Financial Sector

Question 1

What is the discount rate as a monetary policy?

Answer 1

The interest rate commercial banks must pay to borrow from central bank

Question 2

What happens to the money supply in lower reserve ratio?

Answer 2

Increase money supply

Question 3

What are Open Market Operations (OMO)?

Answer 3

Fed purchasing/selling of bonds (securities)

Question 4

The consequence of the Fed buying a bond is what?

Answer 4

Increase money supply

Question 5

Recite the money multiplier equation

Answer 5

1 / Required reserve ratio

Question 6

What are the assumptions of the money multiplier?

Answer 6

1. Banks hold no excess reserves
2. Borrowers spend their entire loans
3. Customers hold no cash

Question 7

What are two shifters in demand for loanable funds?

Answer 7

1. Expectations
2. Government borrowings

Question 8

What are two shifters in supply for loanable funds?

Answer 8

1. Private savings behavior
2. Capital flows (inflow shifts supply to the right)

Question 9

Would the demand for loanable funds shift left or right if a government runs a budget deficit and wants to fix said issue?

Answer 9

Shift right

Question 10

Define loanable funds

Answer 10

Funds from household savings and/or bank loans available for borrowing