Self-Check Questions

1. Why is it important for the members of the Board of Governors of the Federal Reserve to have longer terms in office than elected officials, like the President?

2. Given the danger of bank runs, why do banks not keep the majority of deposits on hand to meet the demands of depositors?

3. Bank runs are often described as “self-fulfilling prophecies.” Why is this phrase appropriate to bank runs?

4. If the central bank sells $500 in bonds to a bank that has issued $10,000 in loans and is exactly meeting the reserve requirement of 10%, what will happen to the amount of loans and to the money supply in general?

5. What would be the effect of increasing the banks’ reserve requirements on the money supply?

6. Why does contractionary monetary policy cause interest rates to rise?

7. Why does expansionary monetary policy causes interest rates to drop?

8. Why might banks want to hold excess reserves in time of recession?

9. Why might the velocity of money change unexpectedly?

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