Question

the fed has regulatory power and can change the reserve ratio requirement for banks. If the fed lowers the reserve ratio requirement which of the following are true? (select all that apply)

a. the money multiplier will also be cut in half

b. the fed is potentially trying to stimulate the economy

c. this will have no effect on bank behavior

d. the fed is encouraging banks to lend more

in regards to solvency and liquidity which of the following are true? (select all that apply)

a. by definition an illiquid bank must also be insolvent

b. by definition and insolvent bank has assets>liabilities

c. by definition an illiquid bank can cover its liabilities in the long run

d. by definition an insolvent bank is also illiquid

Answer 1

1) option B and D are correct . As fed lowers the reserve ration requirement bank will left with more money to lend and hence money creation will increase and stimulate the economy

2) option D is correct . Solvency is a long run concept and liquidity is a short run concept . An illiquid bank may or may not be insolvent but an insolvent bank must be illiquid .