Question
The reserve requirement, open market operations, and the money supply Assume that banks do not hold excess reserves and that households do not hold currency,
The reserve requirement, open market operations, and the money supply
Assume that banks do not hold excess reserves and that households do not hold currency, so the only form of money is checkable deposits. To simplify the analysis, suppose the banking system has total reserves of $500.
Determine the simple money multiplier and the money supply for each reserve requirement listed in the following table.
Reserve Requirement | Simple Money Multiplier | Money Supply |
---|---|---|
(Percent) | (Dollars) | |
5 | ||
10 |
A lower reserve requirement is associated with a ______(SMALLER/LARGER) money supply.
Suppose the Federal Reserve wants to increase the money supply by $200. Again, you can assume that banks do not hold excess reserves and that households do not hold currency
. If the reserve requirement is 10%, the Fed will use open-market operations to _____(BUY/SELL)$ ________worth of U.S. government bonds.
Now, suppose that, rather than immediately lending out all excess reserves, banks begin holding some excess reserves in response 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 multiplier to _____(RISE/FALL) to _______ .
Under these conditions, the Fed would need to ________(BUY/SELL) $___________worth of U.S. government bonds in order to increase the money supply by $200.
Which of the following statements helps to explain why, in the real world, the Fed cannot precisely control the money supply? CHECK ALL THAT APPLY.
A.The Fed cannot control the amount of money that households choose to hold as currency.
B.The Fed cannot control whether and to what extent banks hold excess reserves.
C. The Fed cannot prevent banks from lending out required reserves.
NOTE - THIS QUESTION IS A ONE QUESTION BUT IT IS DIVIDED INTO SUBPARTS. PLEASE ANSWER ALL SUBPARTS WITH AN EXPLANATION.
Step by Step Solution
There are 3 Steps involved in it
Step: 1
Get Instant Access with AI-Powered Solutions
See step-by-step solutions with expert insights and AI powered tools for academic success
Step: 2
Step: 3
Ace Your Homework with AI
Get the answers you need in no time with our AI-driven, step-by-step assistance
Get Started