1. Suppose that the reserve ratio is 0.12 and the currency ratio is 0.3, and there are no excess reserves. a. compute the level of money supply if total reserves are $40 billion? b. Assume that total reserves are unchanged at $40 billion. By how much does the money supply change if the Fed increases the reserve ratio to 0.2? c. By how much does the money supply change if the Fed buys $1 billion of government bonds in the open market? (Keep the reserve ratio at 0.12.)
Functions of the Federal Reserve System
The Federal Reserve System looks after the financial activities and operations of the banking system. It is the apex body that has complete control over the banking regulations. All the guidelines regarding the banking system, money supply, and formulation of the monetary policy come under the purview of the Federal Reserve System. The New York Fed also helps in drafting the monetary policy and supervising the financial system.
Elastic and Inelastic Markets
Measuring the change in percentage of an economic variable with respect to change in a different economic variable is known as elasticity. This change in percentage results in a change in price concerning changes in other factors. In simple terms, when one factor brings a change to another factor, it is called elasticity.
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