Question

Suppose the money supply (as measured by deposits) is currently $250 billion. The reserve requirement is 20%. Bank holds $50 billion in reserves, so there are no excess reserves.

 

The federal reserve ("the fed") wants to increase the money supply by $25 billion, to $275 billion. It could do this through open market operations or by changing the reserve requirement. Assume for this question that you can use the deposit expansion multiplier.

 

1. If the fed wants to increase the money supply using open market operations it should ___(buy/sell) _____worth of U.S. government bonds.

A. 5.0 billion

B. $275 billion

C. $50 billion

D. $200 billion

 

2. Banks, as financial intermediaries, create value for depositors such as Yvette by doing which of the following? (Check all that apply)

A. Create networks

B. Keep credit rates low pay interest

 

Match the correct motive for holding money to the following definitions:

A. Transactions demand for money

B. Precautionary demand for money

C. Speculative demand for money

 

3. The stock of money people hold to pay unpredictable expenses

 

4. The stock of money people hold to pay everyday predictable expenses

 

5. The stock of money people hold to take advantage of future changes in the price of non-money financial assets

 

Identify the motive for holding money in the following scenario.

 

6. Brain recently moved from a commission-based sales job.