Suppose the Federal Reserve needs to raise the interest rate by 1 point. Use the graph below to decide on the appropriate course of action if the reserve requirement is 0%, but banks like to hold 10% of deposits as reserves and the public likes to hold 3% of their money as cash.

Suppose the Federal Reserve needs to raise the interest rate by 1 point. Use the graph below to decide on the appropriate course of action if the reserve requirement is 0%, but banks like to hold 10% of deposits as reserves and the public likes to hold 3% of their money as cash.

ENGR.ECONOMIC ANALYSIS

14th Edition

ISBN:9780190931919

Author:NEWNAN

Publisher:NEWNAN

Chapter1: Making Economics Decisions

Section: Chapter Questions

Problem 1QTC

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The Federal Reserve and the money supply Suppose the money supply (as measured by checkable deposits) is currently $300 billion. The required reserve ratio is 25%. Banks hold $75 billion in reserves, so there are no excess reserves. The Federal Reserve (“the Fed”) wants to decrease the money supply by $32 billion, to $268 billion. It could do this through open-market operations or by changing the required reserve ratio. Assume for this question that you can use the simple money multiplier. If the Fed wants to decrease the money supply using open-market operations, it should ______(buy/sell) $_________ billion worth of U.S. government bonds. If the Fed wants to decrease the money supply by adjusting the required reserve ratio, it should ______(increase/decrease) the required reserve ratio. THis is one question . please answer with an explanation.
Use the following graph for the federal funds market to answer the next question. Q₁ Q1 Q12 Quantity of Reserves Multiple Choice O C If the Fed wants the federal funds rate to be at if, what quantity of reserves do they need to make available to banks? Qf1 Qf2 D₁ Qf3 Sp Sm S₂ It cannot be determined with the information given.
Suppose the Federal Reserve conducts an open market purchase from a bank for $300 million. Assuming the required reserve ratio is 10%, what would be the effect on the money supply in each of the following situations? If there are many banks, all of which make loans for the full amount of their excess reserves, the money supply will increase by $ million. (Enter your response as a whole number.)
None
The author of your textbook defines a bank’s leverage ratio as the value of its assets divided by its capital (or owner’s equity). Explain how a bank with a high leverage ratio runs the risk of a bank run when the market value of the securities it owns falls in value. (Use numbers in your explanation.) Explain how increases in the real interest rate affect the quantity of real money balanced demanded. (Graphically illustrate) Explain how increases in real income affect the demand for real money balances. (Graphically illustrate.)
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Suppose that the Federal Reserve has set a reserve requirement of 10 percent and that banks will not hold any excess reserves. a) If the Federal Reserve conducts open market operations and sells $1 million worth of government bonds to the public, by how much will the money supply decrease? b) Now suppose the Federal Reserve lowers the reserve requirement to 5 percent, but all banks choose to hold an additional 5 percent of deposits as excess reserves. How will this change affect the money supply? Explain.
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