7 Which of the following is correct a The Fed can precisely

7) Which of the following is correct?

a) The Fed can precisely target the money supply because it can exactly determine the money

multiplier.

b) The Fed can precisely target the interest rate because it can exactly determine the money

multiplier.

c) The Fed cannot precisely target the money supply because it cannot exactly determine the

money multiplier.

d) The Fed cannot precisely target the supply of reserves because it cannot exactly determine

the money multiplier.

e) c and d.

8) If the rate of required reserves is 0.1, then the money multiplier is approximately

a) 5

b) 4

c) 10

d) 0.1

9) If the rate of required reserves is 0.2, then

a) A 2 percent increase in the interest rate increases the money supply by 4 percent.

b) A 2 percent increase in the interest rate decreases the money supply by 4 percent.

c) A 1 dollar increase in the reserves increases the money supply by 5 dollars.

d) A 1 dollar increase in the money supply increases the reserves by 5 do

Solution

Question 7

Fed has no control over how much currency households would be willing to hold as well as how much of excess reserves will the bank will be willing to keep with them and not lend.

These two elements impact the value of money multiplier.

So,

The Fed cannot precisely target the money supply because it cannot exactly determine the money multiplier.

Hence, the correct answer is the option (c).

Question 8

Required reserve ratio (rr) = 0.1

Money multiplier = 1/rr = 1/0.1 = 10

Thus,

The money multiplier is approximately 10.

Hence, the correct answer is the option (c).

Question 9

Required reserve ratio (rr) = 0.2

Money multiplier = 1/rr = 1/0.2 = 5

This value of money multiplier indicates that 1 dollar increase in the reserve increases the money supply by 5 dollars.

Hence, the correct answer is the option (c).