Question

The reserve requirement sets the required percentage of vault cash plus deposits with the regional Federal Reserve Banks that banks must keep for their deposits. Many banks have widespread branches and ATMs. How would the existence of branches and ATMs affect the level of excess reserves (above those required) that banks are able to hold?
	ATMs require a lot of vault cash, thus increasing excess reserves. ATMs increase excess reserves, which increases the money multiplier. The existence of ATMs does not affect the level of excess reserves. More ATMs will reduce excess reserves.

The U.S. government produces billions of dollars in banknotes and coins for use in everyday transactions. Based on the given information, which of these is false?
	A portion of checking deposits is loaned out by banks. The more currency that is in circulation, the higher will be the interest rate in the economy. The deposits and lending that occur in a bank starts the money creation process. The currency in circulation alone represents money creation.

For what type of borrowing does the federal funds rate apply?
	from commercial banks to the government from Federal Reserve Bank to commercial banks from consumers to commercial banks from commercial banks to other commercial banks

Alan Greenspan, the former chairman of the Fed, noted that “the Federal Reserve has to be independent in its actions and as an institution, because if Federal Reserve independence is in any way compromised, it undercuts our capability of protecting the value of the currency in society.” What does Alan Greenspan mean when he states “protecting the value of the currency”?
	using gold and silver to back up currency creating deflation creating hyperinflation controlling inflation

Which of these is true?
	A loan to a customer is considered a liability to the bank. Checking accounts are considered liabilities to the bank. Converting cash to checkable deposits increases the money in circulation. The reserve requirement is the percentage of deposits that banks can loan out.

Answer 1

Answers

1)The existence of ATMs does not affect the level of excess reserves.The amount of reserves that needs to be kept with the Federal Reserve Bank is no way related to the number of ATMs.ATMs have been set for the easy dispense of cash and for the convenience of the customers.These helps in the day to day operation of the banks.Excess reserves is determined by the amount of deposits and the central bank.

2)The more currency that is in circulation,the higher will be the interest rate in the economy.The statement is false because it shows the incorrect relationship between the amount of currency in circulation and interest rates.Interest rate in an economy is determined by the demand and supply of currency/money/funds in the economy.If the interest rates are needed to be kept high then the supply of money/currency in the economy is squeezed or reduced and vice versa.If the supply of currency is reduced in the economy,the demand for money would increase relatively and hence the interest rates would rise as people would have lesser easy money available with them.Therefore,there is an inverse relationship between the money supply and interest rates.

3)from Commercial banks to the other commercial banks.The federal funds rate is the benchmark and applies to such transactions in which institutions having excess or extra funds lend away funds to those institutions who are in acute need of money at a particular point of time.

4)Alan Greenspan mean "controlling inflation".The value of any currency is measured in terms of goods and services it can buy.This further depends upon the prices of those goods and services and these prices determines the rate of inflation in the economy.Excess of anything,be it the inflation or value of currency is not healthy for the economy.So it needs to be managed and controlled,under this both hyperinflation as well as deflation gets controlled.

5)Checking accounts are considered liabilities by a bank.Checking accounts are the accounts/deposits against which cheques can be issued.A liability is something like a burden or unwilling thing that gives us an unpleasant feeling.Checking accounts are a type of liability for the bank because it is like a burden,as whenever cheques are issued,it is obligatory for the bank to pay the amount.