Assume that the required reserve ratio is 20%. If the Fed sells $10 million worth of       government bonds from the public, the maximum change in the money supply is:   a) -$50 million. (b) -$20 million.   (c) $20 million.  (d) $50 million.

Q: 3. Assume that the Fed announces a new higher target for the federal funds rate. How will it achieve…

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Q: Conceptual / Calculation Question Suppose the Central Bank decided to purchase $50 billion worth of…

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Q: 7. Explain the tools of Monetary Policy. With a table and example?

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Q: 8. If the central bank carries out an open market operation and buys government securities, the…

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A:

Q: 7. "A wildcat bank, which started up business in a remote area and issued lots of banknotes, would…

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Q: 7. Suppose the Federal Reserve decreases the interest paid on reserves held by banks, and households…

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A: 1)

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Q: Assume that the reserve requirement is 20 percent. Also assume that banks do nothold excess reserves…

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Q: Exercise 2 Suppose that money demand is given by MD= $Y(0.25 – i) where $Y is $100. Also, suppose…

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Q: Conceptual / Calculation Question Suppose the Central Bank decided to purchase $50 billion worth of…

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Q: 7. Suppose the central bank expands the money supply, but because the public expects this action, it…

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Required Reserve and Excess Reserve Analysis

A required reserve is an amount of cash that banks must keep with themselves, which is certain percentage of the deposits made by their customers. Required reserve is a percentage of the bank's deposits that the respective bank must have on each overnight. The percentage rate is set and determined by the nation’s central bank. It is important to have such funds accumulated to meet its uncertain obligations, sudden liabilities and withdrawals. Required reserve is also known as reserve ratio. Reserve ratio is an important tool to control the money supply.