How effective is discount policy as compared to open market operations in managing the money supply? Explain how The Federal Reserve uses discount policy today
What will be an ideal response?
The effectiveness of discount policy in changing the money supply depends upon banks' willingness to borrow reserves. The Fed may lower the discount rate of interest, encouraging bankers to borrow reserves and increase loans. But bankers are not required to increase their borrowing. In contrast, an open market purchase of securities will increase reserves in the banking system and encourage lending. The Fed prefers to limit the use of discount policy to help banks that are temporarily in need of reserves. That is, the Fed uses the policy to serve as a lender of last resort for banks. It did so after the stock market crash in 1987 and after the terrorist attacks on September 11, 2001.
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If the entire banking system has total deposits of $4 billion and a reserve requirement of 5 percent, then the maximum possible amount of loans that the banking system can make equals $2 million
a. True b. False Indicate whether the statement is true or false
Keynesian economists believe that changes in GDP result primarily from changes in
a. aggregate supply and aggregate demand, both contributing equally b. aggregate supply c. aggregate demand d. monetary policy e. fiscal policy
If Japan imposes a quota on imports of rice, the effect will be
A. less rice and higher price in Japan, lower rice prices in exporting countries. B. more rice and higher price in Japan, higher rice prices in exporting countries. C. less rice and lower price in Japan, higher rice prices in exporting countries. D. more rice and lower price in Japan, lower rice prices in exporting countries. E. less rice and higher price in Japan, higher rice prices in exporting countries.
Given a downward-sloping linear demand curve, if total revenue decreases as quantity rises, marginal revenue must be:
A. Positive and demand is elastic B. Negative and demand is elastic C. Positive and demand is inelastic D. Negative and demand is inelastic