Suppose that the reserve requirement is 10% and that the Federal Reserve purchases $4 billion in bonds from a brokerage firm. Initially, as a result of this bond purchase, the money supply will by billion. Suppose the brokerage firm that sold the bonds to the Fed deposits the proceeds of the sale into its account with Nation's Bank. As a result of this deposit, Nation's Bank will be able to extend s billion in additional loans. Suppose that additional loans are extended throughout the banking system and that the proceeds are always redeposited back into checking accounts The M1 money supply will increase by s billion if banks use all of their additional reserves to extend new loans.

Suppose that the reserve requirement is 10% and that the Federal Reserve purchases $4 billion in bonds from a brokerage firm. Initially, as a result of this bond purchase, the money supply will by billion. Suppose the brokerage firm that sold the bonds to the Fed deposits the proceeds of the sale into its account with Nation's Bank. As a result of this deposit, Nation's Bank will be able to extend s billion in additional loans. Suppose that additional loans are extended throughout the banking system and that the proceeds are always redeposited back into checking accounts The M1 money supply will increase by s billion if banks use all of their additional reserves to extend new loans.

ENGR.ECONOMIC ANALYSIS

14th Edition

ISBN:9780190931919

Author:NEWNAN

Publisher:NEWNAN

Chapter1: Making Economics Decisions

Section: Chapter Questions

Problem 1QTC

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Assume that the money demand function is (M / P)d = 2,200 – 200r, where r is the interest rate in percent. If the price level is fixed at P=2, and the Fed wants to fix the interest rate at 7 percent, it should set the money supply at: a. 2,000. b. 1,800. c. 1,600. d. 1,400.
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Changes in the money supply The following graph represents the money market for some hypothetical economy. This economy is similar to the United States in the sense that it ha a central bank called the Fed, but a major difference is that this economy is closed (and therefore does not have any interaction with other world economies). The money market is currently in equilibrium at an interest rate of 4% and a quantity of money equal to $0.4 trillion, designated on the graph by the grey star symbol. INTEREST RATE (Percent) 6.0 5.5 5.0 45 4.0 35 3.0 25 20 0 Money Demand 0.1 Money Supply 0.2 03 0.4 0.5 0.6 0.7 MONEY (Trillions of dollars) 08 4 New MS Curve New Equilibrium Ⓒ image 1 Suppose the Fed announces that it is lowering its target interest rate by 75 basis points, or 0.75 percentage points. To do this, the Fed will use open- market operations to the money by the public. Use the green line (triangle symbol) on the previous graph to illustrate the effects of this policy by placing the…
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Refer to the table below and assume that the Fed's reserve ratio is 10 percent and the economy is in a severe recession. Also suppose that the commercial banks are hoarding all excess reserves (not lending them out) because of their fear of loan defaults. Finally suppose that the Fed is highly concerned that the banks will suddenly lend out these excess reserves and possibly contribute to inflation once the economy begins to recover and confidence is restored (1) (2) Checkable Deposits $20,000 (3) Actual Reserves (4) Required Reserves (5) (6) (7) Reserve Ratio, Money-Creating Potential of Money-Creating Potential Single Bank,-(5) Excess Reserves of Banking System (1) 10 $5,000 $2,000 $3,000 $3,000 $30,000 (2) 20 20,000 5,000 4,000 1,000 1,000 5,000 (3) 25 20,000 5,000 5,000 0 0 (4) 30 20,000 5,000 6,000 -1,000 -1,000 -3.333 a. By how many percentage points would the Fed need to increase the reserve ratio to eliminate one-third of the excess reserves? b. What would be the size of the…
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