1. If the Fed carries out an open market purchase of $2,000 with a 0.05 reserve

Question

1. If the Fed carries out an open market purchase of $2,000 with a 0.05 reserve required ratio and excess reserves of $1,900 then the money supply

A. Increases by $18,000.

B. Increases by $40,000.

C. Increases by $38,000.

D. Decreases by $28,000.

2. When a bank’s excess reserves amount to zero

A. Deposits rise hence money creation is zero.

B. Deposits decrease hence money creation is negative.

C. Deposits are zero hence money creation is zero.

D. Deposits increase hence money creation is positive.

3. In the money market if money demand is less than money supply then

A. There is a surplus of money so people buy bonds.

B. There is a surplus of money so people sell bonds.

C. There is a shortage of money so people sell bonds.

D. There is a shortage of money so people buy bonds.

4. Given that there is a decrease in transactions demand for money the

A. Money supply curve shifts to the right.

B.. Money demand curve shifts to the right.

C. Money demand curve shifts to the left.

D. Money supply curve shifts to the left.

5. In the money market when the fed carries out an open market sale the

A. Money supply curve shifts to the right and the interest rate falls.

B. Money supply curve shifts to the left and the interest rate rises.

C. Money supply curve shifts to the left and the interest rate falls.

D. The money supply curve shifts to the right and the interest rate rises.

Explanation / Answer

Question 1). Answer :- Option B). Increases by $40,000.

Explanation :- Money multiplier = 1 / Required reserve ratio

= 1 / 0.05

= 20.

Increase in money supply = Monetary base * Money multiplier.

= 2000 * 20

= $ 40,000.

Conclusion :-  Increases by $40,000. (Option B).

Question 2). Answer :- Option B). Deposits decrease hence money creation is negative.

Question 3). Answer :- Option A). There is a surplus of money so people buy bonds.

Question 4). Answer :- Option C). Money demand curve shifts to the left.

Question 5). Answer :- Option B). Money supply curve shifts to the left and the interest rate rises.

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