Question

Provide a brief explanation or show work

5. The ratio of the money supply to the monetary base is called:

a. the currency–deposit ratio. b. the reserve–deposit ratio. c. high-powered money. d. the money multiplier.

6. When the Fed makes an open-market sale, it:

a. increases the money multiplier (m). b. increases the currency–deposit ratio (cr). c. increases the monetary base (B). d. decreases the monetary base (B).

7. Suppose the banking system currently has $400 billion in reserves, the reserve requirement is 8 percent, and excess reserves amount to $5 billion. What is the level of deposits?

8. Explain the effect of each of the following scenarios on money supply: (You need to say if money supply increases or decreases and also how)

a. When the Fed buys treasury bonds from the public b. When the Fed decides to ease on banks by lowering the reserve-requirements: c. When the Fed decides to pay interest on excess reserves of banks: d. When the Fed sells treasury bonds to the public e.When the Fed raises the discount rates

9. In a simple graph show the structure of the Fed and very shortly explain the main objective of the Fed.

10. What are the three basic functions of money? Which one is more important than the other two functions and why?

11. The amount of currency in Assumptionland is 430,000. The amount of bank deposits in Assumptionland is 4,310,000. The amount of bank reserves in Assumptionland is 3,400,000 What is the money multiplier in Assumptionland?

Answer 1

5. The ratio of the money supply to the monetary base is called:

Answer: ( D)

ratio of money supply to monetary base is called money multiplier.

Money Multiplier = Supply of money / Monetary Base.

More the value of supply of money, larger shall be money multiplier.

6. When the Fed makes an open-market sale, it:

Answer: .(D).

sale of government securities mops up liquidity from market thereby reducing the monetary based and money supply. Such step is usually taken by the central to control inflationary pressures.