Chapter 13. The Federal Reserve System: Pre-Class 8. ln-Class Activities Packet NameII.D. Number: Section: Date: Part 3. Discussion Questions and Problems 1. Identify the major responsibilities of the Federal Reserve System. 2. What are the differences between the Fed and the U.S. Treasury? 3. Explain how an open market purchase increases the money supply. 4. Explain how an open market sale decreases the money supply. 5. Suppose bankA borrows reserves from bank B. Now that bankA has more reserves than previously, will the money supply increase? Explain. 6. Explain how a decrease in the required reserve ratio increases the money supply. 7. Explain how a check is cleared through the Federal Reserve System. 8. The Fed can change the discount rate directly and the federal funds rate indirectly. Explain. 9. What does it mean to say the Fed serves as the lender of last resort? 10. Explain how market forces would determine the money supply under free banking. Name/I.D. Number: Section: Date: Part 4. Economic Equations and Graphs 1. If reserves increase by $2 million and the required reserve ratio is 8 percent, 5. If reserves decrease by $3 million and the required reserve ratio is 8 what is the change in the money supply? (In all our questions, we assume no cash percent, what is the change in the money supply? What does the simple leakage and banks hold zero excess reserves.) deposit multiplier equal? 2. If reserves increase by $2 million and the required reserves ratio is 10 percent, 6. If the federal funds rate is 6 percent and the discount rate is 5.1 percent, to what is the change in the money supply? whom will a bank be more likely to go for a loan: another bank or the Fed? 3. If reserves decrease by $4 million and the required reserve ratio is 10 percent, 7. Complete the following table by inserting an upward arrow (1) or what is the change in the money supply? downward arrow (1) next to the letters, A - F: Federal Reserve Action Effect on the Money Supply (up or down?) Lower the discount rate A Conduct open market purchase B 4. Reserves change by $10 million, and the money supply changes by $50 million. What does the simple deposit multiplier equal? What does the required reserve Lower required reserve ratio C ratio equal? Raise the discount rate D Conduct open market sale E Raise the required reserve ratio F 5