Question

1. The interest rate in the federal funds market:

a. is an interest rate that is largely unaffected by the policies of the Fed.

b. will fall if the Fed sells bonds and, thereby, reduces the reserves available to banks.

c. is determined by the imposition of price controls imposed by the Fed.

d. rises when the quantity of funds demanded by banks seeking additional reserves exceeds the quantity supplied by banks with excess reserves.

2. If there is a recession, the Fed would most likely encourage banks to provide loans by (reality check - this was most clearly the case before the financial crisis of 2008-9):

a. raising the discount rate.

b. raising the federal funds rate.

c. buying government securities.

d. selling government securities.  

3. Note that this is a money multiplier question:) Imagine that Odyssey National is a brand new bank, and that its required reserve ratio is 10 percent. If it accepts a $1,000 cash deposit, then, excluding the $1,000 initial deposit, the banking system can increase the money supply by:

a. $910.

b. $900.

c. $1,000.

d. $9,000.

Answer 1

1 - Option D

Rises when the quantity of funds demanded by the banks exceeds the quantity of the funds supplied by the banks with excess reserves.

This is because the excess demand condition that the interest rate rise.

2 - Option C

Buying government securities

In case of recession the money supply needs to be extended. Hence the govt will buy the securities and pay for it. Hence the supply of the money in the economy will increase.

3 - Option d

$ 9000

This is done by - Total increase in supply of money

= 1 / 10% * 1000.

= 10000

Less 1000( initial deposit)

Hence , net increase = 9000$