Question

QUESTION 32

1. All else equal, if the Fed engages in a repo transaction, then it means the Fed is attempting to

   		decrease the money supply.
   		increase the money supply.
   		foreclose on a failed bank.
   		raise interest rates.

QUESTION 33

1. An expansionary monetary policy is one that reduces the supply of money.

   True

   False

QUESTION 34

1. An increase in the legal reserve ratio

   		increases the money supply by increasing excess reserves and increasing the monetary multiplier.
   		decreases the money supply by decreasing excess reserves and decreasing the monetary multiplier.
   		increases the money supply by decreasing excess reserves and decreasing the monetary multiplier.
   		decreases the money supply by increasing excess reserves and decreasing the monetary multiplier.

QUESTION 35

1. Answer the question on the assumption that the legal reserve ratio is 20 percent. Suppose that the Fed sells $500 of government securities to commercial banks (paid for out of commercial bank reserves) and buys $500 of securities from individuals, who deposit the cash in checking accounts.

   As a result of the given transactions, reserves in the banking system will

   		remain unchanged.
   		rise by $100.
   		fall by $100.
   		rise by $1,000.

QUESTION 36

1. Answer the question on the basis of the following information: For transactions, households and businesses want to hold an amount of money equal to one-half of nominal GDP. The table shows the amounts of money they want to hold as an asset at various interest rates.

   Interest Rate	Amount of Money Demanded as an Asset
   10%	$20
   8	40
   6	60
   4	80
   2	100

   If nominal GDP is $200 and the interest rate is 6 percent, the total amount of money that households and businesses will want to hold is

   		$120.
   		$140.
   		$160.
   		$180.

Answer 1

(32) (B)

A repo transaction is an expansionary monetary policy tool which increases money supply.

(33) FALSE

An expansionary monetary policy increases money supply.

(34) (B)

When required reserve ratio increases, excess reserve falls, decreasing credit lending, lowering money multiplier and decreasing money supply.

(35) (A)

Fed selling and purchasing securities by the same amount will leave money supply unchanged.

(36) (C)

Transaction demand for money (Mt) = $200/2 = $100

When interest rate = 6%, asset demand for money (Ma) = $60

Total money demand = Mt + Ma = $100 + $60 = $160