31. Which of the following both increase the money supply? an increase in the di
ID: 1168148 • Letter: 3
Question
31. Which of the following both increase the money supply?
an increase in the discount rate and an increase in the interest rate on reserves
an increase in the discount rate and a decrease in the interest rate on reserves
a decrease in the discount rate and an increase in the interest rate on reserves
a decrease in the discount rate and a decrease in the interest rate on reserves
Asset
Amount in $Billions
Small time deposits
780
Large time deposits
1,700
Demand deposits
450
Other checkable deposits
370
Savings deposits
4950
Traveler's checks
5
Money market mutual funds
740
Currency
880
Miscellaneous categories of M2
50
Rupert
has machete
wants fishing spear
Amber
has cooking pot
wants fishing spear
Rob
has fishing spear
wants machete
Tom
has cooking pot
wants machete
all wealth.
all assets, including real assets and financial assets.
all financial assets, but not real assets.
those types of wealth that are regularly accepted by sellers in exchange for goods and services.
wealth.
M1.
M2.
Explanation / Answer
A decrease in the discount rate and a decrease in the interest rate on reserves both increase the money supply.
Discount rate is the rate at which central bank lends money to commercial banks or the rate at which commercial banks borrow additional reserves from central bank.
A decrease in discount rate enables the commercial banks to borrow more as borrowings become cheaper and thus increases their loanable resources which in turn leads to an increase in money supply in the economy.
A fall in interest rate on reserves will induce the commercial banks to keep fewer excess reserves with central bank thereby increasing their loanable funds which in result increases the money supply in the economy.
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