The Fed conducts an open market operation and buys 50,000 of ...

[schs14]

The Fed conducts an open market operation and buys 50,000 of government securities from Commerce Bank. The desired reserve ratio is 25 percent. What is the change in Commerce Bank's total reserves and its excess reserves?
 
  What will be an ideal response?

Question 2

The real interest rate is ________ related to the supply of loanable funds because ________.
 
  A) negatively; the opportunity cost of consumption expenditure increases as the real interest rate rises
  B) negatively; people are motivated to save more as the real interest rate rises
  C) positively; people are motivated to increase their consumption expenditure as the real interest rate rises
  D) positively; the opportunity cost of consumption expenditure increases as the real interest rate rises
  E) None of the above answers is correct.

[peter]

Answer to Question 1

When the Fed buys 50,000 of government securities from Commerce Bank, Commerce Bank's total reserves increase by 50,000. None of these reserves are desired reserves, so Commerce Bank's excess reserves also increase by 50,000.

Answer to Question 2

D

[schs14]

Excellent

[sailorcrescent]

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