1. Increasing the reserve requirement ratio is a. a contractionary policy becaus

Question

1. Increasing the reserve requirement ratio is

a. a contractionary policy because it lowers the amount of excess reserves in the banking system

b. an expansionary policy because it raises the amount of excess reserves in the banking system

c. an expansionary policy because it raises the amount of required reserves in the banking system

d. a contractionary policy because it lowers the amount of total reserves in the banking system

2. The discount rate

a. is set by the Board of Governors.

b. is determined by market forces of demand and supply in the credit market.

c. is determined by markets forces of demand and supply in the market for bank reserves.

d. is determined by investment banks.

3. Open market transactions involve which of the following activities?

I. issuing new Federal Reserve notes

II. buying or selling newly issued government bonds to raise funds for the government

III. buying or selling previously issued government bonds to change the volume of bank reserves

a. II only

b. II and III only

c. I only

d. I, II ,and III

e. III only

4. The Fed conducts an open market purchase of $10 million in government securities. If the reserve ratio is 20%, what is the maximum change in the money supply? Assume banks hold no excess reserves and there is no currency withdrawal from the banking system.

a. maximum decrease in money supply = $50 million

b. maximum decrease in money supply = $10 million

c. maximum increase in money supply = $50 million

d. maximum increase in money supply = $10 million

Explanation / Answer

1) A increasing the reserve ratio is contactionary monetary policy because credit or money multiplier=1/r

2)B credit market determines the discount rate

3)D. All of the above open market transaction

4) money multiplier=1/r=1/0.2=5 and change in money supply=10*5=50 million

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