ili BUSN 3320 Money and Banking Class I - QUESTION 3 1. Open market purchases conducted by the Federal Reserve Bank of New York lead to an increase in bank reserves. For every $1 increase in bank reserves the money supply will increase by $1/2. True False QUESTION 4 1. Bank W borrows $10 million from the Federal Reserve and lends out $8 million to firm X and keeps $2 million in vault cash. Firm X deposits $6 million in a checking account at Bank Y and bank Y lends out $5 million to Firm Z. Firm Z buys farm equipment with the $5 million. The farm equipment manufacturer spends the $5 million money on parts, rent, labor, interest and dividends. $4 million of the farm equipment expenditures end up in checking accounts at various banks. These banks lend out three million to other small businesses that ends up in checking accounts at other banks. The initial loan to bank W by the Fed: C Did not change the money supply. Loans to banks by the Fed are not open market operations so they do not increase the money supply. Increased the money supply by less than $10,000,000. Increased the money supply by more than $10,000,000