TOP: The Fed and the Money SupplyKEY: Bloom\'s: Comprehension 20. If the Federal
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TOP: The Fed and the Money SupplyKEY: Bloom's: Comprehension 20. If the Federal Reserve sells $1,000 in bonds and the required reserve ratio is 0.1 (assume banks hold no excess reserves) what will be the total change in reserves at all banks? a. $10,000 b. $1,000 c. -$10,000 d. -$1,000 e. -$1,100 ANS: D PTS: 1 DIF: Difficulty: Moderate NAT: BUSPROG: Analytic TOP: The Fed and the Money Supply STA: DISC: Monetary and fiscal policy KEY: Bloom's: Analysis 21. If the required reserve ratio is 0.05 and the Fed sells a $2,000 bond directly to an individual who pays for it with a check, what will happen to the money supply? a. The money supply will increase by $2,000. b. The money supply will decrease by $2,000. c. The money supply will increase by $100. d. The money supply will decrease by $100. e. The money supply will decrease by $200. ANS: B DIF: Difficulty: Moderate STA: DISC: Monetary and fiscal policy PTS: 1 NAT: BUSPROG: Analytic TOP: The Fed and the Money Suppl KEY: Bloom's: Analysis 22. The Fed can decrease money supply byExplanation / Answer
Question 20
Federal Reserve has sold bonds worth $1,000. The payment to Federal Reserve will be made through banks. So, reserves held by banks will decrease by $1,000 as payment for these bonds is made.
Since, banks do not hold any excess reserves, total reserves (as they all are required reserves) will decline by $1,000.
So, the total change in reserves at all banks be -$1,000.
The correct answer is the option (D).
Question 21
Fed has sold bonds worth $2,000 to an individual who had paid for this bonds by check. So, checking account deposits with banks will decrease by $2,000.
Checking account deposits are part of money supply.
So, after this transaction, money supply will decrease by $2,000.
The correct answer is the option (B).
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