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 $300. Determine the money multiplier as well as the money supply for each reserve requirement listed in the following table. Reserve Requirement Simple Money Multiplier Money Supply (Percent) 5 (0.5, 1, 5, 10 or 20) (150, 300, 1500, 3000 or 6000) 10 (0.5, 1, 5, 10 or 20) (150, 300, 1500, 3000 or 6000) A higher reserve requirement is associated with a (LARGER or SMALLER) money supply. Suppose the Federal Reserve wants to increase the money supply by $200. Maintain the assumption that banks do not hold excess reserves and that households do not hold currency. If the reserve requirement is 10%, the Fed will use open-market operations to (BUY or SELL) ($_______) 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 (FALL OR RISE) to (1, 2.5, 4, 10 or 20). Under these conditions, the Fed would need to (BUY or SELL) $_________ 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. 1. The Fed cannot control whether and to what extent banks hold excess reserves. 2. The Fed cannot control the amount of money that households choose to hold as currency. 3. The Fed cannot prevent banks from lending out required 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 $300. Determine the money multiplier as well as the money supply for each reserve requirement listed in the following table. Reserve Requirement Simple Money Multiplier Money Supply (Percent) 5 (0.5, 1, 5, 10 or 20) (150, 300, 1500, 3000 or 6000) 10 (0.5, 1, 5, 10 or 20) (150, 300, 1500, 3000 or 6000) A higher reserve requirement is associated with a (LARGER or SMALLER) money supply. Suppose the Federal Reserve wants to increase the money supply by $200. Maintain the assumption that banks do not hold excess reserves and that households do not hold currency. If the reserve requirement is 10%, the Fed will use open-market operations to (BUY or SELL) ($_) 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 (FALL OR RISE) to (1, 2.5, 4, 10 or 20). Under these conditions, the Fed would need to (BUY or SELL) $___ 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. 1. The Fed cannot control whether and to what extent banks hold excess reserves. 2. The Fed cannot control the amount of money that households choose to hold as currency. 3. The Fed cannot prevent banks from lending out required reserves.

ENGR.ECONOMIC ANALYSIS

14th Edition

ISBN:9780190931919

Author:NEWNAN

Publisher:NEWNAN

Chapter1: Making Economics Decisions

Section: Chapter Questions

Problem 1QTC

See similar textbooks

The reserve requirement, open market operations, and the moneysupply

Reserve Requirement	Simple Money Multiplier	Money Supply
(Percent)
5	(0.5, 1, 5, 10 or 20)	(150, 300, 1500, 3000 or 6000)
10	(0.5, 1, 5, 10 or 20)	(150, 300, 1500, 3000 or 6000)

A higher reserve requirement is associated with a (LARGER or SMALLER) money supply.

Suppose the Federal Reserve wants to increase the money supply by $200. Maintain the assumption that banks do not hold excess reserves and that households do not hold currency. If the reserve requirement is 10%, the Fed will use open-market operations to (BUY or SELL) ($_______) 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 (FALL OR RISE) to (1, 2.5, 4, 10 or 20). Under these conditions, the Fed would need to (BUY or SELL) $_________ 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.

1. The Fed cannot control whether and to what extent banks hold excess reserves.

2. The Fed cannot control the amount of money that households choose to hold as currency.

3. The Fed cannot prevent banks from lending out required reserves.

Expert Solution

Trending now

This is a popular solution!

Step by step

Solved in 5 steps with 2 images

SEE SOLUTION Check out a sample Q&A here

Knowledge Booster

Learn more about

Need a deep-dive on the concept behind this application? Look no further. Learn more about this topic, economics and related others by exploring similar questions and additional content below.