1/ The existence of banks: A.has no effect on the trade-off between rate of retu

Question

1/ The existence of banks: A.has no effect on the trade-off between rate of return and liquidity. B.increases the severity of the trade-off between rate of return and liquidity C.decreases both the rate of return and the liquidity of its customers' assets. D.decreases the severity of the trade-off between rate of return and liquidity. 2/When the Fed purchases short-term government securities from banks, the primary effect on excess reserves is that they: A. decrease B. increase C. fluctuate randomly D. remain constant

Explanation / Answer

1. B.increases the severity of the trade-off between rate of return and liquidity.

Higher interest rate reduces the liquidity and vice-versa.

2. B. increase

When Fed purchases government securities then it increases the money supply which increases the deposits of public and leads to increase in the excess reserves of banks.

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