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X' The Marketing Strategy Of Co oud courses apía.com/at/servlet/quiz7quiz action-takeQuiz&iquiz; probGuid-QNA 1/3.6 Keep the Highest: Attempts: 1 Aa Aa 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-the only form of money is checkable deposits. Suppose the banking system has total reserves of $200 billion. Find the simple money multiplier and the money supply for each reserve requirement listed in the following table. Reserve Requirement 10% 2096 Simple Mo For a given level of reserves, a lower reserve requirement is associated with a money supply. Suppose the Federal Reserve (the Fed) wants to increase the money supply by $100 billion. Again, you can assume that banks do not hold ecess reserves and that households do not hold currency. If the reserve requirement is 20%, the Fed will use open-market operations to worth of U.S. government bonds. Now, suppose that rather than immediately lending out all excess reserves, banks begin holding some excess reserves uncertain economic conditions. Specifically, in addi as reserves. This increase in the reserve ratio causes the money multiplier to Fed would need to billion tion to the required reserves of 2006, banks hold an additional 5% of their d eposits worth of U.S. government bonds in order to increase the money supply by $100 to . Under these conditions, the

Explanation / Answer

Option C is the correct answer because the fed cannot control the amount of money that a households choose to hold as currency. because the fed cannot expect how households hold the currency

Option A is wrong because the FED is the Apex authority and all the provisions of the Fed has to be complied by all the banks

Option B is wrong because the Fed can prevent the bank from lending out the required reserves.

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