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

## Monetary Policy Problem Set**[1]**** **

- Suppose the Fed decreases the discount rate.

As a result of this policy, what will happen to the money supply (select one)?- Money Supply increases.
- Money Supply decreases.
- Money Supply stays the same.

- Consider the following balance sheet for Bank of America.

Assets | Liabilities | ||

Reserves | 882 | Deposits | 2100 |

Loans | 1218 |

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.

- What is the money multiplier?

- 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.

- What is the money multiplier?

- What is the level of deposits?

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

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- 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.

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

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

- Suppose the Fed decreases the discount rate.

As a result of this policy, what will happen to the interest rates (select one)?- Interest rates will decrease.
- Interest rates will increase.
- Interest rates will stay the same.

- Suppose the Fed decreases the discount rate.

As a result of this policy, what will happen to the Aggregate Demand (AD) (select one)?- AD will shift to the right.
- AD will shift to the left.
- AD will stay the same.

- Suppose interest rates increase.

As a result of this, what will happen to consumption (C) and investment (I) (select one)?- C will increase and I will decrease.
- Both C and I will increase.
- C and I will not change.
- Both C and I will decrease.
- C will decrease and I will increase.

- 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)?- Price level will increase while GDP will decrease.
- Price level will decrease while GDP will increase.
- Neither price level nor GDP will change.
- Both price level and GDP will decrease.
- Both price level and GDP will increase.
- Price level will increase while GDP will remain the same.

[1] This assignment by Lumen Learning is licensed under a Creative Commons Attribution 4.0 International License. You can access an alternative means to plotting points at https://www.desmos.com/calculator.