please explain every option detailly and give me the right answer, thank you^^ 8

Question

please explain every option detailly and give me the right answer, thank you^^

8. Which of the following statements is true? A) The quantity theory of money explains the relationship between growth in real B) One of the limitations of using money is that it does not allow for the transfer of C) The Fed can influence the money supply in the economy by influencing the D) The discount window interest rate is the interest rate that banks charge each other GDP and changes in nominal interest rates purchasing power into the future. required amount of reserves. for overnight loans

Explanation / Answer

8.
Correct answer:
C

Explanation:
Alternative A is incorrect. Quantity theory of money shows the relationship between the money supply and price level present in the economy. The theory insists that there is a positive relationship between money supply and prices. So, the increase in money supply, will cause increase in the price and inflation will rise. So, the quantity theory of money is about money supply and the price level, rather real GDP and nominal interest rate.

Alternative B is incorrect. Money can store value that can be used as purchasing power in the future. It means that money is not limited by the time period of its issuance.

Alternative C is correct. Changing reserve requirements by changing required reserve ratio, is considered as an important tool for the Fed to influence the money supply. For example, Fed can decrease the required reserve ratio and increases the reserves available to banks for lending purposes. These additional reserves are issued as loans that increases the money supply using the money multiplier effect.

Alternative D is incorrect. Discount interest rate is used between the banks and Federal Reserve so that banks can meet their short term obligations. So, it is not about between the banks where the discount rate is used. Rather, it is between the bank and Fed, where it is used.

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