Question 5

5. The Federal Reserve's organization The interest rate on reserves is the interest rate that the Fed pays banks for holding reserves on deposit at the Fed. For many years, open market operations were the Fed's primary tool for monetary policy. However, since October 2008, it relies more on interest on reserves. An increase in the interest rate on reserves tends to encourage banks to hold reserves. Grade It Now Save & Continue8. The reserve requirement, open market operations, and the money supply Consider a system of banking in which the Federal Reserve uses required reserves to control the money supply (as was the case in the United States before 2008). Assume that banks do not hold excess reserves and that households do not hold currency, so the only money exists in the form of demand deposits. To further simplify, assume the banking system has total reserves of $300. Determine the money multiplier as well as the money supply for each reserve requirement listed in the following table. Reserve Requirement Money Supply (Percent) Simple Money Multiplier ( Dollars) 5 10 A higher reserve requirement is associated with a V money supply. Suppose the Federal Reserve wants to increase the money supply by $200. Maintain the assumption 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. O The Fed cannot control the amount of money that households choose to hold as currency. The Fed cannot control whether and to what extent banks hold excess reserves. The Fed cannot prevent banks from lending out required reserves. Grade It Now Save & Continue9. Bank leverage Use the information given in North Central National Bank's balance sheet to answer the following questions. Bank's Balance Sheet Assets Liabilities and Owners' Equity Reserves $100 Deposits $1,000 Loans $500 Debt $50 Securities $400 Capital (owners' equity) $50 Suppose the owners of the bank contribute an additional $125 from their own funds and use it to buy securities in the name of the bank. This would increase the securities account and the account. This would also bring the leverage ratio from its initial value of to a new value of Which of the following statements regarding the capital requirement is true? Check all that apply. O It's intended goal is to protect the interests of those who hold equity in the bank. O The higher the percentage of assets a bank holds as loans, the higher the capital requirement. O It specifies a minimum leverage ratio for all banks. Grade It Now Save & Continue