Question

Explain how each of the following events affects the monetary base, the money multiplier, and the money supply. The Federal Reserve buys bonds in an open-market operation. The Fed increases the interest rate it pays banks for holding reserves. The Fed reduces its lending to banks through its Term Auction Facility. Rumors about a computer virus attack on ATM machines increase the amount of money people hold as currency rather than demand deposits. The Fed flies a helicopter over 5th Avenue in New York City and drops newly printed $100 bills.

Answer 1

(1) The money it pays will increase the monetary base and money supply.

(2) Reserve-deposit ratio will increase,the money multiplier and money supply will reduce.

(3) The monetary base and money supply will reduce.

(4) money multiplier and money supply will reduce,currency-deposit ratio will increase.

(5) Money supply and monetary base will increase and the money multiplier will be the same.

Explanation: Money supply is the amount of money that is released into the economy through, Government projects,through private investments etc

Monetary base is the total amount of money in circulation within an economy.

Money multiplier is a term used to describe the various investments that leads to an increase in the total value of the invested money.

Reserve-deposit ratio is the fraction of ban deposits that banks keeps as Reserve (money not to be lend out).