Graded Assignment | Read Chapter 13 Back to Assignment Due Sunday 06.10.18 at 11
ID: 1152241 • Letter: G
Question
Graded Assignment | Read Chapter 13 Back to Assignment Due Sunday 06.10.18 at 11:45 P Attempts: 1.9 Keep the Highest: 1.9/5 3. The reserve requirement, open market operations, and the money supply Assume that banks do not hold excess reserves and that households do not hold currency, so the only form of money is checkable deposits. To simplify the analysis, suppose the banking system has tota reserves of $100. Determine the simple money multiplier and the money supply for each reserve requirement listed in the following table Money Supply (Dollars) Simple Money Multiplier (Percent) 25 10 A higher reserve requirement is associated with money suppy Suppose the Federal Reserve wants to Increase the money supply by $100. Again, vou can assume that benks oo not hoid excess reserves and that households do not hold currency. If the reserve requirement is 10%, the Fed wit use open-market operations to s of U.S. government bonds Now, suppose that, rather than immed ately lending out all excess reserves, banks begin holding some excess reserves in response to uncertain economic conditions, Specifically, banks increase the percentage of deposits held as reserves fron1 1096 to 20%. This increase in the reserve ratio causes the multiplier to government bonds in order to increase the money supply by $100 ? to Under these conditions, the red wourd need to worth of U.S Which of the following statements help to exolain why, in the reel worid, the Fea cannost preciselv contror tne money supply? Check a that apoly The Fed cannot control the amount of money that households choose to hold as cuerency The Fed cannot prevent banks from lending out required reserves G The Fed cannot control whether and to what extene banks nold excess reserves Copyright Notices Terms of Use Privacy Notice Security NoticeAccessibilityExplanation / Answer
When Reserve requirement is 25%,then Simple money multiplier = 100/25=4 and Money Supply=4*$100 = $400
When Reserve requirement is10%,then Simple money multiplier = 100/10=10 and Money Supply=10*$100 = $1000
A higher reserve requirement is associated with a smaller money supply.
-Suppose the Fed wants to increase the money supply by $100.Reserve requirements=10%
The fed will use OMO to buy (100*10%)= $10 worth of US government bonds.
-Now Banks increase the percentage of deposits held as reserves from 10% to 20%.
This increases causes money multiplier to fall to 5.(100/20)
Under these conditions,the Fed would need to buy (100*20%)= $20 worth of US government bonds in order to increase money supply by $100.
-The following statements help to explain why in the real world,the Fed cannot precisely control the money supply-
1)The Fed cannot control the amount of money that households choose to hold as currency.
3)The Fed cannot control whether and to what extent banks hold excess reserves.
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