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Money Supply and Government Expenditure

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Solution Summary

The solution determines the money supply and government expenditure.

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1. Choose the Letter or Combination of Letter for those 2 questions

A. FED buys U.S government securities
B. FED Sells U.S government securities
C. FED lowers the discount rate.
D. FED raises the discount rate.
E. FED lowers the reserve ratio.
F. FED raises the reserve ratio.

I. Which of the above would increase or tend to increase the money supply?__A, C, E__

A. FED buys U.S government securities from the open market and pays money to the individuals. Then people have more money at hand and the money supply is increased.
C. Discount rate is the interest rate that private banks pay to borrow from the FED. When it is lowered, banks are more willing to borrow money and loan to the companies. Then the money supply is increased.
E. Reserve ratio refers to minimum reserves banks must hold. When reserve ratio is low, the commercial banks can loan out more of its deposit to the private companies. Then the FED increases money supply by lowering reserve ratio
II. Which of the above would decrease or tend to decrease the money supply?__B, D, F_
B. FED sells U.S government securities to the open market and receives money from the individuals. Then people have less money ...

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