T-An open market puiclase di A. Buys bonds from the public, increasing bank rese

Question

T-An open market puiclase di A. Buys bonds from the public, increasing bank reserves. B. Sells bonds to the public, increasing bank reserves. C. Buys bonds from the public, decreasing bank reserves. D. Sells bonds to the public, decreasing bank reserves. 2. By raising the required reserve ratio, the Fed A. Can lower the interest rate charged to borrowers B. Can increase the lending capacity of the banking system. C. Can reduce the lending capacity of the banking system. D. None of the choices are correct Amount tem $ 40 billion $ 80 billion $ 20 billion Cash held by public Transactions deposits Required reserves O billion Excess reserves U.S. bonds held by public $ 125 billion Table 14.3 Monetary Aggregates of the U.S. Financial System 3. Assume an original balance sheet: On the basis of the inforn required reserve ratio is A. 5 percent. B. 15 percent. C. 25 percent. D. 20 percent.

Explanation / Answer

Ans 2) B. By reducing the required reserve ratio the Fed can increase the lending capacity of the banking system.

The required reserve ratio is the amout of cash that a bank should keep from depositors balances at hand. The ratio is determined by the Central Bank of a nation. Here it is the Federal Reserve . The supply of money in the economy is depended on the required reserve ratio.If the Fed keeps a low reserve ratio the banks can provide more loans to the public increasing the money supply. If the required reserve ratio is kept high then banks have to keep a higher monetary reserve with themselves or with the Federal Reserve reducing the amount of loans they can provide and thereby reducing the money supply in the economy.

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