Chapter 14: The Money Supply Process

Question 1

Three Players

Answer 1

1) The Central bank: Federal Reserve System
2) Banks: depository institutions; financial intermediaries
3) Depositors: individuals and institutions

Question 2

The Fed’s Balance Sheet

Answer 2

Assets: Government securities and discount loans
Liabilities: currency in circulation and reserves

Question 3

Monetary base formula

Answer 3

MB = C + R

• C = currency in circulation
• R = total reserves in the banking system

Question 4

Open Market Purchase see tables in slides

Answer 4

• Always increases the monetary base by the amount of the purchase
• Effect on reserves depends on whether the seller of the bonds keeps the proceeds in currency or in deposits

Question 5

Open Market Sale

Answer 5

• Reduces the monetary base by the amount of the sale

- Reserves remain unchanged

Question 6

Shifts from deposits into currency

Answer 6

• Net effect on monetary liabilities is zero
• Reserves are changed by random fluctuations
• Monetary base is a relatively stable variable

Question 7

Loans to Financial Institutions

Answer 7

Monetary liabilities and base increase by the amount of the loan

Question 8

Other Factors that affect the monetary base

Answer 8

1) Float
2) Treasury deposits at the Federal Reserve
3) Interventions in the foreign exchange market

Question 9

Split monetary base formula

Answer 9

MBn = MB - BR

• MBn = non-borrowed monetary base
• BR = borrowed reserve

Question 10

Multiple deposit creation formula

Answer 10

Change in D = 1/r x change in R

• D = checkable deposits
• r = required reserve ratio
• R = total reserves

Question 11

Factors that determine money supply

Answer 11

1) Nonborrowed monetary base, MBn, increase => MS increase
2) Required reserve ratio, rr, increase = MS decrease
3) Borrowed reserves, BR, increase = MS increase
4) Excess reserves increase = MS decrease
5) Currency holdings increase = MS decrease

Question 12

The money multiplier

Answer 12

M = m x MB

• M = money supply
• m = money multiplier
• MB = monetary base

Question 13

Quantitative easing

Answer 13

Lending and asset purchase programs launched by the Fed in attempt to bolster the economy after the global financial crisis of 2007 that resulted in a huge expansion of the monetary base
-did not lead to an equivalent change in the money supply bc excess reserves rose dramatically