- In a recent economic forum meeting, Jason Federmeyer of the Bank of Detroit, and Lawrence Lobovsky of the Bank of Tulsa, were discussing the demand for money and how it has changed over the years. Federmeyer made the following two statements to Lobovsky: Statement 1: Financial innovation has significantly affected the demand for money. The increased use of credit cards and debit cards, interest-bearing checking accounts, internet banking and even the large number of ATMs around the world have all helped to increase the demand for money above what it would have been if only the increase in real GDP were at work. Statement 2: Although the quantity of money demanded is largely determined by interest rates, the supply of money is determined by the central bank and is independent of interest rates. Are Statement 1 and Statement 2 as made by Federmeyer correct? Statement 1 Statement 2 A) Incorrect Incorrect B) Correct Incorrect C) Correct Correct D) Incorrect Correct 2. At a recent conference “The Fed – Where is it Going?”, Jason Alexdrovitch was discussing the policy tools that the U.S. central bank uses to control the money supply. During the conference he made the following statements: Statement 1: If the Fed wanted to use all of its three major monetary policy tools to increase the money supply, the Fed would sell bonds, reduce the discount rate and increase bank reserve requirements. Statement 2: If commercial banks are increasing their borrowings from the Federal Reserve banks, while the Fed is selling government securities, the borrowing of the commercial banks from the Fed will offset the effects of open market operations. Are Statement 1 and Statement 2 as made by Alexdrovitch correct? Statement 1 Statement 2 A) Incorrect Correct B) Incorrect Incorrect C) Correct Incorrect D) Correct Correct
You love your questions, cavil Imo: 1.D Statement 1: These things have REDUCED demand for money Statement 2: Agree 2.A Statement 1: Buy bonds & reduce reserve required Statement 2: Agree???
Man, somebody has been reviewing econ today … : )
D and B. Overall, the commercial bank borrowing will have a stronger effect and not be offset by the govt. selling securities. Banks are going to use that money to make loans, they’re not going to let that money sit in cash, that increases the money supply. Govt. sells securities (often below par value), different maturities (if the money supply initially decreases, short term securities maturing quickly will reverse that effect). My 2 cents.
- D Overall, financial innovation has reduced the demand for money below what it would have been if only the increase in real GDP was at work. The demand for money is determined, for the most part, by interest rates. However, the quantity of money supplied is determined by the central bank and is independent of the interest rate. 2. A If the Fed wanted to use all of its three major monetary control tools to increase the money supply, the Fed would buy bonds, decrease the discount rate, and decrease the bank reserve requirements. Each of these actions would inject more money into the banking system. When the Fed is selling government securities they are taking money out of the banking system thereby decreasing the money supply. But, if commercial banks are increasing their borrowings from the Fed, more money is being injected into the banking system. This increase in the money supply will offset the effects of the Fed’s open market operations.
“Statement 2: If commercial banks are increasing their borrowings from the Federal Reserve banks, while the Fed is selling government securities, the borrowing of the commercial banks from the Fed will offset the effects of open market operations.” Can someone explain how that would be correct? If a bank is borrowing more money to lend, it has to keep some in required reserves. So the money multiplier effect [(1+c)/(r+e+c)] is not as strong for money changed at banks than in Fed open market operations, correct?
In this instance I think your over thinking it. I interpret the statement as basically saying “the effects work in opposite directions”; correct/incorrect