Question

1A: The discount rate is

Question 1 options:

	The interest rate commercial/private banks charge corporations
	The interest rate the Fed charges commercial/private banks for borrowing funds
	The interest rate commercial/private banks charge their new customers
	The interest rate commercial/private banks charge each other for borrowing funds

2A: If the Fed sells government securities (or bonds) it owns to commercial/private banks, then there is

Question 2 options:

	An increase in the supply of reserves of commercial/private banks
	A decrease in the supply of reserves of commercial/private banks
	No change in the supply of reserves of commercial/private banks
	None of the above

3A: Which of the following represents an action by the Federal Reserve that is designed to increase the money supply?

Question 3 options:

	An increase in the discount rate
	An increase in the required reserve ratio
	Buying government securities (bonds) on the open market
	An increase on the interest rate on excess reserves

4A: When the Fed raises the required reserve ratio, the bank’s excess reserve _____ and the money supply _____

Question 4 options:

	Decrease; decreases
	Increase; Increases
	Remains constant; decreases
	Increase; remain constant

5A: An open market purchase (buying) of government securities (bonds) by the Fed results in _____ in reserves and _____ in the money supply.

Question 5 options:

	A decrease; a decrease
	A decrease; an increase
	An increase; an increase
	An increase; a decrease

6A: An open market sale of securities by the Fed results in _____ in reserves and _____in the money supply.

Question 6 options:

	A decrease; an increase
	An increase; a decrease
	A decrease; a decrease
	An increase; an increase

Answer 1

1. The discount rate is the interest rate charged by the Fed when it lends to commercial banks

Ans: The interest rate the Fed charges commercial/private banks for borrowing funds

2. If the Fed sells the government securities it owns to private/commercial banks, it takes out some portion of the money supply from the banking system and hence decreases the money supply in the economy.

Ans: A decrease in the supply of reserves of commercial/private banks

3. An increase in the discount rate discourages the banks from borrowing. Hence, it is a tool of contractionary monetary policy.

An increase in the reserve ratio increases the required reserves that the banks must hold and hence it decreases the money multiplier. This will have a reducing impact on the money supply.

An increase in the interest rate on excess reserves encourages banks to hold more excess reserves. This reduces the money supply in the market.

When the Fed purchases government bonds/securities, it injects cash into the hands of the private banks/public. This increases the money supply in the economy

Ans: Buying government securities (bonds) on the open market

4. When the Fed increases the required reserve ratio, the banks' excess reserves decrease and the money supply decreases

Ans: Decrease; decreases