Suppose the Federal Reserve system has a required reserve ratio of 0.25 and ther

Question

Suppose the Federal Reserve system has a required reserve ratio of 0.25 and there are no excess in the system. If the Open Market Committee buys $10 million of securities from the banking system, then the total lending capacity of the system: Increases by $2.5 million. Decreases by $2.5 million. Increases by $40 million. Decreases by $40 million. The control of the money supply by the Federal Reserve System is known as: Fiscal policy. Supply-side policy. Monetary policy. Congressional policy. Many economic policies fail because: Measurement difficulties prevent policy makers from correctly identifying what is happening it economy. Forecasts may be inaccurate. There are significant lags in response to policy. All of the above. Rosa buys a bond in the amount of $1000 with a promised interest rate of 7.5 percent. If the interest rate increases to 10 percent Rosa can self her bond for up to: $750. $100. $1075. $107.5. The U.S. economy has been more stable since 1946 because of: large government sector. A shift from manufacturing to services. Automatic stabilizers. All of the above.

Explanation / Answer

Q8. Required reserve ratio = 0.25

Money Multiplier = 1/Required reserve ratio = 1/0.25 = 4

When Open Market Committee buys securities, the money supply as well as lending capacity of banking system increases.

Calculate increase in total lending capacity of banking system -

Increase in total lending capacity = Amount of securities bought by OMC * Money multiplier

                                                 = $10 million * 4

                                                 = $40 million

Thus, the lending capacity of the banking system will increase by $40 million.

Hence, the correct answer is option (C).

Q9. Federal Reserve impacts the economic condition by chaging the money supply. Policy of administering change in money supply is referred to as monetary policy.

So, in a way, the control of money supply by the Federal Reserve System is known as monetary policy.

Hence, the correct answer is option (C).

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