1. If the Federal Reserve buys $250 million worth of government securities and t

Question

1. 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

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

Explanation / Answer

B) Because monetary base is the sum of currency in circulation and bank reserves, when MB is increased by 250 M, it increases bank reserves by the same amount. Hence reserves are higher now by 250 M

B) This is a part of money multiplier equation and with the most direct method of open market purchase, this tool helps in increasing excess reserves and loan amount  

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