Question

Fill in the blanks:

1. When the Fed increases the interest rate it pays on reserves, the money supply will __________.
2. When the FOMC increases its target for the federal funds rate, the money supply will __________.
3. If people decide to hold less currency after a rash of pickpocketing, the money supply __________ .

Answer 1

1. Decrease

2. Decrease

3. Decrease

Step-by-step explanation:

1. When the Fed increases the interest rate it pays on reserves, the money Supply will Decrease

This is because when Fed increases the interest rate paid on the reserves, this will result in further needs of banks in form of incentive to hold more reserves in comparisons to the deposits. Thus will decrease money multiplier and finally will lead to decrease in money supply.

2. When the FOMC increases its target for the federal funds rate, the money Supply will Decrease

When target for the federal fund rate is increased, this means that the banks must loan out a smaller proportion of their cash relative to before the federal fund rate had been increased. The money will be kept in the accounts and thus money supply will decrease.

3. If people decide to hold less currency after a rash of pick pocketing, the money Supply will Decrease

This is due to the fact that when currency is less held by people then the money will be kept in financial institution for the purpose of savings or securing and the supply of money will fall.