**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:\[ \text{Change in money supply} = \text{Change in reserves} \times \frac{1}{(RR + ER)} \]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- $\frac{1}{(RR + ER)}$ = 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 $--- billion. *(Round your response to two decimal 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…

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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

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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:

\[ \text{Change in money supply} = \text{Change in reserves} \times \frac{1}{(RR + ER)} \]

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
- $\frac{1}{(RR + ER)}$ = 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 $--- 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.

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