Due on Nov 16 ar 11 59 PM EST Assume that banks do not hold excess reserves and

Question

Due on Nov 16 ar 11 59 PM EST 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 the analysilk, suppose the barsking system has total reserves of $400. Determine the money multiplier and the money supply for each reserve simplify requirement listed in the following table Money Supply (Percent) A higher reserve requiremert 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 of U.S. government bonds. worth Now, suppose that, rather than immediately lending out all excess reserves, banks begin holding some excess reserves due to uncertain economic condtions. seedkal. banks increase the centage 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 government bonds in order to increase the money supply by $200 worth of u.S. 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 prevent banks from lending out required e a

Explanation / Answer

1. Money multiplier when RR is 20% = 1/0.2 = 5

Money supply = Reserves x Money multiplier = $ 400 x 5 = $ 2000

2. Money multiplier when RR is 10% = 1/0.1 = 10

Money supply = $ 400 x 10 = $ 4000

3. Lower

4. Buy; $ 20 worth of securities

5. decrease to 4

6. buy ; $ 50

7. 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.

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