The reserve requirement and the money supply Assume that banks do not hold exces
ID: 1200020 • Letter: T
Question
The reserve requirement 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 $600 billion. Find the simple deposit multiplier and the money supply for each reserve requirement listed in the following table. For a given level of reserves, a higher reserve requirement is associated with a money supply. Suppose the Federal Reserve (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 worth of U.S. government bonds. Now, 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 ratio causes the money multiplier to to. Under these conditions, the Fed would need to worth of U.S. government bonds in order to increase the money supply by $200 billion. Which of the following statements help to explain why, in the real world, the Fed cannot precisely control the money supply? Check all that apply. The Fed cannot prevent banks from lending out required reserves. The Fed cannot control the amount of money that households choose to hold as currency. The Fed cannot control whether and to what extent banks hold excess reserves.Explanation / Answer
For a given level of reserves, a higher reserve requirement is associated with a smaaler manoey supply.
buy $200 bn
fall 5
buy $ 50bn
checking all the options