For purposes of analyzing the money stock and its relationship to relevant economic variables, money is best thought of as
those items that can be readily accessed and used to buy goods and services.
In the United States, currency holdings per person average about
$4,490; one explanation for this relatively large amount is that criminals probably prefer currency as a medium of exchange.
Liquidity refers to
the ease with which an asset is converted to the medium of exchange.
Which of the following might explain why the United States has so much currency per person?
Currency may be a preferable store of wealth for criminals.
An important function of the U.S. Federal Reserve is to
control the supply of money.
The Fed has the power to increase or decrease the number of dollars in the economy through the decisions of
Which of the following does the Federal Reserve not do?
convert Federal Reserve Notes into gold
When conducting an open-market purchase, the Fed
buys government bonds, and in so doing increases the money supply.
Which of the following is correct concerning the FOMC?
the members of the Board of Governors have the majority of the votes
the New York Federal Reserve Bank District President is always a voting member
all Federal Reserve Bank presidents attend the meetings
All of the above are correct
A bank’s assets equal its liabilities under
both 100-percent-reserve banking and fractional-reserve banking.
In a 100-percent-reserve banking system, if people decided to decrease the amount of currency they held by increasing the amount they held in checkable deposits, then
M1 would not change.
If a bank has a reserve ratio of 8 percent, then
the bank keeps 8 percent of its deposits as reserves and loans out the rest.
If the reserve ratio is 12.5 percent, then $1,000 of additional reserves can create up to
$8,000 of new money.
If the reserve ratio is 8 percent, then a decrease in reserves of $6,000 can cause the money supply to fall by as much as
If you deposit $100 of currency into a demand deposit at a bank, this action by itself
does not change the money supply.
If the Fed raised the reserve requirement, the demand for reserves would
increase, so the federal funds rate would rise.
A problem that the Fed faces when it attempts to control the money supply is that
the Fed does not control the amount of money that households choose to hold as deposits in banks.
During a bank run, depositors decide to hold more currency relative to deposits and banks decide to hold more excess reserves relative to deposits.
Both the decision to hold relatively more currency and the decision to hold relatively more excess reserves would make the money supply decrease.
If the discount rate is lowered, banks borrow
more from the Fed so reserves increase.
If the Fed sells government bonds to the public, then reserves
decrease and the money supply decreases.
The Fed purchases $200 worth of government bonds from the public. The reserve requirement is 12.5 percent, people hold no currency, and the banking system keeps no excess reserves. The U.S. money supply eventually increases by
In 1991, the Federal Reserve lowered the reserve requirement from 12 percent to 10 percent. Other things the same this should have
increased both the money multiplier and the money supply.
In a fractional-reserve banking system with no excess reserves and no currency holdings, if the central bank buys $100 million worth of bonds,
reserves increase by $100 million and the money supply increases by more than $100 million.
Which of the following is not a tool of monetary policy?
increasing the government budget deficit