Question

1. The policy tool of changing reserve requirements is:

A. The most widely used B. The preferred tool from the bank’s perspective C. No longer used D. Still used but only occasionally

2. The demand for reserves curve takes a horizontal shape when

A. The Fed Funds rate equals 2% B. The Fed Funds rate equals the discount rate C. The Fed Funds rate equals the interest rate paid to commercial banks on reserves D. The Discount rate equals 5%

3. Everything else held constant in the market for reserves, when the fed funds rate is 3%, raising the discount rate from 5% to 6%

A. Lowers the fed funds rate B. Raises the fed funds rate C. Has an indeterminate effect on the fed funds rate D. has no effect on the fed funds rate

Answer 1

Question 1 option B The preferred tool from bank's prospective

Because Fed use changing reserve ratio tool when Fed want to control the money supply through banks. When Fed wants to increase money supply, the reserve requirement ratio is decreases. So the banks have more fund for distribute to the publica and when the Fed wants to decrease money supply, the reserve requirement ratio is increased. So the banks have to reserve more amount in reserve and less amount remains to distribute to the public.

So this option is the preferred tool when Fed wants to control money supply through commercial banks.