international economy Question 25: We and the federal funds o 6 discussed two in
ID: 1127845 • Letter: I
Question
international economy
Question 25: We and the federal funds o 6 discussed two interest rates in the context of monetary policy: the discounterest? vernight rate. What is the relationship between these two raceive from te iscount rate reflects the lower interest rates that large corporations tr , and the federal funds overnight rate is the rate charged by the Fe tes of inte when it loans money The discount rate is the rate charged by the Federal Reserve Bank whe private banks, while the federal funds overnight is the rate banks and is not controlled by the Federal Reserve Bank b, to private banks it loans money to charge to one another c. Th e discount rate and the federal funds overnight rate are both rates charged by led by the Federal Reserve Bank, where the federal funds overnight rate and is for vernight loans and the discount rate is for longer term loans Question 26: What is the relationship between the velocity of money (measured as Non divided by M2) and bank liquidity (measured as Non-borrowed Excess Reserves) over the of the business cycle? [Be careful here, because the answer choices contrast two thin relationship between velocity and bank liquidity, and the relationship between bank lend the business cycle.] the ing and During an upturn, the velocity of money increases as banks reduce more money out; during a downturn velocity falls as bank reserves increase During an upturn, the velocity of money decreases as banks reduce their liquidity more money out; during a downturn velocity increases along with the increase in reserves a. their liquidity and lend an d lend b. bank During an upturn, the velocity of money increases and banks also in crease their liquidity by of c. lending less money out; during a downturn, banks increase their lending and the veloc During an upturn, the velocity of money falls as banks increase their liquidity by lending money falls d. ending and the velocity of money rises Question 27: Our banking system is a "fractional reserve" banking system. What does this mean? a. A small proportion of deposits is held on reserve and the rest is loaned out b. Bank reserves have to be deposited with a central monetary authority c. A certain fraction of all loans has to be covered by collateral d. The federal government insures the loans made by banks so that the banks won't lose money on bad loans Question 28: The Federal Reserve Bank can take actions to increase the money supply of the economy or to decrease the money supply. When during the business cycle are we likely to see an increase in the rate ofgrowth of M2 or a decrease in the rate of growth in M2. The Federal Reserve Bank will decrease the growth of M2 during an upturn because the economy is strong and does not need the stimulus of lower interest rates, and they will investors increase the growth of M2 during a downturn to lower interest rates and encourage private The Federal Reserve Bank will increase the growth of M2 during an upturn because transactions demand for money is increasing, and slow the growth of M2 as we approach the peak ofa business cycle, especially when inflation rises above 2% a. b.Explanation / Answer
25. The correct answer is:B)
Reason: By definition, discount rate is the rate charged bh the Fed on private bank loans and federal funds overnight rate is the interest rate charged by banks on each other and is not directly controlled by Fed. It is agreed upon by the baks and the Fed can just influence the federal funds rate to reach some predetermined target levels.
P.S.: As per Chegg's policy, if nothing is being mentioned, then only the first question is to be solved
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