1) (Monetary Control) Suppose the money supply is currently $500 billion and the

Question

1) (Monetary Control) Suppose the money supply is currently $500 billion and the Fed wishes to increase it by $100 billion.

a.  Given a required reserve ratio of 0.25, what should it do?

b.   If it decided to change the money supply by changing the required reserve ratio, what change should it make

2) (Monetary Aggregates) Calculate M1 and M2 using the following information:

Large-denomination time deposits$ 304 billion

Currency and coin held by nonbanking public438 billion

Checkable deposits509 billion

Small-denomination time deposits   198billion

Traveler

Explanation / Answer

The reciprocal of the reserve ratio is the money multiplier which tells us how the money injected by the Fed will increase.

A.here, the reserve ratio is 0.25 i.e. 1/4 so the multiplier is 4. hence if the Fed wishes to add another $100 billion in the economy, it needs to inject $25 billion in the economy.

B.To increase the money supply by changing the reserve ratio, Fed needs to decrease the reserve ratio so that the commercial banks have more loanable funds which the banks can inject in the economy.

Related Questions

Navigate

• Browse (All)
• Browse 1
• Subjects

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