 10 percent on transaction accounts above $47 million. a.Draw up the bank's balance sheet and calculate the bank's excess reserves. b.Suppose the bank makes a loan equal to the amount of its excess reserves that you calculated in part a. Draw up the bank's balance sheet before the customer spends the proceeds of the loan. What are the bank's excess reserves? c.Now suppose the customer spends the proceeds of the loan.Draw up the bank's balance sheet and calculate its excess reserves.

The Fed undertakes dynamic open-market operations

A bank in poor condition may take out a loan under close Fed scrutiny.Such a loan is known as

Suppose the Fed's Open-Market Desk thinks the downward-sloping portion of the demand for reserves is given by the equation D = 28 ? (3 × i), where i is the federal funds rate in percent and D is expressed in billions of dollars.Suppose the Fed is currently supplying $26.5 billion in nonborrowed reserves.There are no secondary or seasonal credit discount loans.The primary credit discount rate is currently set at 2 percent and the interest rate on reserves is 0.30 percent.The Fed's target for the federal funds rate is 1 percent. a.Does the Desk need to change the supply of reserves in the market? How much does it need to add or withdraw from the market? After carrying out its daily actions, what will be the equilibrium amount of reserves and discount loans? b.Suppose the demand curve for reserves shifts to D = 35 ? (3 × i). The Fed does not realize that the demand curve has shifted, so it keeps the supply of nonborrowed reserves at the level you determined in part a. Calculate the equilibrium federal funds rate, reserves, and the amount of primary credit discount loans.

The money supply in an economy equals

If the federal funds rate equals the primary credit discount rate, the Fed is likely to ____securities in the open market, which will cause the federal funds rate to_____ .

Which of the following is true of an economy that has hit the zero lower bound?

The extra collateral the Fed requires above the value of a discount loan is known as

If a bank in the economy has excess reserves of $3 million, and required reserves are 10 percent of transactions accounts under the assumptions of the simple multiplier formula, then eventually the money supply will increase by

The Fed makes an open-market purchase of $5 million in an economy in which no bank holds excess reserves and the assumptions of the simple multiplier hold with a reserve requirement of 8 percent.Draw up a table to show the amount of new deposits in each new bank (show the amounts in the first five of them), the additional reserves held by that bank, and the loans made by that bank, as each successive bank lends out its excess reserves.Finally, calculate the total amount of new deposits, of additional reserves, and of loans made in the economy.

Primary credit discount loans for profit will be zero when

M2 money multiplier equals

A _____is a situation in which additions to an economy's monetary base do not lead to an increase in the economy's Money supply or decline in the interest rate.

The main asset on the Federal Reserve's balance sheet is

The supply curve of reserves in an economy is _____when the federal funds rate is less than the primary credit discount rate.

A _____is a loan from the Fed to a small agricultural bank.