The Fed wants to increase the m one supply (which is cu ently S7,000 by?350. The

Question

The Fed wants to increase the m one supply (which is cu ently S7,000 by?350. The money multiplier i 5 and people hold no cash. For each percentage point he discount rate fal bars borrow an additional S20 Exp ho the Fed can achieve its goals using the follo ing tools using the following tools a. Change resen requirement. Instructions: Enter your responsc rounded to the nearest whole number ed ehoukd lowerthe reserve requrement to percent. b. Change the discount rate. Instructions: Enter your response rounded to two docimol ploces. The Fed should lowor the rate by percentage pohte c. Use open markel operations. Instructions: Enter your reeponee roundod to two decimal placos. The Fed should buy worth of bonds.

Explanation / Answer

a) currently the reserve requirement ratio is 1/5= 0.2. Banks have reserves equal to 0.2*7000= 1400

To get a money supply of 7350, the money mulplier has to be 7350/1400= 5.25. this means required reserves ratio is 1/5.25= 0.19

The fed should LOWER the reserve requirement to 19%

If fed wants to increase the money supply by 350 with multiplier 5, reserves must increase by 350/5= 70. If banks borrow additional 20, the fed should lower the rate by 70/20= 3.5%

The fed should LOWER the rate by 3.50%

The fed should buy 70 worth of bonds

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