Reference no: EM13697505

3) Assuming that banks used all their excess reserves to support an increase in the volume of bank lending, by how much would bank lending expand if the Fed undertook the policy action that was your answer to question (2) ?
Since we know banks do not have any excess reserves, we can assume that the volume of bank lending will increase by 990 million minus the amount banks are asked to keep, in this case 1/11= 90 billion. So, the volume of money that will be loanable is $900 million.

4) Suppose that households in the U.S. increased their desired holdings of currency by $55 million as the Fed was adding reserves to the banking system. How would your answer to question (2) be affected, assuming that the Fed still wished to generate an increase of $990 million in checking account deposits?

5) Suppose that households in the US switched some of their wealth out of their checking accounts and into short term bank CD's. If banks use all excess reserves to support increased lending, what is the effect on this household behavior on the overall volume of bank lending? What is its effect on the level of M1?
6) What is the difference between the Federal Reserve's "discount rate" and the "federal funds" rate? Why is the discount rate in the US not as important in financial markets as the federal funds rate?
7) Why is it not possible for the Fed to predict exactly how large an increase in the money supply (M1) will result from a given open market purchase.