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 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. Here, when the required reserve ratio is 10 percent, the money multiplier 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

Bundle: Essentials Of Economics, Loose-leaf Version, 8th + Lms Integrated Mindtap Economics, 1 Term (6 Months) Printed Access Card

8th Edition

ISBN: 9781337368087

Author: N. Gregory Mankiw

Publisher: Cengage Learning

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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 21, Problem 7PA

To determine

The purchase of bonds by the Fed and the impact on money supply.

Expert Solution & Answer

Chapter 21 Solutions

Bundle: Essentials Of Economics, Loose-leaf Version, 8th + Lms Integrated Mindtap Economics, 1 Term (6 Months) Printed Access Card

Ch. 21.1 - Prob. 1QQ Ch. 21.2 - Prob. 2QQ Ch. 21.3 - Prob. 3QQ Ch. 21.4 - Prob. 4QQ Ch. 21 - Prob. 1CQQ Ch. 21 - Prob. 2CQQ Ch. 21 - Prob. 3CQQ Ch. 21 - Prob. 4CQQ Ch. 21 - Prob. 5CQQ Ch. 21 - Prob. 6CQQ

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