Suppose that the reserves requirements for checking deposit is 10 percent and th

Question

Suppose that the reserves requirements for checking deposit is 10 percent and that banks do not hold any excess reserves.

A. if the fed sells $1 million of government bonds,what is the effect on the economy's reserves and money supply?

B.Now suppose the fed lowers the reserves requirements to 5 percent, but banks choose to hold another 5 persent of deposits as excess reserves.why might banks do so? what is the overall change in the money multiplier and the memory supply as a result of these actions?

Explanation / Answer

the reserves don't change. Money supply goes down by 10m, since this money is now spent on bonds, assuming they are sold to banks. If sold to the public, both reserves and the money supply go down. B. Because they have no loans they want to give out. (Risk of default). Or expectations of future with better stuff. Nothing since keeping an extra 5%.

Related Questions

Navigate

• Browse (All)
• Browse S
• Subjects

---

---

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