1. If the Required Reserve Ratio is .20 and the Fed wants to increase the supply
ID: 1108654 • Letter: 1
Question
1. If the Required Reserve Ratio is .20 and the Fed wants to increase the supply of money by $200 billion, what should the Fed do assuming that people deposit all their money and banks lend all their excess reserves?
a. Buy $40 billion worth of government bonds
b. Buy $20 billion worth of government bonds
c. Sell $40 billion worth of government bonds
d. Sell $20 billion worth of government bonds
e. Buy $50 billion worth of government bonds
2. Which one of these assets is the MOST liquid one?
a. U.S. government bond
b. A cooperate stock
c. Frequent Flyer miles
d. A house
e. Hedge Fund
3.Which of the following events is likely to lower interest rates in the economy?
. The Fed raising the Required Reserve Ratio
b. The Fed selling government bonds
c. An increase in income tax
d. A high rate of inflation
e. A rise in income
4. Which one of these tasks is a role that the Fed has?
a. Telling banks what interest rates they must charge on loans
b. Acting as the central bank for state and local governments
c. Targeting the Federal Funds Rate
d. Issuing new government bonds
e. Regulating hedge funds
Explanation / Answer
1. C. Sell $40 billion worth of government bonds in the market. However, multiplier effect should be also considered to contain inflationary pressure.
2. a. US Government Bond. Hence US Federal Bonds carry universal acceptance they have more liquidity power than other financial instruments that are available in the market.
3. b. Fed selling government bonds. and rise in income. A high circulation of currency or money in the economy or higher liquidity in the economy freezes interest in the market. By selling selling government bonds the Fed could pump more liquidty in the economy which in turn increases money supply that decrease the ROI for short term. Another way rise in income level of the public generates more liquidity and lower demand for cash/money to spend. It would result in reduction of pevailing ROI in the economy. But increase in income level is a long term measure which would be dscouraged in most of the cases by the existing regimes.
4. b. Acting as the central bank for state and local governments. A major role for any central bank is to play as a neutral monetary advisory to the state and local governments in an economy. It decides monetary policy that suits to the economy and controls money supply in the economy to stabilize it for long term periods according to the present conditions prevail in the market/economy.
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