Lecture 18 - 14 True or False When the FOMC decides to cut...

Info iconThis preview shows pages 1–7. Sign up to view the full content.

View Full Document Right Arrow Icon
14. True or False? When the FOMC decides to cut the target Fed funds rate, the New York Fed sells securities to commercial banks to implement the decision. What happens when the New York Fed sells securities, do reserves increase or decrease? Reserves decrease. When the Fed decreases the supply of reserves, what happens to the Fed funds rate? It rises! Thus the answer is false.
Background image of page 1

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full DocumentRight Arrow Icon
15. True or False? If Smith Bank has checkable deposits of $500,000, reserves of $100,000, outstanding loans worth $150,000, and faces a required reserve ratio of 15 percent, then Smith bank has excess reserves of $25,000. Based on the required reserve ratio, how much does Smith Bank need to hold in reserves? $75,000 How much does Smith Bank hold in reserves? $100,000 hus Smith Bank has excess reserves. $100,000 is greater than $75,000. True
Background image of page 2
16. True or False? Virginia National Bank (VNB) has $20,000 in reserves and $300,000 in checkable deposits. If the required reserve ratio is 10 percent, VNB could meet its reserve requirement by making $10,000 in new loans. VNB needs to hold how much in reserves? $30,000 = 10% of $300,000 in deposits. Does VNB need to increase or decrease its reserves? Increase reserves. It needs $30,000 but only has $20,000. Increasing its loans will not add to reserves. The answer is False.
Background image of page 3

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full DocumentRight Arrow Icon
27. The sum of all currency (coins and paper money) plus bank deposits is known by economists as a.convertible currency b.foreign exchange c.the money supply d.cash and marketable securities e.none of the above. c – the money supply
Background image of page 4
28. Suppose that M in an economy is equal to $5,000 and that the monetary base equals $1,000. If the central bank decides to increase M to $6,000, what open-market operation will accomplish this? a.a sale of $200 b.a purchase of $200 c.a sale of $1,200 d.a purchase of $1,200 e.none of the above First note that M = Monetary Base x Money Multiplier $5,000 = $1,000 x mmWhat does mm equal? 5 If the central bank decides to increase M to $6,000, by how much will M increa $6,000 - $5,000 = $1,000 With a mm = 5, how big does the purchase have to be? What type of OMO will increase M? A purchase of gov’t bonds $200 because $200 x 5 = $1,000 – the answer is b
Background image of page 5

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full DocumentRight Arrow Icon
29. Other things equal, which of the following could not possibly cause the money supply to fall? a.a fall in the currency-deposit ratio, k b.a drop in the discount rate combined with a rise in the required reserve ratio c.a rise in the reserve ratio (required plus excess reserves) d.a rise in the discount rate combined with a fall in the required reserve ratio e.a rise in the discount rate combined with a rise in the required reserve ratio This is a very challenging question. Note that [a] would raise the money multiplier and, other
Background image of page 6
Image of page 7
This is the end of the preview. Sign up to access the rest of the document.

This note was uploaded on 03/10/2010 for the course ECON 2 taught by Professor Taylor during the Fall '09 term at Georgetown KY.

Page1 / 20

Lecture 18 - 14 True or False When the FOMC decides to cut...

This preview shows document pages 1 - 7. Sign up to view the full document.

View Full Document Right Arrow Icon
Ask a homework question - tutors are online