Back to Assignment Attempts Keep the Highest / 5 4. Problems and Applications Q2 If the Fed wants to increase the money supply, it can bonds in open-market operations. If the Fed reduces the reserve requirement, the money supply When the Fed decreases the interest rate it pays on reserves, the money supply will When the FOMC decreases its target for the federal funds rate, the money supply will If bankers decide to hold more excess reserves because they are fearful of bank runs, the money supply6. The reserve requirement, open market operations, and the moneysupply Assume that banks do not hold excess reserves and that households do not hold currency, so the only form of money is demand deposits. To simplify the analysis, suppose the banking system has total reserves of $300. Determine the money multiplier and the money supply for each reserve requirement listed in the following table. Reserve Requirement Money Supply (Percent) Simple Money Multiplier (Dollars) 20 10 A higher reserve requirement is associated with a money supply. Suppose the Federal Reserve wants to increase the money supply by $200. Again, you can assume that banks do not hold excess reserves and that households do not hold currency. If the reserve requirement is 10%, the Fed will use open-market operations to $ worth of U.S. government bonds. Now, suppose that, rather than immediately lending out all excess reserves, banks begin holding some excess reserves due to uncertain economic conditions. Specifically, banks increase the percentage of deposits held as reserves from 10% to 25%. This increase in the reserve ratio causes the money multiplier to to . Under these conditions, the Fed would need to $ worth of U.S. government bonds in order to increase the money supply by $200.Which of the following statements help to explain why, in the real world, the Fed cannot precisely control the money supply? Check all that apply. The Fed cannot control whether and to what extent banks hold excess reserves. The Fed cannot control the amount of money that households choose to hold as currency. O The Fed cannot prevent banks from lending out required reserves.5. The money creation process Suppose First Main Street Bank, Second Republic Bank, and Third Fidelity Bank all have zero excess reserves. The required reserve ratio is 10%. Shen, a client of First Main Street Bank, deposits $500,000 into his checking account at First Main Street Bank. Complete the following table to reflect any changes in First Main Street Bank's T-account (before the bank makes any new loans). Assets Liabilities Complete the following table to show the effect of a new deposit on excess and required reserves when the required reserve ratio is 10%. Hint: If the change is negative, be sure to enter the value as negative number. Amount Deposited Change in Excess Reserves Change in Required Reserves (Dollars) (Dollars) ( Dollars) 500,000Now, suppose First Main Street Bank loans out all of its new excess reserves to Poornima, who immediately uses the funds to write a check to Manuel. Manuel deposits the funds immediately into his checking account at Second Republic Bank. Then Second Republic Bank lends out all of its new excess reserves to Antonio, who writes a check to Valerie, who deposits the money into her account at Third Fidelity Bank. Third Fidelity lends out all of its new excess reserves to Caroline in turn. Fill in the following table to show the effect of this ongoing chain of events at each bank. Enter each answer to the nearest dollar. Increase in Deposits Increase in Required Reserves Increase in Loans (Dollars) (Dollars) (Dollars) First Main Street Bank Second Republic Bank Third Fidelity Bank Assume this process continues, with each successive loan deposited into a checking account and no banks keeping any excess reserves. Under these assumptions, the $500,000 injection into the money supply results in an overall increase of in demand deposits. Grade It Now Save & Continue Continue without saving