In the market for bank reserves, a reduction in the required reserve ratio will

Question

In the market for bank reserves, a reduction in the required reserve ratio will cause

A. a reduction in the demand for reserves.

B. a reduction in the federal funds rate.

C. an increase in the equilibrium quantity of reserves.

D. all of the above.

According to the quantity theory of money, the growth of the money supply is positively related to NGDP The quantity theory of money is given by the equation US Growth Rate of M2 and Nominal Gross Domestic Product est where M is a measure of money supply, (1/M) is the inverse of the income velocity and is considered constant by the monetarist economist, and PY is the price level (P) times real output (Y). equal to NGDP Directions click on the graph in the window on the nght and select Multiple Time Series to graph the annual growth rate of the money supply and nominal gross domestic product (NGDP) for the years 1960-2004. For Y1 select M2 Rate of Growth and for Y2 select NGDP Rate of Growth. Roll your cursor lines to identify the data over the plotted Use the graph to help determine which of the following statements are true: 0 A. The growth of M2 and inflation, according to the graph, seem to have no relation to one another, and thus provide evidence for the rejection of the quantity theory of money 10 to 10 O B. There exists a positive relationship between the growth rate of M2 and Data source: IFS cd-rom database inflation, although not a very strong one. This relationship starts breaking down in the early 1990's O D. The quanty theory of money cannot be tested empincaly by examinng the relation between M2 and NGDP since there are other measures of money supply that may perform better than M2

Explanation / Answer

A bank reserve can be defined as the amount the banks keep with them in the vault or with the central bank. Generally, this amount is a percentage of the total money the bank has in deposits. the percentage is decided by the Fed in order to ensure the banks will be able to provide the client with cash upon request.

If the required reserve ratio is reduced then the banks will have to keep less cash locked up in terms of reserve and they will have more liquidity. This will reduce the demand for reserve as the banks already have more liquidity than before. The federal fund rates will be reduced as the demand for those reserves are less and reduction in rates will increase the equilibrium quantity of reserves available in the market.

So, All the options given above are correct. The answer is "D".

Related Questions

Navigate

• Browse (All)
• Browse I
• Subjects

---

---

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.