11) The Federal Open Market committee is primarily responsible for making decisi

Question

11) The Federal Open Market committee is primarily responsible for making decisions about ( open market operations, which involve which of the following? Changing reserve requirements Buying and selling U.S. government securities Changing the discount rate All of the above None of the above 12) If the required reserve ratio is 5% then the value of the simple money (2pts) multiplier is 20 10 4 2 13) Which of the following actions by the Fed would cause the money supply to (2pts) increase? Buying U.S. government securities. Lowering the required reserve ratio. Lowering the discount rate. All of the ab

Explanation / Answer

1). Open market operations refer to buy/ sell of govt securities by the fed to influence money supply in the economy. Buying security means giving money to public so it increases money supply . While, selling securities means borrowing money from public so it decreases money supply. So answer is option 2.

2). Money multiplier formula is 1/R where R is the reseve ratio. Fed fixes R . Banks have to keep R% of deposits as reserves which cant be used for lending. So these act as leakages in money multipler cycle. The amount of loans go on decreasing in every subsequent round due to these leakages. It decreases by R% every time, forming an infinite geometric series. Formula = 1/R. So if R= 5% then , multipler = 1/0.05= 20.

3).All the given actions would increase money supply.

a). Buying govt securities under open mkt operations would increase money with public .

b). Lowering reserve ratio would free up money to be loaned. so money multiplier would increase and final money supply would be higher.

c).Discount rate is the rate at which commercial banks can borrow money from fed. If this rate is lowered then banks can borrow money at cheap rates and can increase their loans. so money supply would increase.

so last option is correct.

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