Question

If the Fed wants to decrease the money supply, it will:

Question 22 options:

a)	increase the rate of interest paid on reserves.

b)	lend money to banks.

c)	decrease the reserve ratio.

d)	buy government bonds.

The Fed lends to banks:

Question 23 options:

a)	as an attempt to limit the number of new loans extended by banks.

b)	on a regular basis as a way to increase the money supply.

c)	as a way of earning profits, which in turn are passed on to the federal government.

d)	only in dire emergencies to avoid insolvency.

Answer 1

Question 22

To decrease money supply Fed increases interst rate paid on reserves which encourages bank to increase reserve ratio and as a result bank will have less money to lend as loans which will result in decrease the supplyof money.

Hence answer is a) increase the rate of interest paid on reserves

.

Question 23

The commercial banks borrow funds from Fed in order to meet the minimum cash reserve ratio if their cash is low at the end of the day.It allows the banks to maintain the minimum threshold

Hence answer is d)only in dire emergencies to avoid insolvency