Question

A. The banking system currently holds $20 billion in required reserves and zero excess reserves. The Fed lowers the required reserve ratio from 15 percent to 12.5 percent. Assuming that there are no cash leakages, the resulting change in checkable deposits (or the money supply) is approximately

$2.7 billion.

$1.5 billion.

$2.0 billion.

$12.5 billion.

$26.6 billion.

B.

Which of the following Fed actions will decrease the money supply?

an open market purchase of Treasury bills

an increase in the required reserve ratio

a decrease in the discount rate relative to the federal funds rate

all of the above

none of the above

C. The Board of Governors of the Federal Reserve is part of a larger policy-making group called the

Senate Banking Committee.

Federal Deposit Insurance Corporation.

American Banking Association.

Federal Open Market Committee.

Answer 1

A.The banking system currently holds $20 billion in required reserves and zero excess reserves.The Fed lowers the required reserve ratio from 15% to 12.5%.Assuming that there are no cash leakages,the resulting change in checkable deposits(or the money supply)is approximately

$26.6 billion

(Initial reserve ratio 15%

deposit multiplier =(1/Reserve ratio)

deposit multiplier =(1/15/100)

deposit multiplier =6.666

deposit multiplier =6.67

checkable deposits =$20billion*6.67

checkable deposit =$133.4 billion

when reserve ratio becomes 12.5%

deposit multiplier =(1/12.5/100)

deposit multiplier=8

checkable deposit =$20billion*8

checkable deposit =$160 billion

thus change in checkable deposits= $160 billion-$133.4 billion

change in checkable deposit=$26.6 billion)

Which of the following Feds action will decrease the money supply?

an increase in the required reserve ratio

(Reserve ratio is the amount of funds which banks must hold,against the deposits which they hold.An increase in the Reserve ratio means a larger amount of deposits are held as reserve,an so banks have less amount of money which they can supply as loan ,this decreases the money supply.On the other hand open market purchase of treasury bills and lower discount rate increase the supply of money in the economy)

C.The Board of Governors of the Federal Reserve is a part of larger policy making group called the

Federal Open Market Committee

(The Federal Open Market Committee comprises of 12 members,7 of which are the Boards of Governors of the Federal Reserve System.The Federal Open Market Committee determines the direction of the monetary policy by undertaking various open market operations)