32- eSecure https://coure.oplia.comjafisenvet/quiz?q 3-00048ckam 1529372047906 O

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32- eSecure https://coure.oplia.comjafisenvet/quiz?q 3-00048ckam 1529372047906 ORAASBD3016364ECSSCE4CF00DD onetary Policy Keep thellighest:3 3. The reserve requirement, open market operations, and the money supply Aa Aesume that benks do nat hod excess reserves ardthat houeehocs do not hoid currency-the cnly form cf money is checksble dcposits. Supposc thbanking system has total reserves of $200 bllion. Find the simpic moncy multiplir and the mercy supply or each reserve requiremert listed in the tellowing table. Money Supply Reserve Requirement Simple Honey Multiplier (Checkable Deposits) For a gwen led ofrcscrve, higher rascrc requircment asocistod witha mancy suppty. Suaposa the Fedral ee Fo) wants to ierease the mency supply by $CC billin. Again, ycu caasme thatbks da not hcld excess reserves and that hcuseholds do not hold aTenc. r the reserve requirement is 20%, the Fed will use Dpr-market worth of U.S, govemmert tonds Now, suppose that rather than immedietey lending out ell excess reserves, berks begin Folding some excess reeves due to uroertain economic conditions. Specifically, in addition to the requred reserves or 20%, banks hold an additional 5% of ter deposits as rcscrvas. This incrcasc in the rcaevc ratio causcs the mancy multipier to Fed wculd need to bilin Under thesc conditors, tho wurth or U.S gavernment bonds in arder to increase tre money suppiy by $100 Which of the folicwing statements help to explain why, in the real wold, the Fed cannat precisely control the money pply Check l thar apply Tho Fed cat presert banks from lending out rcquircd rescre ?The Fed carrot oontrol whether and to what extent banks hold excess reserves. E The Fed cenrot control the amount of money that heuseholds choose to hold as currency O lype hene to search

Explanation / Answer

1) lower money supply

2) buy government securities

3) Change in money supply = 1/Reserve requirement x Buying of government securities

100 billion = 1/0.20 x Buy of securities

Buying of securities = 100 billion x 0.20 = 20 billion

4) Money multiplier with reserve of 20% = 1/0.20 = 5

5) Money multiplier with reserve of 25% = 1/0.25 = 4

6) 100 billion = 1/0.25 x Buy securities

Buy securities = 100 billion x 0.25 = 25 billion

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

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

Reserve Requirement Simple Money Multiplier Money Supply 10% 1/0.10 = 10 200 billion x 10 = 2000 billion 20% 1/0.20 = 5 200 billion x 5 = 1000 billion

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