How does the reserve requirement impact the banking system as a monetary policy tool, and is it used frequently?
What will be an ideal response?
A change in the reserve requirement changes excess reserves and the money multiplier, both of which affect the lending capacity of the banking system. These changes combined can lead to extreme changes in the money supply and disruptions in banking activity. For these reasons, the Fed does not change the reserve requirement frequently. The reserve ratio affects every bank, whereas the discount rate affects only banks in reserve holdings trouble. Open market operations have an even smaller effect on the economy.
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Other things equal, if foreign holdings of U.S. dollars decrease,
A) the balance on the U.S. current account will decrease. B) the balance on the U.S. financial account will decrease. C) the balance on the U.S. capital account will decrease. D) the U.S. balance of payments will decrease.
A monopolistically competitive firm maximizes profits when it
A) produces the quantity at which marginal cost equals the market price. B) produces the quantity at which marginal cost equals marginal revenue and uses the demand curve to determine the market price. C) produces the quantity at which marginal cost equals marginal revenue and sets the price equal to the marginal cost. D) produces the quantity at which marginal cost equals marginal revenue and sets the price equal to the marginal revenue.