Question

27. The reserve ratio is the

Multiple Choice

• percentage of total deposits that are held as bank reserves.

• number of deposit dollars the banking system can create.

• fraction of deposits that banks hold as excess reserves.

• percentage of excess reserves held by banks.

28. The discount rate is the interest rate charged by

Multiple Choice

• the Federal Reserve when it lends money to private banks.

• a private bank when it lends money to commercial customers.

• a regional Fed bank when it lends money to another regional Fed bank.

• a private bank when it lends money to another private bank.

29. If the Fed is concerned about inflation, it should

Multiple Choice

• buy bonds or reduce the discount rate.

• buy bonds or raise the discount rate.

• sell bonds or reduce the discount rate.

• sell bonds or raise the discount rate.

Answer 1

Ans 27.) OPTION (C) Fraction of deposits that banks hold as excess reserves.

Reason :- Reserve ratio is the ratio of a bank's reserves to its total transactions deposits.

Reserve Ratio = Bank reserves / Total deposits

Therefore, OPTION (C) is correct.

Ans 28.) OPTION (A) The Federal Reserve when it lends money to private banks.

--- An interest rate is an amount charged by a lender to borrower for the use of assets. Discount rate is the interest rate that the federal reserve banks charges to the depository institutions and to commercial banks on its overnight loans.

Therefore, OPTION (A) is correct.

Ans 29.) OPTION (C) Sell bonds or reduce the discount rate

Reason :- To control inflation, the FED must use contractionary monitory policy to slow economic growth. It should sell bonds or reduce the discount rate. This FED'S action will reduce the liquidity in the financial system, making it becomes more expensive to get loans. It slows economic growth and demand, which puts downward pressure on prices.

Therefore, OPTION (C) is correct.