Chapter 14 Money, Banks, and the Federal Reserve System Flashcards
M1
the narrowest definition of money
currency in circulation + demand deposits
another term for demand deposits
checking account deposits
M1 in January
$3.4 Trillion
medium of exchange to buy goods and services
money
M2
M1 + savings deposits (largest component) + small time deposits + money market mutual fund shares
M2 in January
$13.3 Trillion
M1 + savings deposits + small time deposits + money market mutual fund shares
M2
currency in circulation + demand deposits
M1
largest component of M2
savings deposits
What is the value of M1?
$3.4 Trillion
What is the value of M2?
$13.3 Trillion
What is the growth rate of M1?
9% M1 Growth Rate
What is the growth rate of M2?
6.6% M2 Growth Rate
What are money market mutual funds?
part of M2
investment/asset take funds buy short term investments
M2 is a part of
Money Market Mutual Funds
What is the largest asset on a commercial bank’s balance sheet?
loans
What is the largest liability on a commercial bank’s balance sheet?
demand deposits
What are “reserves”?
assets
What are “excess reserves”?
amount the bank can lend
True or False
Banks can lend 100% of their excess reserves
True
Banks can lend 100% of their EXCESS reserves
If ABC Bank’s total reserves are $100 million, equity is $35 million, demand deposits are $80 million, bonds are $15 million, and RRR = 5%
What is the value of required reserve?
Required reserve is the % of deposits = $80 million * 0.05 = 4 million
If ABC Bank’s total reserves are $100 million, equity is $35 million, demand deposits are $80 million, bonds are $15 million, and RRR = 5%
What is the value of excess reserves?
Knowing that required reserves is 4 million
Total reserves - required reserves = excess reserves
100 - 4 = 96 million
What is the largest single loan this bank can make (Ignore Federal regulations)?
96 million
If Jenny makes a $2000 checking account deposit and the RRR is 4%, what is the maximum loan from this one deposit that Jenny’s bank make?
pull out 4 % = $ 80
lend rest: 2000 - 80 = 1920
How is most money in the US created?
through bank loans
How does M1 increase after a new loan is made?
checking account increase
demand deposits increase
M1 increases
M1 = currency in circulation + demand deposits
Note: every new loan involves demand deposits which increases demand deposits and thus increases M1
if the Fed buys $500,000 in 10 year bonds from Regions Bank, what is the most the money supply can increase from this one action if the RRR is 4%?
1/RRR = (1 / .04) * 500,000 1/RRR = 25 * 500,000 1/RRR = 12,500,000
What can prevent the money supply from reaching its maximum potential?
if households hold onto cash
don’t pull all they have into checking account
banks don’t lend 100% excess reserves
When banks have more excess reserves, they tend to make blank loads and the money supply tends to grow blank
When banks have more excess reserves, they tend to make more loans and the money supply tends to grow more
Sarah gets a new $50,000 loan.
What happens?
The bank’s assets rise by 50,000
The bank’s loan balance rises by 50,000
The bank’s liabilities rise by 50,000
The bank’s demand deposits rise by 50,000
The nation’s M1 balance rises by $50,000
The nation’s M2 balance rises by $50,000
In time, with a RRR of 10%, the nation’s money supply will rise by $500,000
