Challenge Problem. The chapter mentions that an open market operation by the Fed can increase or decreasethe quantity of deposits in banks and therefore the money supply.The change in the money supply from a Fed open market operation is given by the following equation:Change in money supply = Change in reserves x1/ (RR+ ER)whereRR = the percentage of deposits that banks are required to keep as reservesER= the percentage of deposits that banks voluntarily hold as excess reserves1/ (RR+ ER) = the "money multiplier"Suppose the Fed decides to sell $16 billion in Treasury bonds. Assume that the reserve requirement is 10percent, banks hold 3 percent in excess reserves, and the public holds no cash.This action by the Fed causes the money supply toby S billion. (Round your response to twodecimal places.)

The formulae for the money multiplier(m) is: ∆M=∆R×1RR+ER Where is the change in the supply of…

Answered: This action by the Fed causes the money…

Business

Economics

This action by the Fed causes the money supply to by S billion. (Round your response to two decimal places.)

ENGR.ECONOMIC ANALYSIS

14th Edition

ISBN:9780190931919

Author:NEWNAN

Publisher:NEWNAN

Chapter1: Making Economics Decisions

Section: Chapter Questions

Problem 1QTC

See similar textbooks

Related questions

Q: " the Fed wanted to use a/1 of its policy tools to decrease the money supply, what would it do?

A: Fed has various instruments to decrease money supply. 1. Increase in interest rates makes it…

Q: Using the aggregate money demand theoretical framework, discuss 3 factors that determine Australia’s…

A: Money is a valuable asset that is widely used and accepted as a form of payment. Money can refer to…

Q: Assume that Jones deposits $500 in currency into her checkable-deposit account in First National…

A: Money supply represents the total stock of money in the form of currency in circulation or bank…

Q: Does south china sea issue with respect to taiwan and other countries will make the world markets to…

A: Disputes in the South China Sea (SCS) are escalating as a result of China's continuing military…

Q: Suppose that the Federal Reserve sets the reserve ratio at 30% If the Fed prints $3352 in new money…

A: The legislation of the central bank mandates the bank to keep a percentage of a bank's total…

Q: The economy of Carlsberg is presently in equilibrium, but is suffering a recession as depicted in…

A: Macroeconomic research provides a comprehensive forecast for the fiscal landscapes of entire…

Q: Assume that the fed adopts an inflation-targeting strategy. if oil prices rive abruptly by 20percent…

A: Monetary policy may be a set of tools utilized by a country's financial organization to push long…

Q: Which of the following is not a function of the Fed? O Printing money. O Making loans to banks. O…

A: Since you have posted multiple independent McQs, according to our guidelines, only the first…

Q: Explain how the quantity theory of money model can help explain the effects of monetary policy on…

A: The quantity theory of money is a branch of economics that explains how the amount of money…

Q: define M1 and how the FED can affect the money supply through interest rates can you explain why…

A: The central bank F is controlling the money supply and the interest level in the money market. The…

Q: Discuss the importance of monetary base to the overall money supply.

A: Money supply includes all of the liquidated instruments along with currency in form of deposits and…

Q: Calculate M1, M2 and M3 using the following information: Items Billion $ Negotiable certificates 304…

A: The total inventory of money circulating in an financial system is the money supply. This entails…

Q: What is the relationship between the monetary base and the Fed's balance sheet? The monetary base…

A: The top organisation in the banking industry is the central bank. All other banks' operations are…

Q: Suppose that to finance its credit policy, the Fed pays an annual interest rate of 0.25 percent on…

A: Given, The total amount of reserves held by banks with Fed = $1.3 trillion Interest rate = 0.25 or…

Q: Suppose that inflation is 2 percent, the federal funds rate is 4 percent, and real GDP is 3 percent…

A: The Taylor rule helps in stabilizing the economy. It says that when the inflation or growth rate of…

Q: . One reason the Bank of Canada does not try to influence the money supply directly is that the…

A: When a central bank changes the money supply, it changes interest rates, and changes in interest…

Q: E. Suppose that velocity is constant and the economy's output of goods and services rises by 5…

A: The economy's output of goods and services increase by 5%

Q: The following data come from FRED, a database maintained by the St Louis Fed. According to FRED,…

A: Real GDP is a macroeconomic statistic that adjusts for inflation and reflects the value of goods and…

Q: According to the Seeking Alpha article, the velocity of money is O needed for creating credit O…

A: In economics, there is a significant relationship between the goods market and the money market that…

Q: "Transactions demand for money depends on income and intrest rate." Explain (please use the graphs…

A: The money market would involve the money demand and money supply curves. The money market would…

Q: What happens to the aggregate demand curve when the Fed reduces the money supply? a. It shifts…

A: When the Fed reduces the money supply, then it leads to higher interest rates.

Q: If New Jersey is the only state that is experiencing a recession, why can't the Federal Reserve…

A: Even though New Jersey's has a diverse economy with the major pharmaceuticals, life sciences, having…

Q: If the Fed unexpectedly shifts to a more restrictive monetary policy, which of the following will…

A: A decrease in the money supply or the increment in the short-term interest rates constitutes a…

Q: 7. Using the RBA web site (Table D3 in the Statistic section) look up the most recent exact values…

A: 1. Money base: 219,379 million Australian dollars (AUD) 2. Currency (seasonally adjusted): 79,647…

Q: Suppose that this year, the money supply grows by 6%, velocity increases by 1%, and real GDP…

A: By definition, we assume that the growth rate of price level is the inflation rate. growth rate of…

Q: Given the Quantity Thoeory of Money: if Real GDP equals $2,000, the mone money equals 2, then the…

A: Quantity theory of money shows the relationship between price level, real GDP, velocity and money…

Q: What happens if the fed announces a fall in the money supply? What happens to the price level? show…

A: Equilibrium in money market is obtained where money supply curve and money demand curve intersect…

Q: Assume that output growth in the U.S. is 2%, money demand (L) is decreasing by 1% per year and money…

A: As per the quantity theory of money, in the event that how much money in an economy copies, all else…

Q: Like many other investors you are a “Fed Watcher” who constantly monitors any actions taken by the…

A: Federal reserve system often known as "fed" is the central bank of the united states. It uses its…

Q: Which tool of the monetary policy is most frequently used by the Fed to change the money supply?

A: Monetary policy refers to the credit-control system used by the central bank of a country to achieve…

Q: D7 Suppose that people hold 17 cents out of every dollar of deposits as currency. Suppose that banks…

A: MPC = c = 17/100 = 0.17 Reserve ratio = r = 13/100 = 0.13 Formula of multiplier = (1+c)/(c+r)

Q: Governments can control the inflation by allowing the money supply to grow no faster than the number…

A: When spending on labor and goods outpaces production, inflation results. Prices may increase as a…

Q: A4 Assume the economy is already at full employment. If the central bank increases the money…

A: The term "full employment" in general is used when all available labor resources are utilized as…

Q: Explain the role of reverse repo rate in controlling the money supply in economy

A: According to the given question Money supply basically refers to the amount of the total stock of…

Q: If the Fed decided to decrease the Federal Funds Rate, (*the overnight rate that they lend to other…

A: Answer: option d (increase the supply of money) Explanation: If the Fed decides to decrease the…

Q: If the Fed wants to lower the interest rate, what should they do with the money supply? What tools…

A: Both Central Bank and Central Government have different tools which will help to control the money…

Q: Explain the Fed's policy tools and briefly describe how each works. The Fed uses its policy tools…

A: Fed's policies: Reserve requirements, the discount rate, and open market operations are the three…

Q: "If a central bank's desired intermediate target is a monetary aggregate (money supply), then its…

A: Monetary Policy Monetary policy refers to the policy of the central bank by which the central bank…

Q: “The Fed can perfectly control the amount of the monetary base, but has less control over the…

A: Monetary base is a measure of money supply that includes only notes in circulation,the most liquid…

Q: What is disinflation? What are the two leading causes of inflation? Where online do you find…

A: In an economy, any change in general price level will lead to arise the situation of inflation or…

Q: The following table gives the quantity of money demanded at various price levels (P), the money…

A: The money demand curve is downward sloping. The money supply in the economy is set by the central…

Q: Define the velocity of the money supply.

A: Money supply represents the total stock of money available in an economy. It includes coins, paper…

Q: List the five factors which can affect the money supply. Consider the changes in each of these five…

A: The money supply alludes to how much money or currency coursing in an economy.

Q: First, explain why the money demand curve is downward sloping. Second, explain what factor(s) will…

A: Money demand refers to the demand for holding cash in an economy. It has a negative relationship…

Q: 25. Show in a graph how the Fed essentially chooses a monetary rule that creates a flat effective…

A: The Fed's role has evolved, and it now primarily manages the growth of bank reserves and the money…

Concept explainers

Required Reserve and Excess Reserve Analysis

A required reserve is an amount of cash that banks must keep with themselves, which is certain percentage of the deposits made by their customers. Required reserve is a percentage of the bank's deposits that the respective bank must have on each overnight. The percentage rate is set and determined by the nation’s central bank. It is important to have such funds accumulated to meet its uncertain obligations, sudden liabilities and withdrawals. Required reserve is also known as reserve ratio. Reserve ratio is an important tool to control the money supply.

Question

Challenge Problem. The chapter mentions that an open market operation by the Fed can increase or decrease
the quantity of deposits in banks and therefore the money supply.
The change in the money supply from a Fed open market operation is given by the following equation:
Change in money supply = Change in reserves x1/ (RR+ ER)
where
RR = the percentage of deposits that banks are required to keep as reserves
ER
= the percentage of deposits that banks voluntarily hold as excess reserves
1/ (RR+ ER) = the "money multiplier"
Suppose the Fed decides to sell $16 billion in Treasury bonds. Assume that the reserve requirement is 10
percent, banks hold 3 percent in excess reserves, and the public holds no cash.
This action by the Fed causes the money supply to
by S billion. (Round your response to two
decimal places.)

Expert Solution

Step 1

The formulae for the money multiplier(m) is:

$∆ M = ∆ R \times \frac{1}{R R + E R}$

Where is the change in the supply of money(M)

is the change in the reserve(R)

RR is the required-reserve and ER is the excess-reserve.

Trending now

This is a popular solution!

Step by step

Solved in 2 steps

Knowledge Booster

Learn more about

Need a deep-dive on the concept behind this application? Look no further. Learn more about this topic, economics and related others by exploring similar questions and additional content below.

Similar questions

The quantity theory of money is the proposition that _______.
Read “YOU’RE THE ECONOMIST: Did the Fed Cause the Great Recession?” in Chapter 26. In support of the Fed’s monetary policy prior to the deflation of the home prices bubble, one can argue that the reality is that increasing the money supply and low-interest rates were required to sustain expansion. Based on the Monetarist’s school of thought, criticize the Fed’s policy
What is the role of the Federal Reserve (the Fed)? How much discretion should the Fed have? Should the Fed try to fine-tune the economy or simply keep money supply growing at a steady pace? Why?
3. If the FED can only directly control nominal interest rates, how does the FED influence real interest rates that determine the actual stance of monetary policy?
Explain why we model the demand for real money balance as a function of nationalincome and the nominal interest rate.
If the central bank sells $500 in bonds to a bank t hat has issued $10,000 in loans and is exactly meeting there serve requirement of 10%, what will happen to the amount of loans and to the money supply in general?
Tightening monetary policy causes interest rates to O none of the other answers are correct. O fall; demand; increase O fall; supply; increase O rise; supply; decrease Orise; demand; decrease and aggregate to
Thank You
Expansionary monetary policy is when: None of the statements are correct. The president and congress agree to lower interest rates. The president orders the Federal Reserve to cut income taxes. The Federal Reserve reduces the regulations hindering our business community. The Federal Reserve increases the nation's money and credit supply and raises interest rates. A Moving to the next question prevents changes to this answer. JUL 21 tv 11 A O COMMUNITY
You have been given the banking and financial data in the following table. Your boss wants you to calculate the M1 money supply (using the U.S. laws and regulations) but forgets to tell you which year the data pertain to. You call your boss and she tells you that the data is for 2021. In that case, you calculate the following for your boss: Currency in Circulation $100 Demand Deposits $1,000 Savings Deposits $4,400 Small Time Deposits (Less than $100,000) $2,000 Large Time Deposits (Greater than $100,000) $4,000 Money Market Mutual Funds Deposits Owned by Individuals $1,000 Money Market Mutual Funds Deposits Owned by Institutions $5,000 Total Reserves in the Banking System $2,100 O a. M1 = $1,000 O b. M1 = $1,100 O c. M1 $2,200 = O d. M1 $4,300 O e. M1 $5,500
10. Suppose that a change in transaction technology reduces the amount of currency people want to hold relative to demand deposits. If the Fed does nothing, the money supply will tend to bonds in open-market But the Fed can hold the money supply constant by operations. a. increase, buying b. increase, selling c. decrease, buying d. decrease, selling 11. Which of the following changes would contribute to a decline in the index of leading indicators, suggesting that a recession is more likely? a. a rise in stock prices b. a rise in building permits c. a decline in initial claims for unemployment insurance d. a decline in the slope of the yield curve 12. Stagflation-lower output and higher prices-is caused by a. an expansion in aggregate demand. b. a contraction in aggregate demand. c. a favorable shock to aggregate supply. d. an adverse shock to aggregate supply.
What effect would the discovery of gold that fuels inflation have on the money market? Illustrate with a diagram