1. Suppose the Fed decided to use its \"discount rate,\" as an instrument of mon
ID: 1120411 • Letter: 1
Question
1. Suppose the Fed decided to use its "discount rate," as an instrument of monetary policy; further suppose that the Fed cuts the discount rate. Ceteris paribus, it follows that banks would most likely borrowand therefore, more from the Fed and lend less to the public; the money supply would decrease. B. ymore from the Fed and lend more to the public; the money supply would increase. C. less from the Fed and lend more to the public; the money supply would increase. D. less from the Fed and lend less to the public; the money supply would decrease. 2. Suppose Mr. X decides to forego a major purchase and save his money in an account that pays interest. As a result, he transfers $2,100 from his checking account to his money market mutual fund. Ceteris paribus, it follows that: A. both MI and M2 increase by $2,100. B. Ml increases by $2,100 and M2 increases by $2,100. C. MI decreases by $2,100 and M2 stays the same. D)MI decreases by $2,100 and M2 increases by $2,100 3. Which of the following actions would the Federal Reserve system be unlikely to perform as part of its regular responsibilities? 4Control the supply of money. B Serve as a lender of last resort to commercial banks. Ensure the solvency of the banking system. Make loans to qualified businesses that request them. i oea opon Marke Commite (FOestncease the money supply ben what that means in practice is the Federal Reserve: A. creates money and uses it to purchase various types of stocks and bonds "on the open market-ie. from the public. sells government securities from its portfolio. money and uses it to purchase government securities from the banking system. sells various types of stocks and bonds from its portfolio to commercial banks. 5. Suppose a bank loans XYZ Ice Cream Co. $250,000 to remodel one of its shops near campus. On their respective balance sheets, this loan is , and, ceteris paribus, A, a liability for the bank and an asset for Greg's Ice Cream; the loan increases the money supply liability for the bank and an asset for Greg's Ice Cream; the loan does not increase the money supply asset for the bank and a liability for Greg's Ice Cream; the loan does not increase the money supply D. an asset for the bank and a liability for Greg's Ice Cream; the loan increases the money supplyExplanation / Answer
1. B, when discount rate are lower banks borrows more from central banks and lends more thus increasing the money supply.
2. D, M2 contains both M1 and near money . M1 includes checking deposit and cash and near money include mutual fund.
3. D, reserve bank never makes loans to businesses
4. C, IN OMO's government increases money supply by purchasing bonds and securities.
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