Question

The actions of which of the following could influence the money supply?

Select one:

a. the federal reserve, commercial banks, and the nonbanking public

b. the federal reserve and commercial banks only

c. the nonbanking public only

d. commercial banks only

True or false: An open market purchase is expansionary monetary policy.

If bank reserves are 200, the public holds 500 in currency, and the desired reserve-deposit ratio is 0.20, the money supply is ________.

Select one:

a. 1,300

b. 1,900

c. 1,500

d. 700

Answer 1

1.

The Fed uses the required reserve ratio, federal fund rate and open market operation for changing the money supply. The commercial bank also affects the money supply by changing the interest rate. Hence it can be said that he federal reserve and commercial banks only can influence the money supply.

Hence option b is the correct answer.

2.

Fed buy bonds and money supply increases and so money supply curve shifts rightward, so interest rate decrease. With the open market purchase of government securities money supply increases, so it leads to expansion of money supply in the economy.

Hence the given statement is true.

3.

Monetary base=cash + reserve

Money multiplier= 1/ reserve requirement

Reserve deposit ratio=0.20

Money multiplier=1/0.20

=5

Reserve=200

The maximum possible expansion of deposits= reserve* money multiplier

=200*5

=1,000

Currency=500

Total money supply= currency with public+ money supply expansion

=500+1000

=$1,500

Hence option c is the correct answer.