What is meant by an open market purchase It is the purchase

What is meant by an open market purchase? It is the purchase of goods and services by the federal government in open markets. It is the purchase of foreign goods by the citizens of a country in open international markets. It is the purchase of corporate bonds by commercial banks in open bond markets. It is the purchase of corporate bonds by the Treasury Department in open markets. It is the purchase of corporate bonds by the Fed in open markets. It is the purchase Treasury bonds by the Treasury Department in open markets. It is the purchase of Treasury bonds by the Fed in open markets. None of the above.

Suppose the Fed purchases $1,000 worth of Treasury bonds. Suppose also that the required reserve ratio is 10%. How much money will be created in the banking system? Exactly $1,000 Less than $1,000 for sure At most $1,000 More than $1,000.

Suppose the Fed purchases $1,000 worth of Treasury bonds. Suppose also that the required reserve ratio is 10%. What will be the maximum potential amount of money created in the economy (In other words, at most this much will be created in the system, maybe less but certainty not more)? $1,000 $1,,100 $10,000 $11,000 None of the above

Even though this does not happen often, if the Fed reduces the required reserve ratio, the supply of money will increase. True False

What is the definition of demand for money? The amount of reserves banks want to hold in their Fed accounts.. The amount of money people are willing and able to borrow from banks. The amount of money people actually hold in the form of currency and demand deposits. The portion of their total wealth people want to allocate to money. None of the above.

Solution

(1) Open market purchase is the purchase of Treasury bonds by the Fed in open markets.

(2) Additional money created = $1,000 x (1 - reserve ratio) = $1,000 x 0.9 = $900

This is less than $1,000

(3) Maximum additional money created = $1,000 / Reserve ratio = $1,000 / 0.1 = $10,000

(4) True

Increase in money supply = New deposits / Reserve ratio

As reserve ratio falls, money supply increases more.

(5) The amount of money people actually hold in the form of currency and demand deposits.