Illustrate the following situations using supply and demand curves for money: a. The Fed buys bonds in the open market during a recession. b. During a period of rapid inflation, the Fed increases the reserve requirement. c. The Fed acts to hold interest rates constant during a period of high inflation. d. During a period of no growth in GDP and zero inflation, the Fed lowers the discount rate. e. During a period of rapid real growth of GDP, the Fed acts to increase the reserve requirement.

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Required Reserve and Excess Reserve Analysis

A required reserve is an amount of cash that banks must keep with themselves, which is certain percentage of the deposits made by their customers. Required reserve is a percentage of the bank's deposits that the respective bank must have on each overnight. The percentage rate is set and determined by the nation’s central bank. It is important to have such funds accumulated to meet its uncertain obligations, sudden liabilities and withdrawals. Required reserve is also known as reserve ratio. Reserve ratio is an important tool to control the money supply.