6. The Actaul Deposit Multiplier ***Fill in the blanks using the following terms
ID: 1198429 • Letter: 6
Question
6. The Actaul Deposit Multiplier
***Fill in the blanks using the following terms and numbers***
Increase, Decrease, $40,000, $250,000, $400,000, $10,000
***Fill in the blanks using the following numbers***
12, 7, 5,
***Fill in the blanks using the following terms***
the reserve requirement, the discount rate, open market operations, buy, sell
***Fill in the blanks using the following terms and numbers***
actual increase, actual decrease, maximum potential decrease, maximum potential increase, 0.10, 0.05
***Fill in the blanks using the following terms and numbers***
buy, sell, $200 billion, $275 billion, $5.0 billion, $50 billion
Explanation / Answer
(6)
(a) Buying $50,000 worth bonds will increase money supply by ($50,000 / 0.2) = $250,000
(b) The required assumption is: Banks hold no excess reserve.
It means that banks lend out every dollar of their excess reserves.
(c) If this assumption doesn't hold, money supply would be lower. If banks held excess reserves, they would make fewer loans.
(7)
(a) 7 members on Fed board of governors
(b) FMOC makes monetary policy decisions.
(c) Fed's primary tool is Open Market Operations (OMO). To increase money supply, Fed buys bonds.
(8)
(a) Reserves = 200,000 (Deposits at Fed). If required reserve ratio is 0.10, Required Reserves = 200,000 x 0.1 = 20,000. So it will have increase in excess reserves.
(b) Maximum increase in money supply = Excess reserves / Reserve ratio = (200,000 - 20,000) / 0.10 = 180,000 / 0.1 = 1,800,000.
(c) If reserve ratio = 0.5, required reserves = 200,000 x 0.05 = 10,000. Excess reserves = (200,000 - 10,000) = 190,000. Increase in money supply = 190,000 / 0.05 = 3,800,000
(d) The maximum potential increase in money supply will be higher if required reserves ratio is 0.05.
NOTE: First 3 questions are answered in full.
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