Question

9) Correctly match the scenario with the effect on the money supply

Group of answer choices

Fed conducts an open market sale.

      [ Choose ]            Money supply increases            Money supply increaess.            Money supply increases.            Money supply decreases.      

Fed decreases the reserve requirement

      [ Choose ]            Money supply increases            Money supply increaess.            Money supply increases.            Money supply decreases.      

Fed increases the interest paid on reserves.

      [ Choose ]            Money supply increases            Money supply increaess.            Money supply increases.            Money supply decreases.      

Fed decreases the discount rate.

      [ Choose ]            Money supply increases            Money supply increaess.            Money supply increases.            Money supply decreases.      

10) Assume the reserve ratio is 20%. When banks receive $3000 in reserves, how much money will they create?

Answer 1

(9)

(a) Fed conducts an open market sale => Money supply decreases.

(b) Fed decrease the reserve requirement => Money supply increases.

(c) Fed increase the interest paid on reserves =>Money supply decreases.

(d) Fed decreases the discount rate => Money supply increase.

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(10)

Reserve ratio = 20% = 0.2

Money multiplier = 1 / reserve ratio

=> Money multiplier = 1/0.2

=>Money multiplier = 5

Banks receive reserves of $3000

Money supply change = Money multiplier * Change in reserves

=> Change in money supply = 5 * ($3000)

=> Change in money supply = $15,000

The bank will create the money of $15000.