All Flashcards
What is the difference between required reserves and excess reserves?
Required reserves are the amount banks must legally hold, while excess reserves are the amount banks can loan out.
Compare and contrast assets and liabilities on a bank's balance sheet.
Assets are what the bank owns (e.g., reserves, loans), while liabilities are what the bank owes (e.g., deposits).
How do changes in the reserve ratio affect the money multiplier differently than changes in excess reserves?
Changes in the reserve ratio directly alter the money multiplier, while changes in excess reserves affect the amount of money that can be multiplied.
Differentiate between the money multiplier and the reserve ratio.
The reserve ratio is the fraction of deposits banks must hold, while the money multiplier shows how much the money supply can expand from an initial deposit and is the inverse of the reserve ratio.
What is the difference between the change in demand deposits and the change in the money supply?
The change in demand deposits reflects the total deposits, while the change in the money supply only reflects the new loans created.
Compare and contrast fractional reserve banking and 100% reserve banking.
Fractional reserve banking involves banks loaning out a portion of deposits, creating new money, while 100% reserve banking requires banks to hold all deposits in reserve, preventing money creation.
What is the difference between the money multiplier and the fiscal multiplier?
The money multiplier relates to changes in the money supply and monetary policy, while the fiscal multiplier relates to changes in government spending and taxation.
Compare and contrast the impact of increasing the reserve requirement versus increasing the discount rate.
Increasing the reserve requirement directly reduces banks' lending capacity, while increasing the discount rate makes it more expensive for banks to borrow from the Fed.
What is the difference between the nominal money supply and the real money supply?
The nominal money supply is the actual amount of money in circulation, while the real money supply is adjusted for inflation.
Compare and contrast the effects of an open market purchase and a decrease in the reserve requirement.
Both increase the money supply, but an open market purchase involves the Fed buying government bonds, while a decrease in the reserve requirement allows banks to lend more.
How does a lower reserve ratio affect the money multiplier?
A lower reserve ratio means a larger money multiplier and a greater potential change in the money supply.
How does a bank create money through fractional reserve banking?
By loaning out excess reserves, which then become someone else's deposits, restarting the process.
If a bank receives a new deposit, how does it determine how much it can loan out?
It multiplies the deposit by (1 - reserve ratio) to find the excess reserves available for loans.
How does the money multiplier impact monetary policy?
It shows how changes in the reserve ratio can significantly affect the money supply, influencing inflation and economic growth.
Explain how excess reserves are calculated.
Excess Reserves = Total Deposits - Required Reserves
How do required reserves impact the amount of money a bank can loan?
The higher the required reserves, the less money a bank can loan.
What happens to the money supply if people start holding more cash instead of depositing it?
The money multiplier effect is reduced, leading to a smaller expansion of the money supply.
How does an increase in the reserve requirement impact the money supply?
It reduces the money multiplier, leading to a smaller potential expansion (or larger contraction) of the money supply.
How does fractional reserve banking create new money?
Banks loan out a portion of deposits, which are then re-deposited, creating more money in the economy.
How does the initial deposit affect the total change in the money supply?
The initial deposit is multiplied by the money multiplier to determine the maximum potential change in the money supply.
How does the Federal Reserve use the reserve requirement to influence the money supply?
By increasing the reserve requirement, the Fed reduces the money multiplier and contracts the money supply. Decreasing the reserve requirement increases the money multiplier and expands the money supply.
What is the impact of increasing the reserve requirement on banks' lending capacity?
It reduces banks' lending capacity, as they must hold a larger portion of deposits as reserves.
How does a change in the reserve requirement affect the money multiplier?
An increase in the reserve requirement decreases the money multiplier, and vice versa.
What is the effect of the Fed lowering the reserve ratio?
Banks have more money to lend, increasing the money supply and potentially stimulating economic activity.
How does the reserve requirement affect the overall economy?
It influences the amount of credit available, impacting interest rates, investment, and economic growth.
What is the impact of a higher reserve ratio on the money supply?
It decreases the money supply by reducing the money multiplier.
What is the impact of a lower reserve ratio on the money supply?
It increases the money supply by increasing the money multiplier.
How can the Fed use reserve requirements to combat inflation?
By increasing the reserve requirement, reducing the money supply and aggregate demand.
How can the Fed use reserve requirements to stimulate a recessionary economy?
By decreasing the reserve requirement, increasing the money supply and aggregate demand.
What are some limitations of using reserve requirements as a monetary policy tool?
Frequent changes can disrupt bank operations, and banks may choose to hold excess reserves, reducing the impact.