2. What is the most effective indirect method the Fed uses to change the money m
ID: 2428684 • Letter: 2
Question
2. What is the most effective indirect method the Fed uses to change the money multiplier?
A) open market operations B) changing the required reserve ratio
C) changing the federal funds rate D) changing the level of discount loans
E) changing the interest paid on reserves
4. When the Fed holds U.S. government securities, it
A) pays interest to the government. B) earns interest from the government.
C) declines receiving interest from the government. D) is borrowing from the U.S. Treasury.
8. If the Federal Reserve buys $250 million worth of government securities and the M1 multiplier is 2, bank
reserves will
A) fall by $250 million. B) rise by $250 million.
C) fall by $500 million. D) rise by $500 million
E) fall by $125 million.
Explanation / Answer
(2) (E)
The interest Fed pays on reserves sets the minimum interest rate banks can charge on the loans they make from excess reserves. Therefore changing this rate will change the banks' desire to hold excess reserves, which will influence the excess reserves ratio and impact the money multiplier.
(4) (D)
Fed's purchase of government securities is a form of debt monetization when Fed is holding the government bond and monetizing government debt.
(8) (D)
Purchase of government securities by central bank increases bans reserves (and increases money supply).
Increase in reserves = Purchase of securities x M1 multiplier = $250 million x 2 = $500 million
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