1. Which of the following is true about money? A. It remains constant in value a
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Question
1. Which of the following is true about money?
A. It remains constant in value against all other world currencies.
B. It cannot reduce the ‘transaction costs’ associated with a “barter system.”
C. It will typically store value for the short-term, but not the long-term.
D. It never loses purchasing power.
2. The Federal Reserve introduces new money into the monetary system by purchasing $15,000,000 of new U. S. securities. The flat Required Reserve rate on deposited reserves is 4% (don’t use the brackets on page 52 of the text). The amount of “new money” that will be created as a result is approximately:
A. $20.5 Million
B. $37.5 Million
C. $360 Million
D. $375 Million
3. Given the 0% - 3% - 10% Required Reserve bracketed levels in our text as discussed (“The Reserve Requirement”), if a bank has $107,000,000 of deposited reserves, how much of those reserves may they lend? (Hint: first compute how much they must hold back in reserve)
A. $96,300,000
B. $102,237,000
C. $107,000,000
D. There is not enough information to calculate the amount
Explanation / Answer
1. Then only true statement about money is it will typically store value for the short-term, but not the long term. Due to impact of the inflation, its value decrease over time.
All other statements are false.
2.
3. The cash reserve requirement is minumum amount of reserves that the banks must have in cash.
Assuming the required reserve ratio to be 10 % for banks in US ( which is now 12 % ), 10 % of 107 million $ has to kept as reserve by the bank. The balance can be used for lending.
107 million $ - 10% of 107 $ = 107 - 10.7 = 96.3 million $
Securities purchased The flat required deposit reserve is 4 % : 4 % of 15 m Required Reserves = m x Demand Deposits. If m = 4%: Required Reserves = 0.04 x $15000000 = $60,00,000 Excess Reserves = Reserves - Required Reserves Excess Reserves = $15m - $0.6m = $14.4 m Resultant change in the money supply = (1/0.4) x $ 14.4m = 360 million $Related Questions
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