Question
Please help with this macroeconomics question: Suppose that the reserve requirement for checking deposits is 12% and that banks do not hold any excess reserves.
Please help with this macroeconomics question:
Suppose that the reserve requirement for checking deposits is 12% and that banks do not hold any excess reserves.
a) If the Fed sells $2 million of government bonds, what is the effect on the economy's reserves and money supply?
b) Now, suppose that the Fed lowers the reserve requirement to 6%, but banks choose to hold another 6% of deposits as excess reserves. Why would banks choose to want this? What is the overall change in the money multiplier and the money supply as a result of these actions?
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