Different Types of Interest Rates and Their Behavior

Transcription

1 Different Types of Interest Rates and Their Behavior The federal funds rate is the short-term interest rate banks charge other banks on overnight loans; this rate can be adjusted up or down by actions taken by the Federal Reserve (the "Fed") to grow or slow down the economy and inflation. To increase the money supply and grow the economy, the government buys bonds from banks to increase the amount banks can loan. Bonds (securities) are loans that people give out with their money to a,company or government and they promise to pay you back in full, with regular interest payments. When the Fed buys or sell bonds it is called monetary policy, and it is critical in making an economy stable. When the Fed sets higher interest rates, the banks pass along the higher rates to borrowers, and vice versa when rates go down. Page 1

2 The Federal Funds Rate When inflation is high, the federal funds rate is low to grow the economy. When inflation is low, the federal funds rate increases to slow down the economy by slowing spending. - ) ~ i~~~~~ ~ l 8 6 0, LL.a...JL.:L...LJWL..:L.J~L,...L..L.l...&...L.J...L..1.IWL..J...l-'-l.-1...J...:L..S../IU...I...L.L.1..L..L.1..:LLL..L..:L...L...:&...a...:1...:.L.LL.J...L.L../&...LS:.&::l,iiillii~ LLJ !J976 1Q ~ (), 2018 Page 2

3 The Federal Funds Rate-Questions 48. Which of the following accurately de cribe the federal fund rate? A The intere t rate that bank charge tate government (B The intere t rate that bank charge other bank for overnight loan C The int1ere t rate that bank pay on long-term. av1no (D The intere t rate on per onal loan E The intere t rate on government bond Page 3

4 The Federal Funds Rate-Questions 48. Which of the following accurately de cribe the federal fund rate? A The intere t rate that bank charge tate government (9 The intere t rate that bank charge other bank for overnight loan C The int1ere t rate that bank pay on long-term. av1no (D The intere t rate on per onal loan E The intere t rate on government bond Page 4

5 Demand-Side Policies: Monetary Policies Macroeconomic policy can have substantial effects on economic fluctuations. Governments implement policies to either help to resist recessions or minimize the impact of them. Monetary policymakers typically prefer to implement policies that minimize fluctuations in GDP, thus lessening the chance of a recession occurring. Policies used to influence economic fluctuations are sometimes called demand-side policies because they aim to influence aggregate demand (GDP) in the economy by decreasing fluctuations. Page 5

6 Demand-Side Policies: Monetary Policies (cont.) Keeping inflation low and stable is another part of government policy to stimulate long-term economic growth. The government ( G) has an important role in determining the inflation rate, especially over the long-run (LR), because the inflation rate in the long term depends on the growth rate of the money supply (the total amount of currency (coin and paper money) and deposits in banks in a country, which can be impacted by the government. Page 6

7 Demand-Side Policies: Monetary Policies (cont.) An increase in the money supply increases real GDP, and the goal is to increase it equal to the rate of imports. To increase the money supply, like during a recession, the government buys bonds (loans that people give out with their money to a company or government and they promise to pay you back in full, with regular interest payments) on the open market. A regular increase in the money supply leads to an increase in the price level, but only a possible slight increase in real GDP while a continuous expansion of the money supply causes hyperinflation. Page 7

8 Demand-Side Policies: Monetary Policies (cont.) A decrease in the money supply decreases AD and the price level but doesn't change output in the short-run. Government policy concerning the money supply and the control of inflation is called monetary policy. The institution of government assigned to conduct monetary policy in the U.S. is called the Federal Reserve System, or the "Fed." When the Fed tries to increase the money supply and boost the economy by keeping interest rates low, it is called expansionary monetary policy. Expansionary monetary policy increases the price level and real GDP (Y). Page 8

9 Demand-Side Policies: Monetary Policies (cont.) To keep inflation low and stable, the Fed will implement policies that impact consumer demand (D), depending on the inflation rate. The primary tool that the Fed uses to influence demand is interest rates. If there are signs that inflation is on the rise because aggregate demand (AD) is growing faster than potential output, the Fed may step in and sell bonds to banks in order to raise interest rates, which will then slow the spending of firms and the buying of consumers. This is because as the Fed buys bonds, the amount available for banks to loan decreases, increasing the interest rate. The Fed is also concerned with minimizing the adverse impact of recessions. Lowering interest rates can assist an economy in recovering sooner from a recession, such as during the recession of and the Great Recession of Lowering interest rates brings down the cost of purchasing goods. Page 9

10 Demand-Side Policies: Monetary Policies-Questions 14. Which of the following i a monetary policy that can be u ed to counteract a rece ion? (A) Buying bond in the open market (B Increa ing the di count rate (C Increasing the required re erve ratio (D) Lowering tax rate (E) Increasing government pending Page 10

11 Demand-Side Policies: Monetary Policies-Questions 14. Which of the following i a monetary policy that can be u ed to counteract a rece ion? (e ) Buying bond in the open market (B Increa ing the di count rate (C Increasing the required re erve ratio (D) Lowering tax rate (E) Increasing government pending Page 11

12 Demand-Side Policies: Monetary Policies-Questions 23. In the short run an expan ionary monetary policy would most likely re ult in which of the following change in the price level and real gro dome tic product (GDP? Price Level (A Decrease (B) No change (C) lncrea e (D) Increa e (E) Increa e Real GDP Increase Decrea e No change Decrea e Increa e 59. Advocates of a monetary rule recommend increa ing the money upply at a rate that i equal to the rate of increa e in which of the following? Page 12 (A) Price level (B) Unemployment rate (C Levelofexport (D Level of imports (E) Long-run real gro domestic product

13 Demand-Side Policies: Monetary Policies-Questions 23. In the short run an expan ionary monetary policy would most likely re ult in which of the following change in the price level and real gro dome tic product (GDP? Price Level (A Decrease (B) No change (C) lncrea e (D) Increa e ce) Increa e Real GDP Increase Decrea e No change Decrea e Increa e 59. Advocates of a monetary rule recommend increa ing the money upply at a rate that i equal to the rate of increa e in which of the following? Page 13 (A) Price level (B) Unemployment rate (C Levelofexport c Level of imports (E) Long-run real gro domestic product

14 Demand-Side Policies: Monetary Policies-Questions 24. Which of the following action by the Federal Re erve of the United tate increa e the money upply? (A Buying government bond on tl1e open market B Selling go ernment bond on the open market C Increa ing the re erve requirement D Increa ing the di count rate (E Increa ing the federal fund rate Page 14

15 Demand-Side Policies: Monetary Policies-Questions 24. Which of the following action by the Federal Re erve of the United tate increa e the money upply? (e Buying government bond on tl1e open market B Selling go ernment bond on the open market C Increa ing the re erve requirement D Increa ing the di count rate (E Increa ing the federal fund rate Page 15

16 This is Macroeconomics -po\icj! rtbe Federa In this chapter we will explain why central banks that are independent from the government may bring about better economic performance. We will examine the complexity of the decision facing the monetary policymaker who is given the independence to make policy decisions, and also consider some policy tools policymakers have at their disposal. Finally, we will look at how governments can choose to restrict their monetary policymakers' freedom by choosing to tie the value of their currency to that of another country's currency. Page 16

17 Whl' Are Central Banks Independent? The most important feature of a central bank is the degree of independence from the government that the law gives it. FED officials are appointed to long terms that may span several different Presidents; the four-year term of the chair of the FED does not necessarily coincide with the term of any President. Therefore, like Supreme Court justices in the United States, FED officials develop an independence from governmental influence. The main rationale for central bank independence is that an independent central bank can prevent the government in power from using monetary policy in ways that appear beneficial in the short run but that can harm the economy in the long run. However, accountability is still critical when it comes to central banks to ensure that their actions aren't taken too far. Congress and the FED often speed up, slow down, or stabilize the economy by using fiscal and/or monetary policy. Actions by Congress to stabilize the economy. Page 17

18 The Fed, the Banks, and the T,ink from Reserves to Deposits Governments, usually through a central bank, control the supply of money. In the U.S., the central bank is the Federal Reserve, nicknamed the "FED." A commercial bank, such as Bank of America or Chase, is a firm that channels funds from individual savers to investors by accepting deposits and making loans. The desire for loans is determined by the real interest rate, the lower the real interest rate, the more loans that will be requested. Banks are commonly ref erred to as financial intermediaries. Banks accept deposits and then lend the funds to others and earn profits by charging an interest rate. Page 18

19 TheFED The central bank of a country serves as the main bank to other banks. In other words, commercial banks, like Chase of TD, deposit funds at the central bank, and the central bank in turn makes loans to other commercial banks, like Bank of America. The FED was established as the central bank for the U.S. in 1913 and as of 2013 had over 21,000 employees spread all over the country. Those who direct the FED are ref erred to as the Federal Reserve Board, or Board of Governors. These seven people are appointed to nonrenewable fourteen year terms by the President and confirmed by the Senate. One of the governors is appointed by the President as the Chairman of the Board. Page 19

20 The District Federal Reserve Banks The Federal Reserve system includes not only the Federal Reserve Board in Washington but also twelve Federal Reserve Banks in different districts around the country. The term "FED" refers to the whole federal reserve system, including the Board of Governors of the twelve district banks. Page 20

21 The Federal Open Market Committee (FOMC) The FED makes decisions about the supply of money through a committee called the Federal Open Market Committee (FOMC). The FOMC meets in Washington eight times a year to decide how to implement monetary policy, such as deciding whether to raise, lower, or keep interest rates steady. When journalists in the press run a story about the FED, they usually talk as if the chair has complete power over FED decisions. Some view the chair of the FED as the most powerful person in America, after the President. Page 21

22 FED Regulation of Monetarl' Policy The FED regulates the money supply by changing any one of the fallowing: 1) open market operations by buying and selling government bonds (short-term loans) from banks, 2) lending money to banks at a discount rate, and 3) setting reserve requirements or reserve ratios) on banks.,,::: /?~~ - ~ &-@..--li.-:- ~,fp~p- 1 4=J,Yd )\) Page 22

23 FED Regulation of Monetarl' Policy (cont.) Open market operations occur when the FED buys or sells government bonds (securities) from banks. This is the most important and widely used monetary policy. To increase the money supply, the FED buys government bonds (securities) from banks and pay for the bonds by electronically increasing the banks' account reserves at the FED (buy==bigger). Banks then have more money to loan to borrowers which influences them to decrease their federal funds rate (the short-term interest rate that banks charge one another on overnight loans). This ultimately decreases the nominal interest rate (the interest rate when inflation isn't taken into account) and the real interest rate that borrowers pay. To decrease the money supply, the FED sells government securities to banks (sell==smaller). The FED then electronically decreases the banks' account reserves at the FED, leaving the banks with less money to lend out. Banks ultimately increase their federal funds rate between banks and finally the nominal interest rate increases increasing the real interest rate. Page 23

24 EED Ref!ulation of Monetarv Policy- Questions 6. When a central bank conduct open -market bond ale the money upply.. intere t rate, and aggregate demand will change in which of the following ways in the hort run? Money Aggregate Supply Interest Rate Demand (A) Decrease Increa e Decrea e (B) Decrease Decrease Increa e (C) Decrease Increa e Increa e (D) Increa e Decrease Increa e (E) Increase Decrea e Decrea e 14. Which of the following i a monetary policy that can be u ed to counteract a rece ion? (A) Buying bond in the open market (B) Increasing the di count rate (C) Increasing the required re erve ratio (D) Lowering tax rate (E) Increasing government pending Page 24

25 EED Ref!ulation of Monetarv Policy- Questions 6. When a central bank conduct open -market bond ale the money upply.. intere t rate, and aggregate demand will change in which of the following ways in the hort run? Money Aggregate Supply Interest Rate Demand (. ) Decrease Increa e Decrea e (B Decrease Decrease Increa e (C) Decrease Increa e Increa e (D) Increa e Decrease Increa e (E) Increase Decrea e Decrea e 14. Which of the following i a monetary policy that can be u ed to counteract a rece ion? (e ) Buying bond in the open market (B) Increasing the di count rate (C) Increasing the required re erve ratio (D) Lowering tax rate (E) Increasing government pending Page 25

26 FED Re2ulation of Monetary Policy-Questions 38. If the central bank buys government bonds from individuals on the open market and bank do not loan out any exce s reserves created by the open market purcha e, which of the fallowing will happen? (A) The money upply will increa se. (B) The money upply will remain unchanged. (C) Loan to the private ector will increa e. (D) Demand deposit will decrea e. (E) The level of actual re erve will decrease. 2. Open market operation take place when the (A) central bank buy or ell tock (B) central bank buy or ell government bond (C) central bank increa e or decrea e the di count rate to monitor the money supply (D) central bank increase or decrea e re erve requirements for depo itory in titution (E commercial bank borrow re erve from the central bank Page 26

27 FED Re2ulation of Monetary Policy-Questions 38. If the central bank buys government bonds from individuals on the open market and bank do not loan out any exce s reserves created by the open market purcha e, which of the fallowing will happen? ce) The money upply will increa se. (B) The money upply will remain unchanged. (C) Loan to the private ector will increa e. (D) Demand deposit will decrea e. (E) The level of actual re erve will decrease. 2. Open market operation take place when the (A) central bank buy or ell tock e) central bank buy or ell government bond (C) central bank increa e or decrea e the di count rate to monitor the money supply (D) central bank increase or decrea e re erve requirements for depo itory in titution (E commercial bank borrow re erve from the central bank Page 27

28 FED Regulation of Monetarl' Policy-Questions 3 7. If the central bank conduct an open-market purcha e of bond, which of the following will occur? Page 28 A The price of bond will increa e. (B The money upply will decrea e. (C Total bank re erve will decrea e. (D Con umption will decrea. E The go ernment will balance it budget 46. If aggregate demand i growing faster than longrun aggregate upply, the Federal Re erve i mo t likely to A ell ecuritie on the open market B increa e bond price C increa e income taxe D decrea e the di count rate E decrea e the required re erve ratio

29 FED Regulation of Monetarl' Policy-Questions 3 7. If the central bank conduct an open-market purcha e of bond, which of the following will occur? Page 29 The price of bond will increa e. (B The money upply will decrea e. (C Total bank re erve will decrea e. (D Con umption will decrea. E The go ernment will balance it budget 46. If aggregate demand i growing faster than longrun aggregate upply, the Federal Re erve i mo t likely to ell ecuritie on the open market B increa e bond price C increa e income taxe D decrea e the di count rate E decrea e the required re erve ratio

30 FED Regulation of Monetarl' Policy-Questions 11. To reduce inflation, the central bank vvould be mo t likely to A decrea e the re erve requirernent B decrea e the income tax rate C) increa e the upply of rn ney D) buy government ecuritie l E ell oovernment ecuritie. Page 30

31 FED Regulation of Monetarl' Policy-Questions 11. To reduce inflation, the central bank vvould be mo t likely to A decrea e the re erve requirernent B decrea e the income tax rate C) increa e the upply of rn ney D) buy government ecuritie l < ell oovernment ecuritie. Page 31

32 FED Regulation of Monetarl' Policy (cont.) The 2nd instrument the FED uses to impact monetary policy is the discount rate. This is the interest rate that the FED charges commercial banks when loaning them money. For example, if Bank of America needs $10 million, they could borrow it from the U.S. Treasury (which the FED controls), but they must pay it back with 3 % interest. To increase the money supply, the FED decreases the discount rate, making it cheaper for banks to borrow money from them. To decrease the money supply, the FED increases the discount rate to make it more expensive for banks to borrow from them. Page 32

33 FED Regulation of Monetarl' Policy (cont.) The 3rd and last instrument the FED uses to impact monetary policy is the reserve requirement or reserve ratio ( deposits x reserve ratio). This is the percent of deposits that banks must hold in reserve at the FED and cannot loan out. The FED sets the amount, the ratio, that banks must hold. If you have a bank account, where is your money? Only a small percent of your money is held in reserve. The rest of your money has been loaned out. This is called "Fractional Reserve Banking." When the FED wants to increase the money supply, the FED decreases the amount of money that banks must hold in reserve. Banks then loan out the excess reserves to make money. As more loans are created, more money flows into other banks allowing other banks to keep making more loans, interest rates fall, and AD increases. This process is called the money multiplier, and it is the expansion of a country's money supply that results from banks being able to lend. To decrease the money supply the FED simply increases the reserve requirement or ratio. Excess reserves are simply extra bank reserves at the FED. Page 33

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36 FED Regulation of Monetarl' Policy (cont.) To calculate the financial impact of a bank's increase in their reserves at the FED: money _ 1 - reserve multiplier ratio *If the reserve requirement is.5% and the FED sells $10 million of bonds: 1) what is the multiplier, 2) will happen to the money supply, and 3) by how much? 1. multiplier= 2, 2. ms decreases, 3. $20 million *If the reserve requirement is.1 % and the FED buys $10 million of bonds: 1) what is the multiplier, 2) will happen to the money supply, and 3) by how much? 1. multiplier= 10, 2. ms increases, 3. $100 million *If the FED decreases the reserve requirement from.50% to.20%, what will happen to the money multiplier and by how much? 1. multiplier gets bigger, from 2 to 5 Page 35

37 The Banks-Questions 42. As ume that Atlantic National Bank has demand depo its of $100,000 and no exces re erve, and that the re erve requirement i 10 percent. A cu tomer withdraw $5 000 from the bank. To meet the reserve requirement, the bank rnu t increase its re erve by Page 31 (A) $500 (B) $1 000 (C) $2,000 (D) $4 000 (E) $ As ume that Linda deposits in her checking account the $1,000 cash he was keeping at home for an emergency. If the required re erve ratio is 0.20 what i the maximum change in the money upply from her depo it? (A) $1,000 (B) $1 250 (C) $2 000 (D) $4 000 (E) $5,000

38 The Banks-Questions 42. As ume that Atlantic National Bank has demand depo its of $100,000 and no exces re erve, and that the re erve requirement i 10 percent. $100,000 - $5,000= $95,000 A cu tomer withdraw $5 000 from the bank. $95,000 / 10 /o = $9,500 Page 32 To meet the reserve requirement, the bank rnu t $5 000 still in reserves = increa se its re erve by needed (A) $500 (B) $1 000 (C) $2,000 (D) $4 000 e) $4 500 $4:soo IC\5 required reserves or initial amount required reserve ratio bank deposits or ending amount 45. As ume that Linda deposits in her checking account the.$_!,000 cash he was keeping at home for an emergency. If the required re erve ratio is 0.20 what i the maximum chan_g~ in the money upply from her deeo ilj (A) $1,000 (B) $1 250 required reserves or initial amount required reserve ratio 0 ~ \) I,,.. r-_,,~.lr---- (C) $2 ooo =.ft 5000-\\ F>')O::. (e ) $ 4 OOO bank deposits or ending amount ' LI. u,o OO (E) $5, ,

39 The Banks-Questions 9. Which of the following i a determinant of the amount of money the cornrnercial banking y tern can create? (A The rnarginal propen ity to con urne B The marginal propen ity to ave C The total number of bank (D The ize of the federal debt (E The re erve requirement 19. A bank ha $ 00 milli n in demand d p it and $100 rnilli n in r rv. If the re, er er quir 1n nt i l Op re nt th bank x r r qual (A) $10 million (B $20 milli n (C $ 0 million (D) $100 milli n (E $200 milli n Page 33

40 The Banks-Questions 9. Which of the following i a determinant of the amount of money the cornrnercial banking y tern can create? (A The rnarginal propen ity to con urne B The marginal propen ity to ave C The total number of bank (D The ize of the federal debt (. The re erve requirement 19. A bank ha $ 00 milli n in demand d p it and $100 rnilli n in r rv. If the re, er er quir 1n nt i IO p re nt th bank x r r qual I, (A) $10 million i'800 rn -,<. \ 0 /o ~ Sl),n $20 milli n (C $ 0 million (D) $100 milli n (E $200 milli n Page 34

41 FED Regulation of Monetarl' Policy-Questions ~ C,I.,l {/) ~ ~~ S1 ~ z ~. ll S Money Demand Page 36 QUANTITY OF MONEY 16. In the United States, which event would ha ve cau ed the hift of the money supply curve from S 1 to S 2 in the money market shown above? (A) The purch ase of gover nment bond on the open market by the Federal Re serve (B ) An incre ase in the required reserve ratio (C) A hort -run increa se in output, employment and income (D) An incre ase in general price level in the United State (E) An incre ase in the upply of dollar in foreign exchange market

42 FED Regulation of Monetarl' Policy-Questions ~ C,I.,l {/) ~ ~~ S1 ~ z ~. ll S Money Demand Page 37 QUANTITY OF MONEY 16. In the United States, which event would ha ve cau ed the hift of the money supply curve from S 1 to S 2 in the money market shown above? The purch ase of gover nment bond on the open market by the Federal Re serve (B ) An incre ase in the required reserve ratio (C) A hort -run increa se in output, employment and income (D) An incre ase in general price level in the United State (E) An incre ase in the upply of dollar in foreign exchange market

43 FED Regulation of Monetarl' Policy-Questions 60. A ume that the re erve requirement for demand depo it i 20 percent that banks hold no exces re erve, and that the public hold no currency. If the central bank ells $10,000 worth of government securitie to commercial bank, the total money upply will Page 38 (A) increa e by $ (B) increa e by $50,000 C) decrease by $ (D) decrease by $ (E notchange 48. If the re erve requirement i 10 percent and the central bank ell $ in government bonds on the open market the money upply will (A) increa e by a maximum of $9 000 (B) increa e by a maximum of $ (C) decrea e by a maximum of $9 000 (D) decrease by a maximum of $10,000 (E) decrease by a maximum of $100,000

44 FED Regulation of Monetarl' Policy-Questions 60. A ume that the re erve requirement for demand depo it i 20 percent that banks hold no exces re erve, and that the public hold no currency. Page 39 If the central bank ells $10,000 worth of government securitie to commercial bank, the total money upply will (A) increa e by $ (B) increa e by $50,000 (C) decrease by $ decrease by $ (E notchange 48. If the re erve requirement i 10 percent and the central bank ell $ in government bonds on the open market the money upply will (A) increa e by a maximum of $9 000 (B) increa e by a maximum of $ (C) decrea e by a maximum of $9 000 (D) decrease by a maximum of $10,000 decrease by a maximum of $100,000

45 FED Regulation of Monetarl' Policy-Questions 40. A commercial bank' ability to create money depend on which of the following? Page 40 (A) The exi tence of a central bank (B) A fractional reserve banking y tern (C) Gold or ilver re erve backing up the currency (D) A large national debt (E) The exi tence of both checking accounts and avings account 46. A ume that the required reserve ratio i 10 percent bank keep no exce s reserve and borrower depo it all loan made by bank. Suppose you have aved $100 in cash at home and decide to depo it it in your checking account. A a result of your deposit the money upply can increa e by a maximum of (A) $800 (B) $900 (C) $1,000 (D) $1 100 (E $1,200

46 FED Regulation of Monetarl' Policy-Questions 40. A commercial bank' ability to create money depend on which of the following? Page 41 (A) The exi tence of a central bank A fractional reserve banking y tern (C) Gold or ilver re erve backing up the currency (D) A large national debt (E) The exi tence of both checking accounts and avings account 46. A ume that the required reserve ratio i 10 percent bank keep no exce s reserve and borrower depo it all loan made by bank. Suppose you have aved $100 in cash at home and decide to depo it it in your checking account. A a result of your deposit the money upply can increa e by a maximum of (A) $800 $900 (C) $1,000 (D) $1 100 (E $1,200

47 FED Re2ulation of Monetary Policy-Questions 40. If the central bank raises the required re erve ratio, the money multiplier and the money upply will change in which of the followin g way? Money Multiplier Money Supply (A) Increa e Increa e (B) Increa se Decre ase ( C) Increa se No change (D) Decrease No change (E) Decrease Decre ase 7. If the central bank hold interest rates con tant an autonomou decrea e of $10 million in investment pending! will most likely result in (A) a decrea e of exactly $10 million in gros domestic product (B) a decrease of more than $10 million in gross domestic product (C) an increase of $10 million in taxe to offset the decrea e in inve tment (D) an increase of $10 million in aggregate supply to offset the decrease in inve tment (E) an increase in the co t of loan for investment Page 42

48 FED Re2ulation of Monetary Policy-Questions 40. If the central bank raises the required re erve ratio, the money multiplier and the money upply will change in which of the followin g way? Money Multiplier Money Supply (A) Increa e Increa e (B) Increa se Decre ase ( C) Increa se No change (D) Decrease No change Decrease Decre ase 7. If the central bank hold interest rates con tant an autonomou decrea e of $10 million in investment pending! will most likely result in (A) a decrea e of exactly $10 million in gros domestic product (. a decrease of more than $10 million in gross domestic product (C) an increase of $10 million in taxe to offset the decrea e in inve tment (D) an increase of $10 million in aggregate supply to offset the decrease in inve tment (E) an increase in the co t of loan for investment Page 43

49 FED Regulation of Monetarl' Policy-Questions 15. If the required re erve ratio i 0.2, a $1 billion increa e in bank re erve can lead to an increa e in M 1 of at mo t Page 44 (A) $6 billion (B) $5 billion (C) $1 billion (D) $0.8 billion (E $0.2 billion 33. A ume that the re erve requirement i 10 percent. Marwa depo it $1 million in ca h into her checking account at Fir t Bank. The depo it will initially increa e exce re erve at First Bank by (A) $100,000 (B) $900,000 (C) $1 million (D) $9 million (E) $10 million

50 FED Regulation of Monetarl' Policy-Questions 15. If the required re erve ratio i 0.2, a $1 billion increa e in bank re erve can lead to an increa e in M 1 of at mo t Page 45 (A) $6 billion (. $5 billion (C) $1 billion (D) $0.8 billion (E $0.2 billion 33. A ume that the re erve requirement i 10 percent. Marwa depo it $1 million in ca h into her checking account at Fir t Bank. The depo it will initially increa e exce re erve at First Bank by (A) $100,000. ) $900,000 (C) $1 million (D) $9 million (E) $10 million