Question

2. Using a demand and supply diagram for the market for loanable funds and an AD-AS model, illustrate and explain what happens when the Federal Reserve decides to lower the reserve requirement.
Sample Multiple Choice Questions
1. A money market account is in:
a. M1 only
b. M2 only
c. M1 and M2
d. neither
2. When the Federal Reserve buys bonds, this is
a. Contractionary Monetary Policy
b. Expansionary Monetary Policy
c. Contractionary Fiscal Policy
d. Expansionary Fiscal Policy
3. Which one is or has been considered commodity money?
a. paper notes declared to be legal tender
b. credit cards
c. bitcoins
d. cigarettes
4. If a person deposits $2500 in a bank and the reserve requirement is 20%, how much is held in reserve

Answer 1

2.

When a reserve requirement is lowered, then it increases the money available for lending. It increases the money supply in the market. It is the part of expansionary monetary policy. As a result, interest rate decreases in the market of loanable funds. It helps in encouraging the investment and consumption spending. So, AD increases and shifts to the right. As a result, RGDP increases with a higher price level. It is shown as below.

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1.

B

Money market funds or account is the part of M2 money.

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2.

B

Buying of bonds by the Fed, will increase the money supply. So, it is an expansionary monetary policy.

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3.

C

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4.

Money held as reserve (required reserve) = 2500*20%

Money held as reserve (required reserve) = $500

Remaining amount will be given as loan or kept as excess reserve.