MD, MD, QUANTITY OF MONEY Refer to Figure 34-4. Suppose the money-demand curve is currently MD 2. If the current interest rate is r 2, then Oa. bond issuers and banks will respond by lowering the interest rates they offer. OD. people will respond by selling interest-bearing bonds. Oc the quantity of money that people want to hold is less than the quantity of money that the Federal Reserve has supplied. Od in response, the money-demand curve will shift rightward from its current position to establish equilibrium in the money market INTEREST RATE

Monetary policy: Demand for and supply of money in the money market is shown in diagram below. Th Fed intends to decrease the money supply from the current $60 million. a) How would the Fed use Open Market Operations to achieve this goal? b) If required reserve ratio is set at 3.9% calculate the money multiplier.. c) Using the Open Market Operations, and assuming money multiplier to be 10.15, by how much should should bank reserves change in order to decrease the money supply by $20 million, from $60 million to $40 million? d) Would a successful open market operation increase or decrease the interest rate? e) Briefly explain your answer to part d. INTEREST RATE (Percent) 18 15 12 9 9 3 0 0 20 Money Supply Money Demand 40 60 80 MONEY Dollar Millions 100 120 K

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The graph shows the demand curve for reserves in the market for bank reserves. The federal funds target rate is 4 percent. Draw the supply curve of reserves to achieve the federal funds target rate. Label it. Draw a point at the equilibrium in the market for bank reserves. Choose the statement that is incorrect. O A. Banks hold reserves to meet the required reserve ratio and so that they can make payments. OB. The Fed's open market operations determine the demand for reserves. OC. The higher the federal funds rate, the smaller is the quantity of reserves demanded. O D. Bank reserves are costly to hold because they can be loaned in the federal funds market and earn the federal funds rate. Federal funds rate (percent per year) 8.00 7.00- 6.00- 5.00- 4.00- 3.00- RD 2.00+ 75 25 50 100 Reserves on deposit at the Fed (billions of dollars) >>> Draw only the objects specified in the question.

Macmillan Learning b. A central bank reduces the rate of interest that it charges to commercial banks on loans. expansionary c. The Federal Reserve purchases bonds on the open market. O expansionary d. The Federal Reserve decreases the discount rate. expansionary O contractionary expansionary contractionary contractionary e. A central bank increases the percentage of deposits that banks are required to keep in vaults. O contractionary.

If the Fed sells the U.S. $200 million in government bonds, the total money supply will: O not change. decrease by more than $200 million. O decrease by less than $200 million but more than $0 million. O decrease by exactly $200 million.

Trevor goes to the ATM machine and withdraws $500 in cash. How will this affect the monetary base? Select one: O a. The monetary base will decline as bank reserves fall. O b. The monetary base will increase with the increase in currency in circulation. O c. The monetary base will increase by less than the size of the withdrawal as the increase in the currency in circulation will not be completely offset by a decrease in bank reserves. O d. The monetary base will remain unchanged with the increase in the currency in circulation being exactly offset by a decrease in bank reserves.

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O O O O O O O O O O Which one of the following statements is FALSE? Select one: a. The prime bank rate is the rate banks charge their most credit-worthy commercial customers. b. The Fed can influence the supply of federal funds through open market operations. c. "Tight money" policies tend to increase the money supply growth rate. d. The Fed does not directly set the federal funds rate but instead tightly controls the rate through open market operations. e. The prime bank rate in the United States is consistently higher than the federal funds rate. In recessions, tax revenues tend to decline and transfer payments like unemployment insurance and food stamps tend to increase, so these programs... Select one: a. are procyclical. b. make Aggregate Expenditures less c. are automatic stabilizers. d. create budget surpluses during economic downturns. e. increase unemployment.