Indicate which of the following statements are true and which are false; if fals
ID: 1108497 • Letter: I
Question
Indicate which of the following statements are true and which are false; if false, explain why.
a. If the reserve ratio of a bank falls below the level required by the Fed, it may borrow cash from the Fed at the reigning discount rate.
b. The purchase of government securities (i.e. bonds and bills) from the public by the Fed will begin a contraction in commercial bank credit.
c. If money is to remain generally acceptable as a medium of exchange, and to act as a unit of account and store of value, then it must consist of something that is useful and desirable for its own sake.
d. If a bank is loaned up (i.e. has no excess reserves above the legal minimum), this means its loans equal its deposits.
e. The demand for money will be higher when incomes are higher, and will be lower when interest rates are lower.
f. Inflation always benefits debtors and hurts creditors.
g. Nobody gains when pure, perfectly anticipated inflation occurs. But nobody loses either.
Explanation / Answer
(a) False because Fed bank only refinance those banks which keep reserve ratio as per norms.
(b) False because purchase of securities from public would increase the money supply with people and they will deposit with commercial banks . Thus expansion in credit.
(c) False It is not necessary .Now a days paper currency is in circulation which has no value
(d) False Loans are not equal to deposit. Always it is higher because by derived deposit banks can give loan more than deposit.
(e) False Because when interest rate is low than demand for money would increase.
(f)True. Because purchasing power of money go down so in future creditors would receive the same amount with less purchasing power.
(g) False Inflation does the work of lubrication in the economy So every one benefitted.