Suppose the money supply (as measured by checkable deposits) is currently $300 b

Question

Suppose the money supply (as measured by checkable deposits) is currently $300 billion. The required reserve ratio is 25%. Banks hold $75 billion in reserves, so there are no excess reserves The Federal Reserve ("the Fed") wants to decrease the money supply by $32 bilion, to $268 billion. It could do this through open-market operations or by changing the required reserve ratio. Assume for this question that you can use the simple money multiplier. If the Fed wants to decrease the money supply using open-market operations, it should billion worth of U.S. government bonds If the Fed wants to decrease the money supply by adjusting the required reserve ratio, it should ? the required reserve ratio.

Explanation / Answer

Ans: If the Fed wants to decrease the money supply using open- market operations, it should sale $32 billion worth of U. S government bonds.

Explanation:

When the Fed sales government bonds through the open market operation, then the money in the hands of public will transfered to the Fed's account. As a result the money supply in the economy will decrease.

Ans : If the Fed wants to decrease the money supply by adjusting the required reserve ratio , it should increase the required reserve ratio.

Explanation:

There is an inverse relationship between required reserve ratio and money supply.

Related Questions

Navigate

• Browse (All)
• Browse S
• Subjects

---

---

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.