3 Assume that the Fed has established a minimum reserve requirement of 25 % and
ID: 1097350 • Letter: 3
Question
3 Assume that the Fed has established a minimum reserve requirement of 25 % and the banking system has no current excess reserve. If the Fed buys $25 billion worth of treasury bonds in the open market, briefly explain what can ultimately happen to the lending capacity of the banking system if all hanks lend to their capacity? 4. Assume the solid curse represents the current production possibilities for an economy. CONSUACTION GOODS a. Identify on the graph a movement between two points that would demonstrate short-run increase in capacity utilization. Briefly explain. b. Identify on the graph a movement between two points that would demonstrate long-run economic growth. Briefly explain.Explanation / Answer
3). Reserve requirement is 25 %
Deposit multiplier = 1/r
= 1/.25
=4
Banks getting money in form of Treasury bonds =$25 billion
Total Increase in the capacity = 25*4
= $100 billion
4).
a). A point indicates the under utilization of capacity. Hence Movement from the A to the B indicates the increase in the capacity utilization
b). Shifting of Production Possibilities curve (PPC) indicates the economic growth. Movement from D to C shows the economic growth
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