question archive Assume the banking system contains the following amounts: Total reserves $90 billion Transactions deposits $900 billion Cash held by public $100 billion Reserve requirement 0
Assume the banking system contains the following amounts: Total reserves $90 billion Transactions deposits $900 billion Cash held by public $100 billion Reserve requirement 0
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Assume the banking system contains the following amounts:
| Total reserves | $90 billion |
| Transactions deposits | $900 billion |
| Cash held by public | $100 billion |
| Reserve requirement | 0.10 |
What three steps could the Fed take to offset that potential growth in M1?
O Raise the reserve requirement, raise he discount rate, and use open market purchases.
O Lower the reserve requirement, raise the reserve requirement, and use open market sales.
O Lower the reserve requirement, raise the discount rate, and use open market sales.
O Raise the reserve requirement, raise the discount rate, and use open market sales.
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- The correct option is Raise the reserve requirement, raise the discount rate, and use open market sales.
There are different ways by which the Fed can offset the potential growth of M1 such as:
1. Open market selling of securities so the investors will have less money to invest in the market.
2. Raising the reserve requirement so the amount for the security reserve raises and the amount left for lending falls.
3. Raising the discount rate so that lending in the economy will become expensive.
