Suppose that the reserve requirement for checkingdeposits is 10 percent and that banks do not hold anyexcess reserves.a. If the Fed sells $1 million of government bonds,what is the effect on the economy’s reserves andmoney supply?b. Now suppose that the Fed lowers the reserverequirement to 5 percent but that banks chooseto hold another 5 percent of deposits as excessreserves. Why might banks do so? What is theoverall change in the money multiplier and themoney supply as a result of these actions?

ENGR.ECONOMIC ANALYSIS
14th Edition
ISBN:9780190931919
Author:NEWNAN
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Chapter1: Making Economics Decisions
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Suppose that the reserve requirement for checking
deposits is 10 percent and that banks do not hold any
excess reserves.
a. If the Fed sells $1 million of government bonds,
what is the effect on the economy’s reserves and
money supply?
b. Now suppose that the Fed lowers the reserve
requirement to 5 percent but that banks choose
to hold another 5 percent of deposits as excess
reserves. Why might banks do so? What is the
overall change in the money multiplier and the
money supply as a result of these actions?

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