Aplia: Student Question z?quiz action-takeQuiz&quiz; probGuid QNAPCOA80101000000

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Aplia: Student Question z?quiz action-takeQuiz&quiz; probGuid QNAPCOA801010000003b167d50050000&ctx; susan.thomas-0008&ck; m15 ALTHCOLLABUHC DATA ENRY BPM ADMIN D AETNA ADMIN Paylocity SHAREPOINT O UHC REPLICA USER I Attempts: 1.8 11.81 Keep the Highest: 1.8/36 3. The reserve requirement, open market operations, and the money supply Aa Aa Assume that banks do not hold excess reserves and that households do not hold currency-the only form of money is checkable deposits. Suppose the banking system has total reserves of $300 billion. Find the simple money multiplier and the money supply for each reserve requirement listed in the following table. Money Supply (Checkable Deposits) Reserve Requirement 10% 5% Simple Money Multiplier For a given level of reserves, a higher reserve requirement is associated with a money supphy Suppose the Federal Reserve (the Fed) wants to increase the money supply by $100 billion. Again, you can assume that banks do not hold excess reserves and that households do not hold currency. If the reserve requirement is 59, the Fed use open market operations to worth of U.S. government bonds Now, suppose that rather than immediately lending out all excess reserves, banks begin holding some excess reserves due to tain economic condit ons. Specifically, n addition to the equi ed eserves of SS banks hold an additional 15% of their deposits as reserves. This increase in the reserve ratio causes the money multiplier to Fed would need to billion. to Under these conditions, the worth of U.S. government bonds in order to increase the money supply by $100 Which of the following statements heip to explain why, in the real world, the Fed cannot precisely control the money supply? Check all that apply The Fed cannot control whether and to what extent banks hold excess reserves. The Fed cannot prevent banks from ending out required reserves. The Fed cannot control the amount of money that households choose to hold as currency

Explanation / Answer

1) Simple money multiplier = 1/Reserve requirement = 1/0.10 = 10

Money supply = Reserves x multiplier = 300 billion x 10 = $ 3000 billion

2) Simple money multiplier = 1/Reserve requirement = 1/0.05 = 20

Money supply = Reserves x multiplier = 300 billion x 20 = $ 6000 billion

3) smaller

2) buy

3) $ 5 billion worth of securities

Increase in MS = Multiplier x Reserves

100 billion = 20 x R

R = $ 5 billion

4) decrease

5) 5

Initial multiplier = 1/0.05 = 20

New multiplier = 1/0.2 = 5

6) Buy

7) $ 20 billion woth of US securities

Because 20 x new multiplier = 20 x 5 creates money supply of $ 100 billion.

8) The Fed cannot control the amount of money the households choose to hold as currency.

The Fed cannot control whether and to what extent banks hold excess reserves.

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