e MINDTAP Assume that banks do not hold excess reserves and thait households do
ID: 1123854 • Letter: E
Question
e MINDTAP Assume that banks do not hold excess reserves and thait households do not hold currency, so the only form of money is checkable deposits. To simplity the anallysis, suppose the banking system has total reserves of $100. Determine the simple money multiplier and the money supply for Money Supply (Percent) Reserve wants to increase the money supply by $100. Again, you can assume that banks do not hold excess reserves and not hold currency If the reserve r operations ncrease the percentage of deposits held as reserves from 10% to 20%. This increase r, the reserve worth of toExplanation / Answer
1. Money multiplier = 1/Reserve requirement = 1/0.15 = 6.67
Money supply = Reserves x Money multiplier = 100 x 6.67 = $ 667
2. Money multiplier = 1/0.10 = 10
Money supply = 100 x 10 = $ 1000
3. Increase
4. Buy; $ 10
When Fed buy $ 10 worth of government securities then Change in money supply = Multiplier x 10 = 10 x 10 = $ 100
5. Decrease to 5
Multiplier = 1/0.20 = 5
6. Buy; $ 20 worth of government securities
7. The Fed cannot control the amount of money that households choose to hold as currency.
The Fed cannot control whether and to what extent banks hold excess reserves.
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