8. The reserve requirement, open market operations, and the moncysupply Assume t

Question

8. The reserve requirement, open market operations, and the moncysupply 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 simplify the analysis, suppose the banking system has total reserves of $500. Determine the money multiplier and the money supply for each reserve requirement listed in the following table Money Supply (Dollars) Reserve Requirement (Percent) 25 10 Simple Money Multiplier A lower reserve requirement 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 government bonds worth of U.S. 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 toS to increase the money supply by $200 worth of U.S. government bonds in order 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 control the amount of money that households choose to hold as currency. The Fed cannot prevent banks from lending out required reserves

Explanation / Answer

1) Multiplier = 1/Reserve requirement = 1/0.25 = 4

Money supply = Multiplier x Total reserves = 4 x 500 = $ 2000

2) Multiplier = 1/0.10 = 10

Money supply = 10 x 500 = $ 5000

3) Increase in money supply

4) Buying of government securities

Change in Money supply = Buying of government securities x Multiplier

200 = Buying of government securities x 1/0.10

200/10 = Buying of government securities

Buying of government securities = 20

5) Decrease to 1/0.25 = 4

6) 200 = Buying of securities x 1/0.25

Buying of securities = 200/4 = 50

Buying securities worth $ 50.

7) The Fed cannot control the amount of money that households choose to hold as currency.

Related Questions

Navigate

• Browse (All)
• Browse 8
• Subjects

---

---

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.