Banking 101: Welcome to the Vault
Which of these is counted in M1: checking accounts or savings accounts?
Checking accounts
To increase the money supply, does the Fed buy or sell government bonds?
Buy Bonds
If interest rates rise, what generally happens to business investment?
Investment falls
Which category of money includes cash and checking deposits but not savings?
M1
What is the main role of the Federal Reserve?
Conduct monetary policy and regulate banks
Name one characteristic of money
durability, divisibility, portability, or acceptability.
When fighting inflation, the Fed is most likely to buy or sell bonds?
Sell Bonds
If interest rates increase, how does consumer borrowing typically change?
It decreases
If the public holds more cash instead of depositing it, what happens to the banking system’s ability to create loans?
It decreases
Which action increases the monetary base: buying or selling government bonds?
Buying
Which monetary aggregate includes savings accounts and small time deposits (CDs)?
M2
Name one Fed tool other than open market operations.
Reserve Requirement or discount rate
When the Fed increases the money supply, what usually happens to borrowing and spending in the economy?
It increases
If banks increase their lending, what happens to the money supply overall?
It increases
If unemployment is rising and the economy is slowing, the Fed will generally ______ interest rates.
Lower them
What do we call the fraction of deposits banks must keep on reserve?
Required Reserves
If the Fed lowers the discount rate, banks are encouraged to…
Borrow more
When the Fed sells government bonds, what happens to bank reserves and interest rates?
Reserves decrease, interest rates rise
A subsidy or policy that increases bank reserves tends to ______ the money supply.
Increase
What is the name of the rate used for short-term interbank lending that the Fed targets?
The federal funds rate
If a bank receives a $1,000 deposit and the reserve requirement is 10%, how much must it hold as required reserves?
$100
Open market purchases cause bank reserves to ______ and the money supply to ______.
Increase; increase
Name one long-run economic effect of prolonged low interest rates.
Encourages borrowing/risk-taking OR may fuel inflation
Explain why a lower reserve requirement increases potential money creation.
Banks can lend more of each deposit, and lending multiplies through the banking system
Explain how open market operations impact bank reserves and interest rates.
Buying bonds adds reserves and lowers rates; selling removes reserves and raises rates