Suppose that the reserve requirement for checking deposits is 10 percent and that banks do not have hold any excess reserves. If the Fed sells 1 million of government bonds, what is the effect on the economy's reserves and money supply? Now, suppose that the Fed lowers the reserve requirement to 5 percent but the banks choose to hold another 5 percent of deposits as excess reserves. What is the overall change in the money multiplier and the money supply as a result of these actions?
Suppose that the reserve requirement for checking deposits is 10 percent and that banks do not have hold any
Now, suppose that the Fed lowers the reserve requirement to 5 percent but the banks choose to hold another 5 percent of deposits as excess reserves. What is the overall change in the money multiplier and the money supply as a result of these actions?
Answer:
Given,
Reserve requirement (rr) = 10% or 0.1
If the Fed sells 1 million government bonds then the reserves will decrease by $1 million.
The following formula will be used to find the change in the money supply.
The money supply will decrease by $10 million.
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