Chose the correct answer: A) If the Fed buys U.S. government securities, bank re
ID: 1202274 • Letter: C
Question
Chose the correct answer:
A)If the Fed buys U.S. government securities,
bank reserves will decrease.
the interest rate will rise.
the discount rate will rise.
the quantity of money will eventually increase.
B)When the Fed buys U.S. government securities from a bank, the Fed pays for the securities by
borrowing money from the U.S. Treasury.
crediting the bank's checking account at the Fed.
decreasing the amount of money in circulation.
giving the bank gold.
C)If a banking system has $1,000 of reserves and the required reserve ratio is 50%, the maximum volume of checkable deposit liabilities of all depository institutions combined would be
$5,000
$2,000
$1,000
$500
D)Continuing with the scenario from the previous question, what would happen if the Fed reduced the reserve requirement from 50% to 10%?
Reserves would fall and Deposits would fall by ten times the decrease in Reserves.
Reserves would fall and Maximum Deposits would rise.
Reserves would stay the same, and Maximum Deposits would rise to $10,000.
Reserves would stay the same, and Maximum Deposits would fall to $100.
-bank reserves will decrease.
-the interest rate will rise.
-the discount rate will rise.
-the quantity of money will eventually increase.
Explanation / Answer
A) The correct option is D
Explanation : The federal has the legal authority to create money and the fed buys the securities from banks by paying money to banks . Thus the quantity of money will eventually increase.
B) The correct option is B
Explanation : The fed has the legal authority to create money and when it buys securities from banks , it is essentially crediting bank's checking account at the Fed which ultimately increases the money supply.
C) The correct option is B
Calculation : (1/0.5) X $ 1000 = $ 2000
D) The correct option is C
Calculation :
(1/0.10) X 1,000 = $ 10,000
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