12. Which of the following Fed actions will increase bank lending? Instructions:
ID: 1105337 • Letter: 1
Question
12. Which of the following Fed actions will increase bank lending?
Instructions: You may select more than one answer. Click the box with a check mark for correct answers and click to empty the box for the wrong answers.
1.The Fed reverse repos $10 billion worth of Treasury bonds to non-bank financial firms.unanswered
2.The Fed lowers the discount rate from 4 percent to 2 percent.unanswered
3.The Fed raises the discount rate from 5 percent to 6 percent.unanswered
4.The Fed raises the reserve ratio from 10 percent to 11 percent.
1.The reserves of commercial banks are assets to commercial banks and liabilities of the Federal Reserve System.
True or False
2.(Last Word) Which of the following best explains why there may exist a negative lower bound for interest rates, beyond which lowering interest rates is counterproductive?
Multiple Choice
a.Negative lower bounds refer only to real rates of interest, not nominal rates.
b.Because of the premium that banks charge on loans over what they pay depositors, up to a point they are always guaranteed to earn a positive rate of interest.
c.Depositors will be willing to accept small negative interest rates in exchange for the convenience of being able to make electronic transactions.
d.The rate of deflation that one would expect at the negative lower bound would keep real interest rates at or above zero.
3.In 2008, at the depth of the Great Recession, the Fed moved toward a ZIRP when it aimed to keep the Federal funds rate between
Multiple Choice
a.1.0 percent and 1.25 percent.
b.2 percent and 2.5 percent.
c.2.5 percent and 3.0 percent.
d. 0 and 0.25 percent.
6. The use of monetary policy to shift aggregate demand to the right in a severe recession is like
Multiple Choice
a.pushing on a string.
b.putting all your eggs in one basket.
c.pushing the envelope.
d. pulling on one's purse-strings.
Explanation / Answer
Question 12
In order to increase bank lending, Fed has to increase the reserves with banking system.
Lowering of discount rate from 4 percent to 2 percent will lower the cost of borrowing reserves by banks from Fed.
This way bank will borrow more reserves from Fed and thus would have greater quantum of reserves to lend and thus would lend more.
Hence, the correct answer is the option (2).
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