17) When the Fed receives an inflow of Federal Reserve notes from commercial ban

Question

17) When the Fed receives an inflow of Federal Reserve notes from commercial banks, its

A) assets rise.                        B) liabilities decline.                           

C) liabilities increase.               D) assets decline.

18) If the reserve requirement on checkable deposits is .25, the ratio of currency held by the public to demand

     deposits is .15, the ratio of time deposits to demand deposits is 3, the reserve requirement on time deposits is 0,

     and the ratio of excess reserves to demand deposits is 0, then the demand deposit multiplier is

A) 5.       B) 4.      C) 3.33.        D) 2.5.

19) __________ the required reserve ratio will __________ the potential for multiple expansion.

A) Raising; increase           B) Lowering; decrease

C) Raising; decrease         D) None of the above.

20) A major limitation of the discount rate as a policy tool is that the initiative for its use rests with

A) commercial banks.         B) Congress.

C) the U.S. Treasury.           D) The Federal Reserve FOMC.

21) Which of the following situations is likely to lead to dynamic open market operations?

A) A recession          B) An increase in discount lending

C) An increase in the checkable deposits     D) An increase in currency holdings by the public

Explanation / Answer

Q19. Money multiplier is calculated as follows -

Money multiplier = 1/Required reserve ratio

Lower the value of required reserve ratio, larger is the value of money multiplier. Higher the value of required reserve ratio, smaller is the value of money multiplier.

So, going by above understanding, raising the required reserve ratio will decrease the potential for multiplier expansion.

Thus, the correct answer is option (C).

Q20. Discount rate is the rate at which Fed lends fund to commercial banks. Fed can change the discount rate but it cannot compel the commercial banks to borrow. So, the major limitation of the discount rate as a policy tool is that the initiative for its use rests with commercial banks that is Fed can only change the discount rate but its effectiveness on economy will depend on whether commercial banks change their behavior accordingly or not.

Thus, the corect answer is option (A).

Q21. Dynamic open market operations are generally resorted to in case of recession.

Thus, the corect answer is option (A).

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