Question

When the Fed lowers the discount rate, it makes it

	a.	more difficult for banks to accept deposits.
	b.	cheaper for banks to borrow from each other.
	c.	more difficult for banks to extend loans.
	d.	cheaper for banks to obtain additional reserves by borrowing from the Fed.

Suppose the Fed purchases $10 million of U.S. securities from the public. If the reserve requirement is 10 percent, the currency holdings of the public are unchanged, and banks have zero excess reserves both before and after the transaction, the total impact on the money supply will be a:

	a.	$10 million increase in the money supply.
	b.	$10 million decrease in the money supply.
	c.	$100 million decrease in the money supply.
	d.	$100 million increase in the money supply.

Answer 1

1> d> cheaper for banks to obtain additional reserves by borrowing from the Fed.

Discount rate is charged for the interest rate on the loan provided by Fed to depository institutions, so it will make it easier to borrow from the Fed if the discount rate falls.

2> d> $100 million increase in the money supply.

The money multiplier = 1/ reserve requirement = 1/0.1 = 10

Also, there will be an increase in money supply since Fed purchased securities by paying money to the people.

So, the increase in money will be purchase amount * multiplier = $ 10 * 10 = $100 million

answered by: anonymous