Suppose the banks in the Federal Reserve System have $100 million in transaction

Question

Suppose the banks in the Federal Reserve System have $100 million in transactions accounts and the reserve requirement is 0.10. Ceteris paribus, if the reserve requirement is decreased to 0.07, then excess reserves will increase by: $3 million. O $7 million. $700 billion $10 million. QUESTION 2 All of the following are true about the basic money supply except: It includes money kept in transactions accounts. It includes credit card balances. It includes currency held by the public It is known as M1. QUESTION 3 Members of the Federal Reserve Board of Governors are appointed for one fourteen-year term: So that Fed decisions will be based on political considerations. O In an effort to isolate the Fed from political pressures In an effort to make the Fed responsive to voters To give Congress better control over the money supply

Explanation / Answer

1. Ans: $3 million

Explanation:

Initially the reserve requirement = $100 million * 0.10 = $10 million

When resreve requirement is 0.07, the new reserve requirement = $100 million * 0.07 = $7 million

Increase in reserve ratio = $10 million - $7 million = $3 million

2. Ans: It includes credit card balances

Explanation:

The basic money supply = currency held by the public + balances in transactions accounts.

3. Ans: In an effort to isolate the Fed from political pressures.

4. Ans: The incentive to borrow reserves decreases

Explanation:

Because high discount rates means borrowing from the Fed is expensive.

5. Ans: The lending capacity of the banking system decreases.

Explanation:

Because bank has to keep more funds in reserve.

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