You can click on the following link to download the problem set for this module: Monetary Policy Problem Set.

Monetary Policy Problem Set[1] 

1. Suppose the Fed decreases the discount rate.
   As a result of this policy, what will happen to the money supply (select one)?
   1. Money Supply increases.
   2. Money Supply decreases.
   3. Money Supply stays the same.

2. Consider the following balance sheet for Bank of America.

Suppose that someone deposited $100 at Bank of America.

Given this data, what is the minimum amount by which the money supply will increase?

Use the following information to answer questions 3 and 4:

Suppose that the Fed conducts a $110 million open market purchase of government bonds.

In addition, suppose that the required reserve ratio (R) is 42 percent and that banks do not hold any excess reserves.

3. What is the money multiplier?

4. What is the effect on the money supply? More precisely, by how much will the money supply increase?

Use the following information to answer questions 5 through 8:

Assume that the banking system has total reserves of $882 billion.

Assume also that required reserves are 42 percent and that banks do not hold any excess reserves and households hold no currency.

5. What is the money multiplier?

6. What is the level of deposits?

7. Now suppose that the Fed decreased the required reserves to 33.6. What is the new multiplier?

8. If the Fed decreases the required reserves to 33.6, what is the level of excess reserves? Make sure to include a negative sign if necessary.

9. If the Fed wishes to conduct expansionary monetary policy, it should (select one)
   1. Increase required reserve ratio
   2. Decrease required reserve ratio
   3. Sell T-Bills.
   4. Decrease taxes. 

10. If the Fed wishes to conduct contractionary monetary policy, it should (select one)
    1. Decrease required reserve ratio.
    2. Buy T-bills.
    3. Sell T-Bills.
    4. Increase taxes.

11. Suppose the Fed decreases the discount rate.
    As a result of this policy, what will happen to the interest rates (select one)?
    1. Interest rates will decrease.
    2. Interest rates will increase.
    3. Interest rates will stay the same.

12. Suppose the Fed decreases the discount rate.
    As a result of this policy, what will happen to the Aggregate Demand (AD) (select one)?
    1. AD will shift to the right.
    2. AD will shift to the left.
    3. AD will stay the same.

13. Suppose interest rates increase.
    As a result of this, what will happen to consumption (C) and investment (I) (select one)?
    1. C will increase and I will decrease.
    2. Both C and I will increase.
    3. C and I will not change.
    4. Both C and I will decrease.
    5. C will decrease and I will increase.

14. Suppose the Fed decreases the discount rate.
    As a result of this policy, what will happen to price level and GDP in the short-run (select one)?
    1. Price level will increase while GDP will decrease.
    2. Price level will decrease while GDP will increase.
    3. Neither price level nor GDP will change.
    4. Both price level and GDP will decrease.
    5. Both price level and GDP will increase.
    6. Price level will increase while GDP will remain the same.