Question

Cost of capital can best be defined as:

• compensation demanded by the investor of a firm before taxes, transaction costs, and interest expense are considered

• compensation demanded by the investor of a firm before taxes only are considered

• compensation demanded by the investor of a firm before taxes and transaction costs are considered

• compensation demanded by the investor of a firm after taxes and transaction costs are considered

Answer 1

Money multiplier=1/ required reserve ratio

Money creation= Deposit* money multiplier

A required reserve can be defined as a reserves that the Fed orders banks to hold. An excess reserve can be defined as a reserves that the extra amount the banks are willing to hold.

Required reserve= total reserve – excess reserve

If excess reserve is more, required reserve will be less. If required reserve is less, then money multiplier will be more.

If banks choose to hold a larger fraction of their deposits as excess reserves, then the money multiplier will rise so the money supply will rise.

When government makes open market purchases, then money supply increase.

Monetary base= currency + reserve

If the Fed makes open market purchases, the monetary base rise and the money supply rise.

Since lending by Federal reserve to Commercial banks are liabilities to commercial banks.

If the Federal Reserve increases lending to a bank, the bank’s assets do not change. It’s liabilities rise.