Question

1-Currently banks are holding a massive amountof excess reserves.  

If banks decided that now was the time to start making loans, which of the following are realistic ways the Federal Reserve could keep the money supply from expanding?

CHECK ALL THAT APPLY

		increase the interest rate paid on bank reserves
		make discount loans
		increase the reserve requirement
		purchase securities from banks
		sell securities to banks
		decrease the reserve requirement
		decrease the interest rate paid on bank reserves

2-If banks choose to increase their holdings of excess reserves relative to deposits, then the money multiplier (mm1 or mm2) _____ and the money supply ______, all else held constant.

		decreases, decreases
		decreases, increases
		increases, decreases
		increases, increases

Answer 1

1. Right options are the following:

• increase the interest rate paid on bank reserves
• increase the reserve requirement
• sell securities to banks

Explanation: When the Fed increases the interest rate paid on bank reserves, banks would maintain higher excess reserve and the money supply will not expand. Also, when the Fed increases the reserve requirements, banks would be forced to maintain a higher reserve and the money supply will not expand. Lastly, when the Fed sells securities to banks, money flows from the banks to the Fed; so, the money supply is reduced.