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 to keep the economy controlled from the fluctuations and it also has to control the money supply of the economy through its monetary policies . The controlling of the money supply is one of the prime most responsibilities of the Fed. The banks are financial institutions that play an important role in a financial market. They are the institutions that accept the excess savings of people as deposits and use the deposits to provide loans to the needy people. The banks provide interest to the depositors and collects higher interests from the borrowers. The money creation of the banks takes place in this manner. The money created out of every dollar of reserve by the financial institution bank is known as the multiplier. The multiplier is usually reciprocal of the reserve ratio and here the reserve ratio is equal to 1 4 , which means that the multiplier value is the reciprocal (which is 4)

Bundle: Principles of Economics, Loose-leaf Version, 8th + LMS Integrated MindTap Economics, 2 terms (12 months) Printed Access Card

8th Edition

ISBN: 9781337607735

Author: N. Gregory Mankiw

Publisher: Cengage Learning

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Question

Chapter 29, Problem 3CQQ

To determine

The money created by the banks.

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Chapter 29 Solutions

Bundle: Principles of Economics, Loose-leaf Version, 8th + LMS Integrated MindTap Economics, 2 terms (12 months) Printed Access Card

Ch. 29.1 - Prob. 1QQ Ch. 29.2 - Prob. 2QQ Ch. 29.3 - Prob. 3QQ Ch. 29.4 - Prob. 4QQ Ch. 29 - Prob. 1CQQ Ch. 29 - Prob. 2CQQ Ch. 29 - Prob. 3CQQ Ch. 29 - Prob. 4CQQ Ch. 29 - Prob. 5CQQ Ch. 29 - Prob. 6CQQ

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Humongous Bank is the only bank in the economy. The people in this economy have 20 million in money, and they deposit all their money in Humongous Bank. Humongous Bank decides on a policy of holding 100 reserves. Draw a T-account for the bank. Humongous Bank is required to hold 5 of its existing 20 million as reserves, and to loan out the rest. Draw a T-account for the bank after it has made its first round of loans. Assume that Humongous bank is part of a multibank system. How much will money supply increase with that original 19 million loan?
Explain how to use an open market operation to expand the money supply.

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