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i safari File Edit View History Bookmarks Window Help 17% D Mon 27 Nov 12:00:34 PM · ezto.mheducation.com Chapter 9 Homework Consider The F When a central bank increases bark When a central bank increases bank reserves by $1, the money supply rises by more than $1. The amount of extra money created when the central bank increases bank reserves by $1 is called the money multiplier. a. The money multiplier is generally greater than 1 because: in a fractional-reserve banking system, each dollar bill is spent more than once (velocity is larger than 1), thereby increasing the money supply by more than $1 O in a fractional-reserve banking system, each dollar of reserves can support more than one dollar of deposits, thereby increasing the money supply by more than $1 O n a 100 percent reserve banking systern, each dollar of reserves supports exactly one hundred dollars of deposits, thereby increasing the money supply by $100 when a central bank increases bank reserves by $1, deposits are automatically increased by $1 as well, thereby increasing the money supply by $2. 31 The money multiplier is equal to 1 when: reserves > deposits. reserves- deposits. reserves deposits. per b. The initial money supply is $2,000, of which $1000 is currency held by the public. The desired reserve-deposit ratio is 0.25. Calculate the increase in the money supply associated with increases in bank reserves of $100. What is the money multiplier in this economy? Assume that individuals do not change their currency holdings. Instructions: Enter your responses as integer values. Increase in bank reserves Increase in money supply S100 Money multiplier C. A general rule for calculating the money multiplier is 1/(desired reserve-deposit ratio). 1/deposit ratio. 1/desired reserve. 1/(deposit ratio-desired reserve). d. Suppose the Fed wanted to reduce the money multiplier, perhaps because it believes that change would give it more precise control over the money supply. In order to achieve its goal, the Fed would 27Explanation / Answer
Since you have answered the first question correctly I assume you don't need an explaination for it.
a. The money multiplier is generally greater than 1 because In a fractional reserve banking system, Each dollar of reserves can support more than one dollar of deposits, thereby increasing the money supply by more than $1.
The money mulitplier is equal to one then, Reserves = deposits.
B. Given initial money supply is $2000 and currency held by public is $1000.So the deposits are:
2000-1000=1000
the desired deposits ratio is 0.25, then initial bank reserve is = 1000*0.25 = 250
An increase of $1 in bank reserve expands deposits from $250 to (251/0.25) = 1004 .
Increase in money supply = 1004-250 = 754
The money multiplier is 1/0.25 = 4
C. 1/ (reserve ratio- deposit ratio)
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