Suppose the banking systeam has reserves of $750,000, demand deposits of $2,500,

Q: Suppose the banking systeam has reserves of $750,000, demand deposits of $2,500,

a. b. c. You can self plot the graph, that is a very small issue. d. The GDP increases and inflation would perhaps go up because of release of money which in turn increases spending capacity of people. Demand Deposits 2500000 Less: bought back 125000 Balance 2375000 Reserve requirement 475000 Current reserves 750000 Excess 275000

ID: 2505477 • Letter: S

Question

Suppose the banking systeam has reserves of $750,000, demand deposits of $2,500,000 and a reserve requirment of 20%.

a) If the Fed now purchases $125,000 worth of government bonds from the public, what are the excess reserves of the bankings system? ( Assume the public deposits the entire $125,000 in demand deposits.)

b) How much can the banking system increase the money supply by, given the new reserve position?

c) Using graphs, explain in detial how the change in money supply affects investment demand and as a consequence, aggregate demand. What role dose the spending multiplier play in this process? Explain.

d) What is the impact of the Fed's actions on GDP, unemployment and inflation?

Explanation / Answer

c. You can self plot the graph, that is a very small issue.

d. The GDP increases and inflation would perhaps go up because of release of money which in turn increases spending capacity of people.

Demand Deposits 2500000 Less: bought back 125000 Balance 2375000 Reserve requirement 475000 Current reserves 750000 Excess 275000

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Suppose the banking systeam has reserves of $750,000, demand deposits of $2,500,

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