Part A. Assume that banks do not hold excess reserves and that households do not hold currency, so the only form of money is checkable deposits. To simplify the analysis, suppose the banking system has total reserves of $100. Determine the simple money multiplier and the money supply for each reserve requirement listed in the following table Reserve Requirement (Percent) Simple Money Mutiplier Money Supply (Dollars) 15 10 A higher reserve requirement is associated with a ___ (smaller or larger) money supply. Part B. Suppose the Federal Reserve wants to increase the money supply by $100. 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 _ (buy or sell) $_ (fill in blank) worth of U.S. government bonds. Part C. Now, suppose that, rather than immediately lending out all excess reserves, banks begin holding some excess reserves in response to uncertain economic conditions. Specifically, banks increase the percentage of deposits held as reserves from 10% to 20%. This increase in the reserve ratio causes the multiplier to _ (fall or rise) to __(1, 2 ,5 , 6.67 , 10). Under these conditions, the Fed would need to _ (buy or sell) $___ (fill in blank) worth of U.S. government bonds in order to increase the money supply by $100.

ENGR.ECONOMIC ANALYSIS

14th Edition

ISBN:9780190931919

Author:NEWNAN

Publisher:NEWNAN

Chapter1: Making Economics Decisions

Section: Chapter Questions

Problem 1QTC

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Part A.

Assume that banks do not hold excess reserves and that households do not hold currency, so the only form of money is checkable deposits. To simplify the analysis, suppose the banking system has total reserves of $100.

Determine the simple money multiplier and the money supply for each reserve requirement listed in the following table

Reserve Requirement (Percent)	Simple Money Mutiplier	Money Supply (Dollars)
15
10

A higher reserve requirement is associated with a _____ (smaller or larger) money supply.

Part B.

Suppose the Federal Reserve wants to increase the money supply by $100. 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 _____ (buy or sell) $_____ (fill in blank) worth of U.S. government bonds.

Part C.

Now, suppose that, rather than immediately lending out all excess reserves, banks begin holding some excess reserves in response to uncertain economic conditions. Specifically, banks increase the percentage of deposits held as reserves from 10% to 20%. This increase in the reserve ratio causes the multiplier to _____ (fall or rise) to ______(1, 2 ,5 , 6.67 , 10). Under these conditions, the Fed would need to _____ (buy or sell) $_____ (fill in blank) worth of U.S. government bonds in order to increase the money supply by $100.

Definition Definition Capital reserves held by banks or financial institutions over and above the reserves that are required to be maintained by the regulator toward its liabilities and for internal controls. For commercial banks, excess reserve is the amount over the standard reserve as decided by the central bank. These excess reserve funds are available in the form of cash and cash equivalents.

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