Question

A. The lower the discount rate relative to the federal funds rate, the more likely a...

A. The lower the discount rate relative to the federal funds rate, the more likely a commercial bank will borrow from

another commercial bank instead of the Fed.
the Fed instead of another commercial bank.
the U.S. Treasury instead of either the Fed or another commercial bank.
the public.

B.

When the Federal Reserve system was being created, some people thought that there should be as few district banks as possible to enhance efficiency and for ease of operation.

True

False

C.

Exhibit 13-1

Bank

Increase in Checkable Deposits

New Required Reserves

New Checkable Deposits Created by Extending New Loans

A

$0

$0

$1,000

B

$1,000

(A)

(B)

C

(C)

$90

(D)

D

$810

(E)

(F)

​

Assume that the required reserve ratio is 10%, that there are no cash leakages, and that banks hold zero excess reserves.

Refer to Exhibit 13-1.  Suppose that the Federal Reserve conducts open market operations by purchasing $1,000 worth of government securities from Bank A.  As a result, Bank A finds itself with $1,000 in excess reserves that it lends out and those funds end up in Bank B. The loan made by Bank B ends up in Bank C, and the loan made by bank C ends up in Bank D.  What dollar value goes in blanks (E) and (F), respectively?.

$729; $81
$81; $729
$10; $800
$700; $110
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Homework Answers

Answer #1

(A) Option (2)

Discount rate is the interest rate Fed charges for loans extended to commercial banks. Federal funds rate is the interest rate commercial banks charges for extending loans to other commercial banks. When discount rate falls, ceteris paribus commercial banks will borrow from Fed since interest rate is lower.

(B) TRUE

(C) Option (2)

For Bank B,

New required reserves = $1,000 x 10% = $100 (A)

New checkable deposits created = $1,000 - $100 = $900 (B)

For Bank C,

Increase in checkable deposits = $900 (C)

New required reserves = $900 x 10% = $90

New checkable deposits created = $900 - $90 = $810 (D)

For Bank D,

Increase in checkable deposits = $810

New required reserves = $810 x 10% = $81 (E)

New checkable deposits created = $810 - $81 = $729 (F)

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