Question

Provide a brief explanation or show work

1. In the United States, the money supply is determined:

a. only by the Fed. b. only by the behavior of individuals who hold money and of banks in which money is held. c. jointly by the Fed and by the behavior of individuals who hold money and of banks in which money is held. d. according to a constant-growth-rate rule

2. In a 100-percent-reserve banking system, if a customer deposits $100 of currency into a bank, then the money supply:

a. increases by $100. b. decreases by $100. c. increases by more than $100. d. remains the same.

3. In a fractional-reserve banking system, banks create money because:

a. each dollar of reserves generates many dollars of demand deposits. b. banks have the legal authority to issue new currency. c. funds are transferred from households wishing to save to firms wishing to borrow. d. the wealth of the economy expands when borrowers undertake new debt obligations

4. If currency held by the public equals $100 billion, reserves held by banks equal $50 billion, and bank deposits equal $500 billion, then the monetary base equals:  

a. $50 billion. b. $100 billion. c. $150 billion. d. $600 billion

5. The ratio of the money supply to the monetary base is called:

a. the currency–deposit ratio. b. the reserve–deposit ratio. c. high-powered money. d. the money multiplier.

6. When the Fed makes an open-market sale, it:

a. increases the money multiplier (m). b. increases the currency–deposit ratio (cr). c. increases the monetary base (B). d. decreases the monetary base (B).

7. Suppose the banking system currently has $400 billion in reserves, the reserve requirement is 8 percent, and excess reserves amount to $5 billion. What is the level of deposits?

8. Explain the effect of each of the following scenarios on money supply: (You need to say if money supply increases or decreases and also how)

a. When the Fed buys treasury bonds from the public b. When the Fed decides to ease on banks by lowering the reserve-requirements: c. When the Fed decides to pay interest on excess reserves of banks: d. When the Fed sells treasury bonds to the public e.When the Fed raises the discount rates

9. In a simple graph show the structure of the Fed and very shortly explain the main objective of the Fed.

10. What are the three basic functions of money? Which one is more important than the other two functions and why?

11. The amount of currency in Assumptionland is 430,000. The amount of bank deposits in Assumptionland is 4,310,000. The amount of bank reserves in Assumptionland is 3,400,000 What is the money multiplier in Assumptionland?

Answer 1

(1) (a)

In developed countries, money supply is solely determined and fixed by its central bank.

(2) (d)

In 100% fractional banking system, increase in deposit is offset by decrease in cash held by public, so money supply remains unchanged.

(3) (a)

Banks keep a portion of deposits as required reserves and lends out the rest amount. When all commercial banks do this, total increase in money supply is higher than initial increase in deposit.

(4) (c)

Monetary base = Currency + Reserves = $(100 + 50) billion = $150 billion

NOTE: As per Answering Policy, 1st 4 questions are answered.