4. If currency held by the public equals S100 billion, reserves held by banks eq

Question

4. If currency held by the public equals S100 billion, reserves held by banks equal S50 billion, and bank deposits equal S500 billion, then the monctary base equals: A) S50 billion B) S100 billion. C) S150 billion. D) S600 billion 5. In a 100-percent-reserve banking system, if a customer deposits S100 of currency into a bank, then the money supply: A) increases by S100, B) decreases by $100. C) increases by more than $100. D) remains the same. 6. If the ratio of currency to deposits (cr) increases, while the ratio of reserves to deposits (rr) is constant and the monetary base (B) is constant, then: A) it cannot be determined whether the money supply increases or decreases. B) the money supply increases. C) the money supply decreases. D) the money supply does not change. 7. When the Fed decreases the interest rate paid on reserves, if the ratio of currency to deposits decreases also while the monctary base is constant, then: A) it cannot be determined whether the moncy supply increases or decreases. B) the money supply increases C) the money supply decreases. D) the two changes exactly offset each other 8. When the Fed increases the interest rate paid on reserves, it reserve deposit ratio (rr). A) increases the B) decreases the reserve deposit ratio (rr). C) increases the monetary base (B) D) decreases the monetary base (B) 9. If the Federal Reserve wishes to increase the moncy supply, it should: A) decrease the discount rate. B) increase interest paid on reserves. C) sell govenment bonds. D) decrease the monetary base. Page 2

Explanation / Answer

4) Monetary base = Currency + Total reserves = 100 B + 50 B = 150 B. Select option C

5) In this case there is no change in money supply because there are no reserves held. Option D

6) Money supply decreases because more amount of deposits are held as currency. Option C

7) Money supply increases. Banks will hold less reserves when interest rate reduces. Also less

currency is held so more deposits are made. Option B

8) Option D

9) Option A

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