2. More on Money Creation Indicate which of the following statements are true an

Question

2. More on Money Creation Indicate which of the following statements are true and which are false; iffalse, explain why a. Ifthe reserve ratio of a bank falls below the level required by the Fed, it may borrow cash from the Fed at the reigning discount rate. The purchase of govemment securities (i.e. bonds and bills) from the public by the Fed will begin a contraction in commercial bank credit Ifmoney is to remain generally acceptable as a medium of exchange, and to act as a unit of account and store of value, then it must consist of something that is useful and desirable for its own sake If a bank is loaned up (i.e. has no excess reserves above the legal minimum), this means its loans equal its deposits. The demand for money will be higher when incomes are higher, and will be lower when interest rates are lower Inflation always benefits debtors and hurts creditors. Nobody gains when pure, perfectly anticipated inflation occurs. But nobody loses either. b. c. d. o. f. g.

Explanation / Answer

A) true : if the reserve ratio of a bank falls then it may try to borrow from other banks but in case other banks does not provide any loan then the bank have to borrow from Fed at the prevailing discount rate.

B) false beacuse this move will cause an increase in money supply

C) true since money is valuable it is considered to be a medium of exchange

D) true because case reserves and required reserves are proportional to each other.

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