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1. Assume that the reserve requirement for the commercial banks is 25%. If the Federal Reserve...

1. Assume that the reserve requirement for the commercial banks is 25%. If the Federal Reserve Banks buy $3 billion in government securities, the lending ability of the commercial banking system will increase by _____.

a. $4.5 billion

b. $9 billion

c. $12 billion

d. $15 billion

2. Which of the following statements is correct?

a. The federal funds rate is derived based on the prime rate.

b. The federal funds rate is the rate banks charge their most creditworthy customers.

c. The discount rate is the rate banks charge one another on overnight loans.

d. The prime rate involves longer, more risky loans than the federal funds rate.

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Answer #1

Answer:

1]

Assume that the reserve requirement for the commercial banks is 25%. If the Federal Reserve Banks buy $3 billion in government securities, the lending ability of the commercial banking system will increase by $12 billion

The lending ability rise by = $3 / reserve requirement = 3 / 25 = $12 billion

C] 12 billion

2]

d. The prime rate involves longer, more risky loans than the federal funds rate.

The primer rate is higher than the federal fund rate because the prime rate involves longer more risky loans than overnight loans between banks. But the federal fund rate and primer interest rate closely track one another

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