Victoria Viewitch
New member
Assume that banks do not hold excess reserves and that households do no hold currency – the only form of money is demand deposits. Suppose the banking system reserves of $600 billion. Find the money multiplier and the money supply for each reserve requirement listed below:
Reserve Requirement
A. 10%
B. 20%
Find the money multiplier and money supply (demand deposits) for each reserve requirement
Suppose the Fed wants to increase the money supply by $200 billion. Again, you can assume that banks do not hold excess reserves and that households do not hold currency. If the reserve requirement is 20% , the Fed will use open market operations to _______ (answer: sell or buy, choose one) ___________ (quantity) worth of US government bonds.
Then suppose that, rather than immediately lending out all excess reserves, banks begin holding some excess reserves due to uncertain economic conditions. Specifically, in addition to the required reserves of 20% banks hold an additional 5% of their deposits as reserves. This increase in the reserve deposit ratio causes the money multiplier to ______________ (fall or rise. pick one) to ______ (number). Under these conditions, the Fed would need to ___________ (buy or sell) ______________ (number) worth of US government bonds in order to increase the money supply by $200 billion.
Which of the following statement help to explain why, in the real world, the Fed cannot control the money supply? Check all that apply
______ The Fed cannot prevent banks from lending out required reserves
_______ The Fed cannot control whether and to what extend banks hold excess reserves
_________ The Fed cannot control the amount of money that households choose to hold as curency
Reserve Requirement
A. 10%
B. 20%
Find the money multiplier and money supply (demand deposits) for each reserve requirement
Suppose the Fed wants to increase the money supply by $200 billion. Again, you can assume that banks do not hold excess reserves and that households do not hold currency. If the reserve requirement is 20% , the Fed will use open market operations to _______ (answer: sell or buy, choose one) ___________ (quantity) worth of US government bonds.
Then suppose that, rather than immediately lending out all excess reserves, banks begin holding some excess reserves due to uncertain economic conditions. Specifically, in addition to the required reserves of 20% banks hold an additional 5% of their deposits as reserves. This increase in the reserve deposit ratio causes the money multiplier to ______________ (fall or rise. pick one) to ______ (number). Under these conditions, the Fed would need to ___________ (buy or sell) ______________ (number) worth of US government bonds in order to increase the money supply by $200 billion.
Which of the following statement help to explain why, in the real world, the Fed cannot control the money supply? Check all that apply
______ The Fed cannot prevent banks from lending out required reserves
_______ The Fed cannot control whether and to what extend banks hold excess reserves
_________ The Fed cannot control the amount of money that households choose to hold as curency