Question

8.According to the textbook, which of the following statements is (are) correct?

(x)Fractional reserve banking is a system where banks must hold an amount of cash based on a percentage of its loans.

(y)The Federal Reserve can alter the size of the money supply by changing reserves or changing reserve requirements.

(z)If the Fed decreases reserve requirements, the money supply will decrease.

A.(x), (y), and (z)B.(x) and (y) only C.(x) and (z) only D.(y) and (z) only E.(y) only

9.The Federal Reserve System regulates the money supply primarily by

A.restricting the issuance of Federal Reserve Notes.

B.controlling the production of coins at the United States mint.

C.varying the reserves of banks, largely through sales and purchases of government bonds.

D.altering the reserve requirements of banks and thereby the ability of banks to make loans.

Which of the following statements about the Federal Reserve is (are) correct?

(x) When the Federal Reserve conducts open market transactions, it buys or sells government bonds from the public and these actions allow the Fed to control the level of reserves in the banking system.

(y)In general, if the Fed bought a bond from a bank via the open market, then the bank’s excess reserves would increase and the money supply would increase if the bank loans out all of its excess reserves.

(z)If the Fed buys government bonds then the money supply will eventually decrease.

A.(x), (y), and (z)B.(x) and (y) onlyC.(x) and (z) onlyD.(y) and (z) onlyE.(x) only

Answer 1

8. (x) Fractional reserve banking is a system in which banks are mandated to hold an amount of cash based on a percentage of the deposits held by it. Statement (x) is incorrect

(y)The Fed can alter the money supply through changing the required reserve ratio. Statement (y) is correct

(z) When the Fed decreases the reserve requirements, the money multiplier which is the inverse of required reserve ratio increases and thus the money supply increases. Statement (z) is incorrect

Ans:  E.(y) only

9. The most often used tool of monetary policy is conducting open market operations. This is because through OMOs the Fed can immediately alter the money supply based on the policy requirements and this tool is very flexible and has a negligible lag time to take effect in the market while the other tools have a significant lag time to take full effect.

Ans: C.varying the reserves of banks, largely through sales and purchases of government bonds.

10. (x) When the Fed conducts open market operations(OMOs), it buys or sells government securities from the public. Though such OMOs, the Fed increases or decreases money supply in the market. Such an increase or decrease in the money supply leads to a subsequent increase or decrease in bank reserves(Indirect implication. The Fed can directly control the reserves by changing the required reserve ratio). Statement (x) is correct

(y) When the Fed purchases a bond through OMO, it injects extra money into the market and thus increases the excess reserve of the banks which can be lent out further to increase the money supply. Statement (y) is correct

(z) When the Fed buys government bonds, it injects money into the market and thus increases the money supply. Statement (z) is incorrect

Ans: B.(x) and (y) only