Question

8. Explain the effect of each of the following scenarios on money supply: (You need to say if money supply increases or decreases and also how)

a. When the Fed buys treasury bonds from the public

b. When the Fed decides to ease on banks by lowering the reserve-requirements:

c. When the Fed decides to pay interest on excess reserves of banks:

d. When the Fed sells treasury bonds to the public e.When the Fed raises the discount rates

9. In a simple graph show the structure of the Fed and very shortly explain the main objective of the Fed.

10. What are the three basic functions of money? Which one is more important than the other two functions and why?

11. The amount of currency in Assumptionland is 430,000. The amount of bank deposits in Assumptionland is 4,310,000. The amount of bank reserves in Assumptionland is 3,400,000 What is the money multiplier in Assumptionland?

Answer 1

8.

a. Money supply increases

When the Fed buys treasury bonds from the public, the money flows from the Fed to the public and the money supply increases.

b. Money supply increases

When the reserve requirement falls, banks have more money to lend. This increases the money supply.

c.Money supply decreases

When the Fed pays interest on excess reserves, banks hold more reserves with the Fed and they have less money to lend. So, the money supply falls.

d. Money supply decreases

When the Fed sells treasury bonds to the public, the money flows from the public to the Fed and the money supply decreases.

e. Money supply decreases

When the Fed raises the discount rate, it lowers the excess reserves in commercial banks and contracts the money supply.