8. The reserve requirement, open market operations, and the moneysupply Consider a banking system where the Federal Reserve uses required reserves to control the money supply. (This was the case in the U.S. prior to 2008.) Assume that banks do not hold excess reserves and that households do not hold currency, so the only form of money is demand deposits. To simplify the analysis, suppose the banking system has total reserves of $500. Determine the money multiplier and the money supply for each reserve requirement listed in the following table. Reserve Requirement (Percent) 5 10 Simple Money Multiplier A lower reserve requirement is associated with a Money Supply (Dollars) to money supply. Suppose the Federal Reserve wants to increase the money supply by $200. Again, you can assume that banks do not hold excess reserves and that households do not hold currency. If the reserve requirement is 10%, the Fed will use open-market operations to worth of U.S. government bonds. Now, suppose that, rather than immediately lending out all excess reserves, banks begin holding some excess reserves due to uncertain economic conditions. Specifically, banks increase the percentage of deposits held as reserves from 10% to 25%. This increase in the reserve ratio causes the money multiplier to . Under these conditions, the Fed would need to worth of U.S. government bonds in order to increase the money supply by $200.
8. The reserve requirement, open market operations, and the moneysupply Consider a banking system where the Federal Reserve uses required reserves to control the money supply. (This was the case in the U.S. prior to 2008.) Assume that banks do not hold excess reserves and that households do not hold currency, so the only form of money is demand deposits. To simplify the analysis, suppose the banking system has total reserves of $500. Determine the money multiplier and the money supply for each reserve requirement listed in the following table. Reserve Requirement (Percent) 5 10 Simple Money Multiplier A lower reserve requirement is associated with a Money Supply (Dollars) to money supply. Suppose the Federal Reserve wants to increase the money supply by $200. Again, you can assume that banks do not hold excess reserves and that households do not hold currency. If the reserve requirement is 10%, the Fed will use open-market operations to worth of U.S. government bonds. Now, suppose that, rather than immediately lending out all excess reserves, banks begin holding some excess reserves due to uncertain economic conditions. Specifically, banks increase the percentage of deposits held as reserves from 10% to 25%. This increase in the reserve ratio causes the money multiplier to . Under these conditions, the Fed would need to worth of U.S. government bonds in order to increase the money supply by $200.
Chapter1: Making Economics Decisions
Section: Chapter Questions
Problem 1QTC
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Transcribed Image Text:**Understanding the Limitations of the Fed's Control Over Money Supply**
The following statements illustrate why the Federal Reserve (the Fed) faces challenges in precisely controlling the money supply in practical scenarios. Consider which of these points apply:
- The Fed cannot control whether and to what extent banks hold excess reserves.
- The Fed cannot control the amount of money that households choose to hold as currency.
- The Fed cannot prevent banks from lending out required reserves.
These factors demonstrate the complexity and limitations inherent in the Fed's regulatory efforts over the money supply.
Transcribed Image Text:**8. The Reserve Requirement, Open Market Operations, and the Money Supply**
Consider a banking system where the Federal Reserve employs required reserves to control the money supply. (This was the case in the U.S. prior to 2008.) Assume that banks do not hold excess reserves and that households do not hold currency, so the only form of money is demand deposits. To simplify the analysis, suppose the banking system has total reserves of $500. Determine the money multiplier and the money supply for each reserve requirement listed in the following table.
| **Reserve Requirement** (Percent) | **Simple Money Multiplier** | **Money Supply** (Dollars) |
|-----------------------------------|----------------------------|-----------------------------|
| 5 | \_\_\_ | \_\_\_ |
| 10 | \_\_\_ | \_\_\_ |
A lower reserve requirement is associated with a \_\_\_\_ money supply.
Suppose the Federal Reserve wants to increase the money supply by $200. Again, you can assume that banks do not hold excess reserves and that households do not hold currency. If the reserve requirement is 10%, the Fed will use open-market operations to \_\_\_ $ \_\_\_ worth of U.S. government bonds.
Now, suppose that, rather than immediately lending out all excess reserves, banks begin holding some excess reserves due to uncertain economic conditions. Specifically, banks increase the percentage of deposits held as reserves from 10% to 25%. This increase in the reserve ratio causes the money multiplier to \_\_\_ to \_\_\_\_. Under these conditions, the Fed would need to \_\_\_ $ \_\_\_ worth of U.S. government bonds in order to increase the money supply by $200.
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