5-2 (45-47) Question 45. 45. If the Federal Reserve increases the interest rate

Question

5-2 (45-47)

Question 45. 45. If the Federal Reserve increases the interest rate on bank deposits at the Fed, banks will want to hold (Points : 5) fewer reserves, so the reserve ratio will fall. fewer reserves, so the reserve ratio will rise. more reserves, so the reserve ratio will fall. more reserves, so the reserve ratio will rise.

Question 46. 46. The Fed can decrease the money supply by conducting open-market (Points : 5) sales or by raising the discount rate. sales or by lowering the discount rate. purchases or by raising the discount rate. purchases or by lowering the discount rate.

Question 47. 47. One surprising thing about the U.S. money stock is that (Points : 5) banks hold so much currency relative to the public. the public holds so much currency relative to banks. there is so little currency per person. there is so much currency per person.

Explanation / Answer

Q45. If the Federal Reserve increases the interest rate on bank deposits at the Fed then banks will want to hold more reserves with Fed.

This is because increase in interest rate on reserves held at Fed will increase the income earned by banks through these reserves and that will prompt the banks to place more reserves with Fed.

Reserves placed with Fed by banks come under the category of required reserves.

So, if banks hold more reserves with Fed then required reserves increases.

When required reserves increases, reserve ratio rises.

Thus, if the Federal Reserve increases the interest rate on bank deposits at the Fed, banks will want to hold more reserves, so the reserve ratio will rise.

Hence, the correct answer is option (4).

Q46. When Fed wants to decrease money supply, it generally conduct open market sale of US Treasury securities. It can also raise the discount rate.

Both these actions results in decrease in quantum of excess reserves with banks and thus reduce their lending ability leaidng to fall or decrease in money supply.

Thus, the Fed can decrease the money supply by conducting open-market sales or by raising the discount rate.

Hence, the correct answer is option (1).

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