Sub part (a): Explanation The Federal Reserve is the central bank of the US economy, and it is usually known as the Fed. The Fed has the responsibility of keeping the economy controlled from the fluctuations, and it has to control the money supply of the economy through its monetary policies . When the purchase of the government bonds from the public takes place, it will provide the money to the public which will increase the consumption in the economy. As a result of the multiplier effect, the money supply in the economy will increase by the multiplier times. It is given that the required reserve ratio of the checking accounts is 10 percent, which means that the multiplier value of the economy can be calculated as follows: Money multiplier = 1 Reserve ratio = 1 0.10 = 10 Therefore, the value of the money multiplier in the economy is 10 Sub part (b): To determine The impact of selling of bonds on the money supply and reserves.

The impact of selling of bonds on the money supply and reserves.

ECNS 202 PRINTOUT

8th Edition

ISBN: 9781337096584

Author: Mankiw

Publisher: CENGAGE L

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Question

Definition Definition Capital reserves held by banks or financial institutions over and above the reserves that are required to be maintained by the regulator toward its liabilities and for internal controls. For commercial banks, excess reserve is the amount over the standard reserve as decided by the central bank. These excess reserve funds are available in the form of cash and cash equivalents.

Chapter 16, Problem 9PA

Sub part (a):

To determine