6) Assume that the currency-deposit ratio is 0.5. The Federal Reserve carries ou

Question

6) Assume that the currency-deposit ratio is 0.5. The Federal Reserve carries out open-market operations, purchasing $1 million worth of bonds from banks. This action increased the money supply by $2 million. What is the reserve-deposit ratio? A) 0.25 B) 0.35 C) 0.40 D) 0.50 7) When U.S. banks borrow from one another, they must pay the A) discount rate. B) prime rate. C) Fed funds rate. D) Interbank Offer Rate. 8) The Taylor rule relates A) the nominal Fed funds rate to inflation over the past year and the deviation of output from full-employment output. B) the growth rate of the monetary base to the growth rate of nominal GDP and the change in velocity over the past year. C) the nominal Fed funds rate to the growth rate of nominal GDP and the change in velocity over the past year. D) the growth rate of the monetary base to inflation over the past year and the deviation of output from full-employment output. 9) According to the Taylor rule, if the Fed’s targeted nominal Fed funds rate is 1% (i.e. the nominal interest rate) and the inflation rate was 1% last year, how far below full-employment has output fallen? A) 1.5%. B) 3%. C) 4.5%. D) 6%. 10) Which of the following will increase the money supply by increasing the money multiplier? A) Increasing the interest rate the Fed pays on reserves. B) An open-market purchase. C) An open-market sale. D) Decreasing the interest rate the Fed pays on reserves.

Explanation / Answer

6) the correct answer is 0.25, option A. Note that when money supply is increased by 2 million dollar monetary base was increased by 1 million dollar which means money multiplier has a value of 2. Currency deposit ratio is 0.5 so required reserve ratio is 0.25. this makes the numerator of the multiplier equal to 1.5 and denominator equal to 0.75. hence the multiplier is 2

7) option C the federal funds rate. It is the rate of interest is charged by commercial bank when they borrow from each other.

8) option A is correct. Taylor rule is used for target for Federal funds rate. It allows the central bank to just follow simple rule to maintain the monetary growth in the economy and simultaneously having inflation rate under control

10) option B is correct. Increase in the money supply from open market purchase of government securities will release money in the economy with the help of bank Reserves. This will speed up tse the money creation process.

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