Principles of Economics (12th Edition)
12th Edition
ISBN: 9780134078779
Author: Karl E. Case, Ray C. Fair, Sharon E. Oster
Publisher: PEARSON
expand_more
expand_more
format_list_bulleted
Concept explainers
Question
Chapter 25, Problem 2.4P
To determine
Why leakages make it difficult for the fed to control the money supply precisely.
Expert Solution & Answer
Want to see the full answer?
Check out a sample textbook solution
Students have asked these similar questions
Currently, the Fed does not have complete control of the money supply because
the Congress and the Treasury can also make changes to the money supply.
government bonds may not be available for purchase when the Fed wants to perform OMO.
the Fed does not know where all the U.S. currency is located.
the amount of money in the real economy depends on the behavior of depositors and bankers.
All of the above are correct.
A deposit of $100 was made to the bank as
we know the money supply won't increase
until the bank loans the $100. If the required
reserve ratio is 6%, how much will the money
supply ultimately increase once this new
deposit has gone all the way through the
system? What is the money multiplier in this
case?
Which of the following statements help to explain why, in the real world, the Fed cannot precisely control the money supply? Check all that apply.
The Fed cannot prevent banks from lending out required reserves.
The Fed cannot control whether and to what extent banks hold excess reserves.
The Fed cannot control the amount of money that households choose to hold as currency.
Chapter 25 Solutions
Principles of Economics (12th Edition)
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
- Suppose again that checkable deposits started off at $400,000 in First Main Street Bank, the required reserve ratio is 15%, and no excess reserves and no cash leakage exist. You know from the previous step that, due to the sale of securities by the Fed, the money supply in the economy contracted from $400,000 to $392,000. But the contraction of the money supply does not stop with First Main Street Bank. It moves to other banks. The loan repayment that Charles made to First Main Street Bank was written on a check Second Republic Bank issued. Then, when the check cleared, the reserves of Second Republic Bank declined, and Second Republic Bank found itself reserve deficient as well. It applied loan repayments to its reserve deficiency position. The effect continued with other banks and so on. The initial removal of funds in the amount of $8,000 will cause the money supply to contract by $______. Therefore, the money supply is $______. (Hint: round the results of your calculations to the…arrow_forwardSuppose you examine the central bank’s balance sheet and observe that since the previous day, reserves had risen by $400 million. In addition, on the asset side of the central bank’s balance sheet, securities had risen by $400 million. What activity did the central bank carry out earlier in the day to lead to these changes in the balance sheet? Do you think by carrying out this activity the central bank was aiming to increase, decrease, or maintain the size of the money supply? The central bank conducted an open market (purchase /sale) of $400 million with a commercial bank. This transaction would involve $400 million of securities being ( added to / removed from) the central bank’s balance sheet. There would be (an increase / a fall ) of $400 million in reserves to reflect the related payment ( to / by ) the commercial bank ( from / into) its reserve account. By carrying out this activity, the central bank was aiming to (increase / decrease) maintain the size of the money supply.arrow_forwardOne of the instruments available for controlling money supply is Open Market Operation(OMO). Explain briefly this instrument and how it works to control money in circulation!arrow_forward
- You just deposited $4,000 in cash into a checking account at the local bank. Assume that banks lend out all excess reserves and there are no leaks in the banking system. That is, all money lent by banks gets deposited in the banking system. Round your answers to the nearest dollar. If the reserve requirement is 20%, how much will your deposit increase the total value of checkable bank deposits? If the reserve requirement is 8%, how much will your deposit increase the total value of checkable deposits? Increasing the reserve requirement decreases the money supply. %24 %24arrow_forwardFind the amount of money that would be created in the banking system because of the money multiplier if the required reserve ratio is 14%, and a bank that had been holding $1,000 as excess reserves decides to loan all this money out.arrow_forwardMoney serves three functions in the economy: medium of exchange, unit of account, and store of value. Which of the following statements describes how inflation affects the ability of money to serve as a unit of account? Check all that apply. Inflation erodes money's purchasing power. In some countries with hyperinflation, prices are posted in terms of U.S. dollars rather than the local currency, even though the local currency is still used to purchase the good. Inflation causes menu costs.arrow_forward
- If deposits in the banking system are $540, while the reserve ratio is 0.2 and the currency to deposit ratio is 0.9, then a) calculate the total demand for high powered money. b) calculate the money multiplierarrow_forwardIf the required reserve ratio is 8 percent, currency in circulation is $350 billion, checkabledeposits are $500 billion, and excess reserves total $100 billion, then what impact would a$100 million increase in the monetary base have on the money supply?arrow_forwardSuppose you win on a scratch-off lottery ticket and you decide to put all of your $3,500 winnings in the bank. The reserve requirement is 5%. How much maximum of new money will be created (maximum amount of new checking deposits created by the banking system) as a result of your bank deposit? Hint: do not count your initial deposit as part of increase. Number $70000 ☐ ☐ Incorrect. The bank can only loan out excess reserves. Calculate the excess reserves after the lottery winnings were deposited, than multiple that number by the money multiplier. Which events could cause the increase in the money supply to be less than its potential? Check all that apply. Some loan recipients choose to hold some cash instead of depositing all of it in banks. All money loaned out is deposited back into the banking system. Banks decide to keep some excess reserves on hand. Banks choose to loan out all excess reserves.arrow_forward
- Prosperville is experiencing demand-pull inflation. The government is hoping to reduce the money supply by $400 billion. With a reserve requirement of 0.10, what is the change in reserves needed to achieve the desired change in the money supply?arrow_forwardIn the U.S., currency in circulation (C) is $1.2 trillion and the monetary base (B) is $3.7 trillion. Assume the reserve-deposit ratio (rr) and the currency-deposit ratio (cr) are both 0.25. What is the size of bank reserves (R)? What is the money multiplier? What is the money supply? What is the velocity of money if nominal GDP is $17 trillion? If the FOMC increases bank reserves (R) by $0.5 trillion and banks choose to hold all the additional reserves rather than loan them out, what is the new money supply? What is the new money supply if instead banks loan out 50% of the additional new reserves and households deposit all the additional loans? Assume that the velocity of money is constant and real GDP is growing at 1%. Use the numbers in part (a) to answer the next question. If the Fed wishes to keep the price level constant, how much (in dollars) do they need to increase the money supply?arrow_forwardAssume that bank deposits are $3,200 billion, the required reserve ratio is 10%, and currency outstanding is $400 billion. What can the central bank do to decrease the money supply by $100 million? Assume that banks do not hold excess reservesarrow_forward
arrow_back_ios
SEE MORE QUESTIONS
arrow_forward_ios
Recommended textbooks for you
Macroeconomics: Private and Public Choice (MindTa...EconomicsISBN:9781305506756Author:James D. Gwartney, Richard L. Stroup, Russell S. Sobel, David A. MacphersonPublisher:Cengage Learning
Economics: Private and Public Choice (MindTap Cou...EconomicsISBN:9781305506725Author:James D. Gwartney, Richard L. Stroup, Russell S. Sobel, David A. MacphersonPublisher:Cengage Learning
Macroeconomics: Private and Public Choice (MindTa...
Economics
ISBN:9781305506756
Author:James D. Gwartney, Richard L. Stroup, Russell S. Sobel, David A. Macpherson
Publisher:Cengage Learning
Economics: Private and Public Choice (MindTap Cou...
Economics
ISBN:9781305506725
Author:James D. Gwartney, Richard L. Stroup, Russell S. Sobel, David A. Macpherson
Publisher:Cengage Learning