p.11
Fractional Reserve Banking Explained
What are reserves (R) in the banking system?
The portion of deposits that banks have not lent.
p.2
Role of Central Banks in Monetary Control
What is a central bank?
An institution that controls the money supply.
p.28
Impact of Banking Scenarios on Money Supply
Why does a higher currency-deposit ratio limit money creation in the banking system?
Because banks won’t be able to create as much money without sufficient deposits.
p.16
Fractional Reserve Banking Explained
How much will Secondbank loan out from the $800 deposit?
$640 (80% of the deposit).
p.31
Fractional Reserve Banking Explained
What are excess reserves?
Reserves held by banks above the reserve requirement.
p.2
Fractional Reserve Banking Explained
How do banks create money?
Through various banking processes and mechanisms.
p.43
Bank Capital and Leverage
What is bank capital?
The owners’ equity in the bank.
p.7
Money Supply and Monetary Policy
What is the money supply?
The quantity of money available in the economy.
p.41
Definition and Functions of Money
What is the definition of money?
The stock of assets used for transactions.
p.19
Fractional Reserve Banking Explained
What type of banking system creates money?
A fractional-reserve banking system.
p.10
Role of Central Banks in Monetary Control
What role does the banking system play in the monetary system?
It plays an important role because the money supply includes demand deposits.
p.42
Money Supply and Monetary Policy
What factors does the money supply depend on?
Monetary base, currency-deposit ratio, and reserve ratio.
p.41
Definition and Functions of Money
What are the three main functions of money?
Medium of exchange, store of value, unit of account.
p.31
Money Supply and Monetary Policy
How do changes in excess reserves affect the monetary system?
If banks change their excess reserves, then the reserve ratio (rr), money multiplier (m), and money supply (M) change.
p.18
Money Supply and Monetary Policy
What is the total money supply formula provided?
Total money supply = (1 / rr) × $1,000.
p.21
Bank Capital and Leverage
What are the total assets in the provided example?
$200 (reserves) + $500 (loans) + $300 (securities) = $1000.
p.23
Bank Capital and Leverage
How do capital requirements vary based on risk?
They are higher for banks that hold more risky assets.
p.36
Money Multiplier Concept
What was the effect of the increase in the reserve-deposit ratio on the money multiplier?
The money multiplier dropped sharply.
p.11
Fractional Reserve Banking Explained
What do a bank's assets include?
Reserves and outstanding loans.
p.6
Definition and Functions of Money
Is currency considered money?
Yes, currency is considered money.
p.9
Money Supply and Monetary Policy
What is included in M2 in addition to M1?
Small time deposits, savings deposits, money market mutual funds, and money market deposit accounts.
p.6
Definition and Functions of Money
Are checks considered money?
Yes, checks are considered money.
What do bank regulators require from banks?
To hold sufficient capital.
p.27
Money Multiplier Concept
What happens to the money supply if households hold more currency and less in demand deposits?
The money supply decreases.
p.33
Impact of Banking Scenarios on Money Supply
What effect did losses on bad loans have on banks?
Banks tightened lending standards and increased excess reserves.
p.27
Money Multiplier Concept
What does 'cr' represent in the money multiplier formula?
The currency ratio, which is the proportion of money held as currency.
p.28
Money Multiplier Concept
What happens to the money multiplier (m) when the currency-deposit ratio (cr) increases?
The money multiplier (m) falls.
p.9
Money Supply and Monetary Policy
What does M1 include in the money supply measures?
Currency, demand deposits, travelers’ checks, and other checkable deposits.
p.24
Money Supply and Monetary Policy
What is the currency-deposit ratio (cr)?
cr = C / D, which depends on households’ preferences.
p.11
Fractional Reserve Banking Explained
What is fractional-reserve banking?
A system in which banks hold a fraction of their deposits as reserves.
p.4
Definition and Functions of Money
How does money serve as a store of value?
It transfers purchasing power from the present to the future.
p.21
Bank Capital and Leverage
How is the leverage ratio calculated?
Leverage ratio = assets/capital.
p.5
Types of Money: Fiat vs. Commodity
What are examples of commodity money?
Gold coins and cigarettes in P.O.W. camps.
p.41
Types of Money: Fiat vs. Commodity
What is commodity money?
Money that has intrinsic value.
p.14
Fractional Reserve Banking Explained
What are the initial values of currency (C), deposits (D), and money supply (M) before the deposit?
C = $1000, D = $0, M = $1000.
p.14
Fractional Reserve Banking Explained
What happens to currency (C) and deposits (D) after households deposit $1,000 at Firstbank?
C = $0, D = $1,000, M = $1,000.
p.10
Money Supply and Monetary Policy
What is the formula for the money supply?
M = C + D, where M is the money supply, C is currency, and D is demand deposits.
p.40
Role of Central Banks in Monetary Control
What policies have been implemented since the 1930s to prevent widespread bank failures?
Federal Deposit Insurance and other measures.
p.5
Types of Money: Fiat vs. Commodity
What is fiat money?
Money that has no intrinsic value, such as paper currency.
p.32
Instruments of Monetary Policy
What is the significance of the case study on Quantitative Easing?
It illustrates the relationship between monetary base expansion and M1 growth.
p.43
Bank Capital and Leverage
What is the impact of leverage on banks?
A small decline in the value of bank assets can have a huge impact on bank capital.
p.20
Bank Capital and Leverage
What is bank capital?
The resources a bank’s owners have put into the bank.
p.4
Definition and Functions of Money
What is the role of money as a unit of account?
It is the common unit by which everyone measures prices and values.
p.20
Bank Capital and Leverage
What does a more realistic balance sheet include?
Assets, Liabilities, and Owners’ Equity.
p.26
Money Multiplier Concept
What is the formula for the money multiplier (m)?
m = 1 / (rr + cr), where cr is the currency ratio.
p.35
Money Multiplier Concept
What happens to each dollar of the monetary base?
It gives rise to a multiple expansion in credit as banks make loans from deposits.
p.32
Money Supply and Monetary Policy
What happened to the monetary base from August 2008 to August 2011?
The monetary base tripled.
p.13
Money Supply and Monetary Policy
What does M represent in a scenario with no banks?
M = C = $1,000 (money supply equals currency).
p.19
Fractional Reserve Banking Explained
What do bank loans provide to borrowers?
Some new money and an equal amount of new debt.
p.30
Instruments of Monetary Policy
What are reserve requirements?
Fed regulations that impose a minimum reserve-deposit ratio.
p.26
Money Multiplier Concept
How is the change in money supply (Δ M) calculated?
Δ M = m × Δ B, where Δ B is the change in the monetary base.
p.25
Money Multiplier Concept
How does the money multiplier (m) relate to the required reserve ratio (rr)?
The money multiplier is inversely related to the required reserve ratio.
p.12
Fractional Reserve Banking Explained
What does 100-percent-reserve banking entail?
Banks hold all deposits as reserves.
p.12
Fractional Reserve Banking Explained
What is fractional-reserve banking?
Banks hold a fraction of deposits as reserves and use the rest to make loans.
p.38
Money Supply and Monetary Policy
What does the equation M = m × B represent in the context of banking?
It represents the relationship between money supply (M), money multiplier (m), and bank reserves (B).
p.2
Definition and Functions of Money
What will you learn about money in this chapter?
The definition, functions, and types of money.
p.19
Fractional Reserve Banking Explained
Does a fractional-reserve banking system create wealth?
No, it creates money but does not create wealth.
p.29
Instruments of Monetary Policy
How can the Fed increase the monetary base?
By buying government bonds and paying with new dollars.
p.5
Types of Money: Fiat vs. Commodity
Can you give an example of fiat money?
The paper currency we use.
p.25
Money Supply and Monetary Policy
What does the equation M = C + D represent in the monetary system?
It represents the money supply, where M is the total money supply, C is currency, and D is demand deposits.
p.7
Money Supply and Monetary Policy
What is monetary policy?
The control over the money supply.
p.39
Historical Case Studies: Financial Crises
What was the impact of the bank failures on the monetary system?
It led to significant changes in banking regulations and monetary policy.
p.26
Money Multiplier Concept
What does the money multiplier (m) represent?
The increase in the money supply resulting from a one-dollar increase in the monetary base.
p.36
Fractional Reserve Banking Explained
What happened to the reserve-deposit ratio during the financial crisis of the early 1930s?
It increased due to banks curtailing their lending.
p.18
Money Supply and Monetary Policy
What does 'rr' represent in the money supply formula?
The ratio of reserves to deposits.
p.21
Bank Capital and Leverage
What is the total amount of liabilities in the example?
$750 (deposits) + $200 (debt) = $950.
p.23
Bank Capital and Leverage
What action did the government take during the financial crisis?
Injected billions of dollars of capital into banks to ease the crisis.
p.24
Money Supply and Monetary Policy
What is the formula for the monetary base (B)?
B = C + R, where C is currency and R is reserves controlled by the central bank.
p.11
Fractional Reserve Banking Explained
What is 100-percent-reserve banking?
A system in which banks hold all deposits as reserves.
p.42
Fractional Reserve Banking Explained
What does fractional reserve banking create?
Money, as each dollar of reserves generates many dollars of demand deposits.
p.21
Bank Capital and Leverage
What is leverage in the context of banking?
The use of borrowed money to supplement existing funds for purposes of investment.
p.5
Types of Money: Fiat vs. Commodity
What is commodity money?
Money that has intrinsic value.
p.8
Instruments of Monetary Policy
What do open market operations involve?
The purchase and sale of government bonds.
p.30
Instruments of Monetary Policy
What is the role of interest on reserves in monetary policy?
The Fed pays interest on bank reserves deposited with the Fed.
p.38
Historical Case Studies: Financial Crises
What was a significant factor leading to bank failures in the 1930s?
Loss of confidence in banks.
p.12
Fractional Reserve Banking Explained
What are the three scenarios considered to understand the role of banks?
1. No banks, 2. 100-percent-reserve banking, 3. Fractional-reserve banking.
p.23
Bank Capital and Leverage
What impact did the 2008-2009 financial crisis have on bank capital?
Losses on mortgages shrank bank capital and slowed lending.
p.22
Bank Capital and Leverage
What are the total assets of the bank before the recession?
$1,000 (calculated from $950 after a 5% fall).
p.10
Money Supply and Monetary Policy
What components make up the money supply?
Currency plus demand (checking account) deposits.
Why is bank capital important?
It ensures that depositors can be repaid.
p.33
Instruments of Monetary Policy
What is quantitative easing?
A monetary policy where the Fed buys long-term government bonds to reduce long-term rates.
p.29
Instruments of Monetary Policy
How can the Fed encourage banks to borrow more reserves?
By lowering the discount rate.
p.42
Instruments of Monetary Policy
How can the Fed control the money supply?
Through open market operations, reserve requirement, discount rate, and interest on reserves.
p.31
Money Multiplier Concept
What does the money multiplier (m) depend on?
The currency ratio (cr) and the reserve ratio (rr).
p.33
Monetary Policy and Inflation Control
What is the Fed considering to prevent inflation?
Various 'exit strategies.'
p.38
Historical Case Studies: Financial Crises
What is the relationship between credit, reserve requirements, and money supply in the context of bank failures?
Increased credit and reserve requirements lead to a reduced money supply.
p.35
Instruments of Monetary Policy
How did the Fed respond to the financial crisis?
By quadrupling its balance sheet and flooding the economy with liquidity.
p.28
Money Supply and Monetary Policy
How does an increase in the currency-deposit ratio (cr) affect the money supply (M)?
It causes the money supply (M) to fall.
p.28
Fractional Reserve Banking Explained
What is the effect of households depositing less money on banks?
Banks can’t make as many loans.
p.40
Role of Central Banks in Monetary Control
What is the purpose of Federal Deposit Insurance?
To prevent bank runs and large swings in the currency-deposit ratio.
p.29
Instruments of Monetary Policy
What is the discount rate?
The interest rate the Fed charges on loans to banks.
p.6
Definition and Functions of Money
Are credit cards considered money?
No, credit cards are not considered money; they are a means of borrowing.
p.30
Instruments of Monetary Policy
How can the Fed influence the reserve-deposit ratio through interest rates?
By paying a lower interest rate on reserves.
p.22
Bank Capital and Leverage
What happens to a bank's capital if its assets fall by 5% during a recession?
Capital becomes zero if assets fall to $950 and liabilities equal $950.
p.38
Historical Case Studies: Financial Crises
How does a loss of confidence in banks affect the money supply (m)?
It reduces the money supply.
p.14
Fractional Reserve Banking Explained
What does Firstbank's balance sheet show after the deposit?
Assets: reserves $1,000; Liabilities: deposits $1,000.
p.36
Definition and Functions of Money
What are reserves in the context of the monetary system?
Reserves are for all depository institutions.
p.24
Fractional Reserve Banking Explained
What does the reserve-deposit ratio (rr) represent?
rr = R / D, which depends on regulations and bank policies.
p.8
Role of Central Banks in Monetary Control
What is the central bank of the United States called?
The Federal Reserve (the Fed).
p.31
Money Supply and Monetary Policy
What is one reason the Fed cannot precisely control the money supply (M)?
Households can change their currency ratio (cr), causing changes in m and M.
p.39
Historical Case Studies: Financial Crises
What does the data from August 1929 indicate?
It serves as a reference point for bank performance before the failures.
p.30
Instruments of Monetary Policy
How can the Fed reduce the reserve-deposit ratio?
By reducing reserve requirements.
p.33
Instruments of Monetary Policy
What type of securities did the Fed buy to help the housing market?
Mortgage-backed securities.
p.23
Bank Capital and Leverage
What is the purpose of capital requirements for banks?
To ensure banks can pay off depositors.
p.14
Fractional Reserve Banking Explained
What is the impact of 100-percent-reserve banking on the money supply?
It has no impact on the size of the money supply.
p.35
Money Multiplier Concept
What does the money multiplier measure?
The ratio of the money supply to the monetary base.
p.3
Definition and Functions of Money
What is the definition of money?
Money is the stock of assets that can be readily used to make transactions.
p.2
Role of Central Banks in Monetary Control
What is one of the main functions of a central bank?
To control the money supply.
p.40
Historical Case Studies: Financial Crises
What historical event prompted the implementation of policies to prevent bank failures?
The widespread bank failures of the 1930s.
p.24
Fractional Reserve Banking Explained
What factors influence the reserve-deposit ratio?
Regulations and bank policies.
p.25
Money Supply and Monetary Policy
What is the relationship between currency (C) and demand deposits (D) in the money supply equation?
They are components of the total money supply.
p.27
Money Multiplier Concept
What is the formula for the money multiplier?
m = 1 / (cr + rr), where cr is the currency ratio and rr is the reserve ratio.
p.36
Fractional Reserve Banking Explained
How did the currency-deposit ratio behave during the recent crisis compared to the early 1930s?
It declined slightly during the recent crisis, unlike the increase in the early 1930s.
p.23
Bank Capital and Leverage
What is a capital requirement?
The minimum amount of capital mandated by regulators.
p.41
Types of Money: Fiat vs. Commodity
What is fiat money?
Money that has no intrinsic value.
p.22
Bank Capital and Leverage
What is the formula for calculating capital?
Capital = Assets - Liabilities.
p.37
Historical Case Studies: Financial Crises
Did the drop in the money supply cause The Great Depression?
It may not have caused it, but it contributed to its severity.
p.23
Bank Capital and Leverage
What was the intended outcome of government capital injections during the crisis?
To encourage more lending.
p.12
Fractional Reserve Banking Explained
What is the role of banks in the monetary system?
To manage deposits and facilitate loans based on reserve requirements.
p.31
Money Multiplier Concept
What is the formula for the money supply (M)?
M = m × B, where m is the money multiplier and B is the monetary base.
p.33
Money Multiplier Concept
What happened to the money multiplier as a result of banks tightening lending standards?
The money multiplier fell.
p.27
Money Multiplier Concept
What does 'rr' represent in the money multiplier formula?
The reserve ratio, which is the proportion of deposits that banks must hold as reserves.
p.27
Money Multiplier Concept
What is the intuition behind a decrease in money supply when households hold more currency?
Less money in demand deposits means banks have less to lend, reducing the overall money supply.
p.36
Money Supply and Monetary Policy
What does M1 measure in the money supply?
Deposits associated with the money supply measure.
p.36
Monetary Policy and Money Supply
What action did the Fed take during the recent crisis that differed from the 1930s?
The Fed tripled the monetary base.
p.36
Money Supply and Monetary Policy
What was the outcome of the Fed's actions during the recent crisis?
The money supply continued to expand.
p.22
Bank Capital and Leverage
What are the liabilities of the bank?
$950 (sum of deposits and debt).
p.22
Bank Capital and Leverage
What are the components of the bank's assets?
Reserves ($200), Loans ($500), and Securities ($300).
p.35
Money Supply and Monetary Policy
What happened to the monetary base during the financial crisis?
It increased rapidly and eventually rose above M1.
