Principles of Economics (12th Edition)
Principles of Economics (12th Edition)
12th Edition
ISBN: 9780134078779
Author: Karl E. Case, Ray C. Fair, Sharon E. Oster
Publisher: PEARSON
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Chapter 25, Problem 6.2P
To determine

To discuss the difference in the impact on money supply due to using a fiscal surplus to buy back bonds and using open market operations to buy them.

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The U.S. money supply (M1) at the beginning of 2015 was $2,683.3 billion broken down as follows: $1,165.7 billion in currency, $3.5 billion in traveler's checks, and $1,514.1 billion in checking deposits. Suppose the Fed decided to increase the money supply by decreasing the reserve requirement from 11 percent to 10 percent. Assume all banks were initially loaned up (had no excess reserves) and the quantity of currency and traveler's checks held outside of banks did not change. How large a change in the money supply would have resulted from the change in the reserve requirement? The money supply would change by $ billion. (Round your response to two decimal places and include a minus sign if necessary.)
2. The theory of liquidity preference and the downward-slopingaggregate demand curve The following graph shows the money market in a hypothetical economy. The central bank in this economy is called the Fed. Assume that the Fed fixes the quantity of money supplied. Suppose the price level decreases from 90 to 75. Shift the appropriate curve on the graph to show the impact of a decrease in the overall price level on the market for money. 12 Money Supply 10 Money Demand Money Supply MD1 2 MD2 10 20 30 40 50 60 MONEY (Billions of dollars) INTEREST RATE (Percent)
A problem that the Fed faces when it attempts to control the money supply is that the Fed can only control excess reserves but not total reserves.   the Fed has to get the approval of the U.S. Treasury Department whenever it uses any of its monetary policy tools.   the Fed does not have a tool that it can use to change the money supply by either a small amount or a large amount.   the Fed does not control the amount of money that households choose to hold as deposits in banks.
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