If the Federal Reserve conducts a $10 million open-market sale and the reserve r
ID: 1209857 • Letter: I
Question
If the Federal Reserve conducts a $10 million open-market sale and the reserve requirement is 20%, the maximum change in the money supply is: A. a decrease of $8 million. B. an increase of $10 million. C. a decrease of $10 million. D. a decrease of $50 million. If the Federal Reserve increases the discount rate: A. the money supply is likely to decrease. B. the federal funds rate must decrease. C. the money supply is likely to increases. D. the money supply is not likely7 to change. If the Federal Reserve wanted to increase the money supply, it could the required reserve ratio, and bonds on the open market. A. decrease; increase the federal funds rate; sell B. decrease; increase the personal tax rate; buy C. decrease; decrease the discount rate; buy D. increase; increase the personal tax rate; sellExplanation / Answer
18. a decrease of $50 million.
Explanation:Open market sale means money supply will decrease. Here multiplier = 1 / RR = 1/0.2 = 5. Therefore, $10 million sale means money supply will decrease by $50 million (5 * $10 million)
19. the money supply is likely to decrease.
Explanation: Because money supply and discount rate are inversly related.
20. If the Federal Reserve wanted to increase the money supply, it could decrease the required reserve ratio, decrease the discount rate and buy bonds on the open market.
Explanaton: Decrease in RR will lead to increase in value of multiplier will leads to increase in momey supply. Again money supply and discount rate are inversly related. so, decrease in discount rate leads to increase in momey supply. Lastly when the Fed buys bond, money flows from Fed to the hands of public which leads to increase in momey supply.
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