Assume that banks do not hold excess reserves and that households do not hold cu
ID: 1201198 • Letter: A
Question
Assume that banks do not hold excess reserves and that households do not hold currency, so the only form of money is demand deposits. To simplify the analysis, suppose the banking system has total reserves of $300. Determine the money multiplier and the money supply for each reserve requirement listed in the following table. Reserve Requirement Money Supply (Dollars) Simple Money Multiplier plier Dollars) 10 A higher reserve requirement is associated with a money supply. Suppose the Federal Reserve wants to increase the money supply by $200. Again, you can assume that banks do not hold excess reserves and that households do not hold currency. If the reserve requirement is 10%, the Fed will use open-market operations to of U.S. government bonds. worth Now, suppose that, rather than immediately lending out all excess reserves, banks begin holding some excess reserves due to uncertain economic conditions. Specifically banks increase the percentage of deposits held as reserves from 10% to 25% This increase in the reserve ran za se heExplanation / Answer
Money multiplier is given as = 1/reserve requirement.
Money supply = multiplier*monetary base.
1. r = 5% or 0.05
Multiplier = 1/0.05 = 20.
Money supply = 20*300 = $6000.
2. r = 10% or 0.10
Multiplier = 1/0.10 = 10
Money supply = 10*300 = $3000.
3. LOWER
Higher reserve requirement implies that the bank has to keep a higher proportion of deposit that it gets in the form of reserves and it cannot lent it out for loans (and lesser excess reserves available). This reduces the money supply in the economy.
4. BUY.
When the Fed buys bonds, it pays cash in return, hence money supply would increase in the economy.
money supply = $200.
r = 10% or 0.10
Multiplier = 1/0.10 = 10
money supply = multiplier*worth of bonds bought.
200/10 = worth of bonds bought..
$20 worth of bonds need to be bought to increase the money supply by $200.