Suppose that, for every 1 percentage point decline of the discount rate, commercial banks collectively borrow an additional $2 billion from Federal Reserve Banks. Also assume that the reserve requirement is 20%. If the Fed increases the discount rate from 4.0% to 4.25%, bank reserves will ________.
A. increase by $0.75 billion and the money supply will increase by $3.75 billion
B. increase by $1 billion and the money supply will increase by $5 billion
C. decline by $0.5 billion and the money supply will decline by $2.5 billion
D. increase by $0.5 billion and the money supply will increase by $2.5 billion
Answer: C
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A) 100 percent. B) 50 percent. C) 25 percent. D) 0 percent.
As president and CEO of MegaWorld industries, you must decide on some very risky alternative investments:
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In an open economy, the government deficit is 400 and investment exceeds saving by 300, so in equilibrium the trade deficit (IM ? X) must be
a. 100. b. 200. c. 300. d. 700.
The forward exchange market:
a. Is a market with no default risk. b. Is the market for current deliveries but future payments. c. Handles transactions for individuals or companies who would like to reduce foreign exchange risk by locking in exchange rates now. d. Is the market for current delivery.