Consider a system of banking in which the Federal Reserve uses required reserves to control the money supply (as was the case in the United States before 2008). Assume that banks do not hold excess reserves and that households do not hold currency, so the only money exists in the form of demand deposits. To further simplify, assume the banking system has total reserves of $400. Determine the money multiplier as well as the money supply for each reserve requirement listed in the following table. Reserve Requirement (Percent) 20 10 Simple Money Multiplier A higher reserve requirement is associated with a Money Supply (Dollars) money supply. Suppose the Federal Reserve wants to increase the money supply by $200. Maintain the assumption 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 U.S. government bonds. worth of 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. Which of the following statements help to explain why, in the real world, the Fed cannot precisely control the money supply? Check all that apply. 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. The Fed cannot control whether and to what extent banks hold excess reserves
Consider a system of banking in which the Federal Reserve uses required reserves to control the money supply (as was the case in the United States before 2008). Assume that banks do not hold excess reserves and that households do not hold currency, so the only money exists in the form of demand deposits. To further simplify, assume the banking system has total reserves of $400. Determine the money multiplier as well as the money supply for each reserve requirement listed in the following table. Reserve Requirement (Percent) 20 10 Simple Money Multiplier A higher reserve requirement is associated with a Money Supply (Dollars) money supply. Suppose the Federal Reserve wants to increase the money supply by $200. Maintain the assumption 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 U.S. government bonds. worth of 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. Which of the following statements help to explain why, in the real world, the Fed cannot precisely control the money supply? Check all that apply. 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. The Fed cannot control whether and to what extent banks hold excess reserves
Chapter1: Making Economics Decisions
Section: Chapter Questions
Problem 1QTC
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Transcribed Image Text:Consider a system of banking in which the Federal Reserve uses required reserves to control the money supply (as was the case in the United States
before 2008). Assume that banks do not hold excess reserves and that households do not hold currency, so the only money exists in the form of
demand deposits. To further simplify, assume the banking system has total reserves of $400. Determine the money multiplier as well as the money
supply for each reserve requirement listed in the following table.
Reserve Requirement
(Percent)
20
10
Simple Money Multiplier
A higher reserve requirement is associated with a
Money Supply
(Dollars)
money supply.
Suppose the Federal Reserve wants to increase the money supply by $200. Maintain the assumption 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 S
worth of U.S. government bonds in order
to increase the money supply by $200.
Which of the following statements help to explain why, in the real world, the Fed cannot precisely control the money supply? Check all that apply.
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.
The Fed cannot control whether and to what extent banks hold excess reserves.
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