1. Consider an economy with a reserve requirement m = 0.25, and assume that bank
ID: 1215294 • Letter: 1
Question
1. Consider an economy with a reserve requirement m = 0.25, and assume that banks, on average, keep some excess reserves. The value of the money multiplier will be
(a) equal to 4
(b) larger than 4
(c) smaller than 4
(d) zero, since there are excess reserves in the system.
2. For given increase in the supply of reserves to banks by the Fed, the drop in the federal funds rate (FFR)
(a) is larger the more sensitive to the FFR the demand for reserves (by banks) is
(b) is larger the less sensitive to the FFR the demand for reserves (by banks) is
(c) does not depend on how sensitive to the FFR the demand for reserves (by banks) is
(d) is equal to the total change in the supply of reserves
3. An increase in money supply by the Fed (via an increase in the supply of reserves to banks) is most successful when
(a) the demand of reserves by banks is steeper
(b) consumption and investments are more sensitive to interest rate changes
(c) the AS curve is flatter (that is, when firms prefer not to change prices)
(d) all of the above conditions are realized.
Explanation / Answer
= 1/ 0.25
= 4
Hence, the correct option is a.
2.(b) is larger the less sensitive to the FFR the demand for reserves (by banks) is
Federal fund rates are the interest rate at which a depository institution lends funds maintained at the Federal Reserve to another depository institution overnight. The federal funds rate is one of the most influential interest rates in the U.S. economy, since it affects monetary and financial conditions, which in turn have a bearing on key aspects of the broad economy including employment, growth and inflation.
3.b. Consumption and investments are more sensitive to interest rate changes
When the Fed increases the money supply, it lowers the interest rate. This causes Ip to increase, and thus causes aggregate expenditures to increase.
Related Questions
Navigate
Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.