Question

True/False answers for the questions below:

4. The monetary base includes the gold stock owned by the government.

5. If the Federal Reserve wanted to increase checkable deposits by $1 million and the required reserve ratio was 5%, using the simple model they would buy $50,000 of securities.

6. If the money supply is $10 million and the monetary base is $2 million, then the money multiplier must be 1/5.

7. The “rr” term in the money multiplier formula stands for “real reserves.”

8. The currency ratio is currency held by the public divided by bank reserves.

9. If the currency ratio rises, the money supply will fall.

10. If interest rates are very low, we may expect banks to hold a lot of excess reserves

Thank You!!!

Answer 1

4. Monetary base does not include gold stock owned by the government. Hence, the given statement is False.

5. Money multiplier = 1/reserve ratio = 1/0.05 = 20 (where reserve ratio = 5%=5/100=0.05).

Then, if government purchases $50,000 of securities, total money supply increases by = $50,000*money multiplier = $50,000*20 = $1 million.

Hence, the given statement is True.

6. Money multiplier is the ratio of money supply to monetary base. Then, money multiplier = $10 million/$2 million = 5.

Hence, the given statement is false.

7. The rr term refers to reserve requirement (or reserve ratio). Hence, the given statement is False.

8. Currency ratio is the currency held by the public divided by total deposits

i.e., Currency ratio = Currency hold by public/total deposit .

Hence, the given statement is False.

9. If the currency ratio increases, money multiplier falls. As a result, money supply falls. Thus, the given statement is True.

10. If interest rates are low, there is a greater demand for loans. As a result, commercial banks have relatively lower quantity of excess reserves. Thus, the given statement is False.