Topic: Open market operation
Skill: Level 3: Using models
Section: Checkpoint 11.4
Status: Old
AACSB: Analytical thinking
9) If the Fed sells $100 million of U.S. government securities, what happens to the quantity
of money?
Skill: Level 2: Using deinitions
Section: Checkpoint 11.4
Status: Old
AACSB: Written and oral communication
10) When the Fed buys a government security, what happens to the monetary base and the
quantity of money? Which changes by more or do both change by the same amount?
Skill: Level 2: Using deinitions
Section: Checkpoint 11.4
Status: Old
AACSB: Written and oral communication
11) “When the Fed makes an open market purchase of government securities, the quantity
of money will eventually decrease by a fraction of the initial change in the monetary base.”
Is the previous statement correct or incorrect? Explain your answer.
Skill: Level 2: Using deinitions
Section: Checkpoint 11.4
Status: Old
AACSB: Written and oral communication
118
12) If a bank receives an additional deposit of $50,000 and the desired reserve ratio is 20
percent, what is the amount of new loans the bank can make?
Skill: Level 2: Using deinitions
Section: Checkpoint 11.4
Status: Old
AACSB: Analytical thinking
13) How can a new deposit of $10,000 at one bank create other new deposits at other
banks? Suppose the desired reserve ratio is 10 percent and people keep no currency
outside of the banks. What will be the new amount of deposits in the second and third
rounds?
Skill: Level 3: Using models
Section: Checkpoint 11.4
Status: Old
AACSB: Analytical thinking
14) The Fed conducts an open market operation and increases a bank’s excess reserves by
$2,000. Explain the irst ive rounds of the money creation process if the desired reserve
ratio is 25 percent and if people keep no currency outside of the banking system.
Skill: Level 3: Using models
Section: Checkpoint 11.4
Status: Old
AACSB: Analytical thinking
119
15) “If the currency drain ratio increases, the monetary base decreases.” Explain whether
the previous statement is correct or incorrect.
Skill: Level 2: Using deinitions
Section: Checkpoint 11.4
Status: Old
AACSB: Relective thinking
16) What is a “currency drain”? How and why does it afect the money multiplier?
Skill: Level 2: Using deinitions
Section: Checkpoint 11.4
Status: Old
AACSB: Written and oral communication
17) How does a currency drain afect the money multiplier?
Skill: Level 2: Using deinitions
Section: Checkpoint 11.4
Status: Old
AACSB: Written and oral communication
120
18) Explain how the currency drain ratio afects the size of the money multiplier. In your
explanation, suppose that in one round of the money creation process a bank gains $1
million in new deposits and reserves. Further suppose that the desired reserve ratio is 10
percent and the currency drain ratio is 50 percent.
Skill: Level 2: Using deinitions
Section: Checkpoint 11.4
Status: Old
AACSB: Analytical thinking
19) If the currency drain ratio increases, how can the Fed adjust the monetary base to
ofset the efect on the quantity of money?
Skill: Level 3: Using models
Section: Checkpoint 11.4
Status: Old
AACSB: Written and oral communication
121
20) Suppose the Fed conducts an open market operation in which it buys government
securities from a commercial bank. Why is there a multiplier efect on the quantity of
money?
Skill: Level 3: Using models
Section: Checkpoint 11.4
Status: Old
AACSB: Written and oral communication
21) If the currency drain ratio is 40 percent and the desired reserve ratio is 15 percent,
what does the money multiplier equal?
Skill: Level 3: Using models
Section: Checkpoint 11.4
Status: Old
AACSB: Analytical thinking
22) Suppose the currency drain is 20 ratio percent and the desired reserve ratio is 10
percent.
a. What does the money multiplier equal?
b. If the Fed purchases $10 million of U.S. government securities, by how much will the
quantity of money increase or decrease?
Skill: Level 3: Using models
Section: Checkpoint 11.4
Status: Old
AACSB: Analytical thinking
122
23) The Fed purchases $100,000 of U.S. government securities from One Bank. Assuming
the desired reserve ratio is 10 percent, banks loan all excess reserves, and the currency
drain is 20 percent, how much does the quantity of money increase?
Skill: Level 3: Using models
Section: Checkpoint 11.4
Status: Old
AACSB: Analytical thinking
123