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Chapter 16: Q6. (page 347)

Which of the following Fed actions will increase bank lending?

Select one or moreanswers from the choices shown.

a. The Fed raises the discount rate from 5 percent to 6 percent.

b. The Fed raises the reserve ratio from 10 percent to 11 percent.

c. The Fed lowers the discount rate from 4 percent to 2 percent.

d. The Fed sells bonds to commercial banks.

Short Answer

Expert verified

The correct option, in this case, will be c). The Fed lowers the discount rate from 4 percent to 2 percent.

Step by step solution

01

Step 1. Explanation for the correct option

When the discount rates are reduced, the commercial banks are encouraged to borrow more funds from the Fed. Commercial banks use these excess reserves for lending purposes, thereby increasing bank lending.

02

Step 2. Reasons for the incorrect options

a. This is incorrect because if the discount rates, that is, the rate at which the Fed grants loans to commercial banks, increase, it will reduce the lending.

b. This is incorrect because when the reserve ratio increases, the reserves decrease, and so does lending.

d. This is incorrect because when the Fed sells bonds to commercial banks, it absorbs reserves from them, and lending is reduced.

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Most popular questions from this chapter

Does the Taylor Rule put a higher weight on resolving the unemployment gap or the inflation gap? Explain.

In the tables that follow, you will find consolidated balance sheets for the commercial banking system and the 12 Federal Reserve Banks. Use columns 1 through 3 to indicate how the balance sheets will read after each transaction a to c is completed. Do not cumulate your answers; that is, analyze each transaction separately, starting in each case from the numbers provided. All accounts are in billions of dollars.


\(

Consolidated Balance Sheet:

All commercial banks

1

2

3

Assets


Reserve

Securities

Loans




33

60

60





150

3














Liabilities and net worth:



Checkable deposits

Loans from federal reserve banks


\)

Consolidated Balance Sheet:

The 12 Federal Reserve Banks

1

2

3

Assets


Securities

Loans to commercial banks




60

03





33













Liabilities and net worth:



Reserves of commercial bank


Treasury deposits

Federal reserve notes

3

27






a. A decline in the discount rate prompts commercial banks to borrow an additional \(1 billion from the Federal Reserve Banks. Show the new balance-sheet numbers in column 1 of each table.

b. The Federal Reserve Banks sell \)3 billion in securities to members of the public, who pay for the bonds with checks. Show the new balance-sheet numbers in column 2 of each table.

c. The Federal Reserve Banks buy $2 billion of securities from commercial banks. Show the new balance-sheet numbers in column 3 of each table.

d. Now review each of the previous three transactions, asking yourself these three questions: (1) What change, if any, took place in the money supply as a direct and immediate result of each transaction? (2) What increase or decrease in the commercial banks' reserves took place in each transaction? (3) Assuming a reserve ratio of 20 percent, what change in the money-creating potential of the commercial banking system occurred as a result of each transaction?

The Taylor Rule puts _________ as much weight on closing the unemployment gap as it does on closing the inflation gap.

a. just

b. twice

c. half

d. ten times

What is the basic objective of monetary policy? What are the major strengths of monetary policy? Why is monetary policy easier to conduct than fiscal policy?

A bank currently has \(100,000 in checkable deposits and \)15,000 in actual reserves. If the reserve ratio is 20 percent, the bank has ______ in money-creating potential. If the reserve ratio is 14 percent, the bank has _______ in money-creating potential

a. \(20,000; \)14,000

b. \(3,000; \)2,100

c. −\(5,000; \)1,000

d. \(5,000; \)1,000
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