week nine - money supply

Question 1

who are the three players in the money supply process

Answer 1

• the central bank: federal reserve system
• banks: : depository institutions; financial intermediaries
• Depositors: individuals and institutions

Question 2

What are the liabilities on the Federal Reserve System’s balance sheet?

Answer 2

The liabilities on the Federal Reserve System’s balance sheet include currency in circulation, which is held by the public, and reserves, which consist of bank deposits at the Fed and vault cash.

Question 3

What are the assets on the Federal Reserve System’s balance sheet?

Answer 3

government securities, which affect the money supply and earn interest, and discount loans, which provide reserves to banks and earn the discount rate.

Question 4

e.g What are the assets (uses of funds) on a bank’s balance sheet?

Answer 4

reserves and cash items, securities, deposits at other banks, loans, and bank capital.

Question 5

What are the liabilities (sources of funds) on a bank’s balance sheet? e.g.

Answer 5

checkable deposits, Nontransaction deposits, other deposits (e.g., savings deposits), borrowings, and bank capital.

Question 6

what is the equation for monetary base

Answer 6

MB = C + R
C = currency in circulation
R = total reserves in the banking system

Question 7

what happens in an open market purchase

Answer 7

An open market purchase always increases the money base by the amout purchsed

Question 8

what happens in an open market sale

Answer 8

reduces the monetary base by the amount of the sale but the reserves remain unchanged

Question 9

what happens when deposits turn into currency

Answer 9

• Net effect on monetary liabilities is zero
• reserves are changed by random fluctuations
• monetary base is relatively stable

Question 10

what happens when the federal reserves give financial institutions a loan

Answer 10

monetary liabilites of the Fed have increased by 100m and the monetary base also increases by that amount

Question 11

what other factors affect the monetary base

Answer 11

• float : the lag between the FED clearing a check from the bank e.g. weather
• treasury deposits at the fed :
• interventions of the foreign exchange market:

Question 12

Can the Fed determine the amount of borrowing by banks from it?

Answer 12

No

Question 13

How can the monetary base be split into two components?

Answer 13

The monetary base (MB) can be split into two components: the non-borrowed monetary base (MBn) and the level of borrowed reserves (BR) from the Fed.

Question 14

How is the money supply related to the non-borrowed monetary base and the level of borrowed reserves?

Answer 14

The money supply is positively related to both the non-borrowed monetary base (MBn) and the level of borrowed reserves (BR) from the Fed.

Question 15

what factors determine the money supply

Answer 15

• change in the required reserves ratio
• the money supply is negatively related to the required reserve ratio
• changes in the excess reserves
  the money supply is negatively related tot hr excess reserves
• changes in currency holdings
• the currency supply is negatively related to currency holdings

Question 16

what is the equation of the money multiplier

Answer 16

money supply = multiplier x money base