PRINCIPLES OF MACROECONOMICS(LOOSELEAF)
7th Edition
ISBN: 9781260110920
Author: Frank
Publisher: MCG
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Chapter 10, Problem 3RQ
To determine
Determine how the Fed will reduce the money supply of U.S economy using the open market operations.
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Bank Three currently has $600 million in transaction deposits on its balance sheet. The Federal Reserve has currently set the reserve requirement at 10 percent of transaction deposits. (LG 4-3)
If the Federal Reserve decreases the reserve requirement to 8 percent, show the balance sheet of Bank Three and the Federal Reserve System just before and after the full effect of the reserve requirement change. Assume Bank Three withdraws all excess reserves and gives out loans and that borrowers eventually return all of these funds to Bank Three in the form of transaction deposits.
Redo part (a) using a 12 percent reserve requirement.
The Fed achieves its federal funds rate target _______.
A.
level by setting the discount rate and the interest on reserves rate
B.
range because whatever the supply of reserves, the rate is between the discount rate and the interest on reserves rate
C.
level by conducting daily open market operations
D.
range by setting the supply of reserves equal to the quantity of reserves demanded at the range midpoint
Which of the following monetary tools is the Fed most likely to use for carrying out its day-to-day management of the money supply?
Changes in the discount rate
Changes in the reserve requirement
Changes in tax rates
Open market operations
Chapter 10 Solutions
PRINCIPLES OF MACROECONOMICS(LOOSELEAF)
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Similar questions
- Bank Three currently has $600 million in transaction deposits on its balance sheet. The Federal Reserve has currently set the reserve requirement at 10 percent of transaction deposits. If the Federal Reserve decreases the reserve requirement to 8 percent, show the balance sheet of Bank Three and the Federal Reserve System just before and after the full effect of the reserve requirement change. Assume Bank Three withdraws all excess reserves and gives out loans and that borrowers eventually return all of these funds to Bank Three in the form of transaction deposits.arrow_forwardIn the mid 1800's, grain sellers in Chicago would deliver their grain to warehouses and receive a paper receipt that represented their claim on the grain in storage. These receipts became so widely used that grain traders began to use them as money, and they would use the warehouse receipts to settle debts and as collateral to secure short-term loans. Despite their widespread use as a form of currency, the warehouse receipts were not fiat money because: A. Grain is a commodity, so the receipts were commodity money and not fiat money B. The receipts were not legal tender formally recognized by a governmentarrow_forwardSuppose the Fed buys $2000000 in government securities from someone who is a depositor at the First National Bank of El Reno. Lets assume the person deposits this money in this bank. Further assume that the current reserve requirement ratio is 20%. Please indicate below what will initially happen to this bank's balance sheet as a result of this transaction. Change in Reserves Change in loans Change in deposits Please indicate what will eventually happen to the nation's banking system as a result of this transaction. Change in reserves Change in loans Change in Depositsarrow_forward
- The Federal Reserve conducts a $30 million open-market purchase of government bonds. If the required reserve ratio is 15 percent, the largest possible increase in the money supply that could result is million, and the smallest possible increase is million.arrow_forwardIn the past, the Federal Reserve (Fed) mandated that member commercial banks must hold a certain fraction of their checkable deposits in the form of bank deposits at the Fed and/or vault cash because the sum of these two accounts equals reserves. The fraction of checkable deposits that banks must hold in reserve form is called the required reserve ratio (r). Suppose no excess reserves were in the banking system and the required reserve ratio(r) was 20%. The Fedbought a government bond worth $750,000 from Raphael, a client of First Main Street Bank. Raphael deposited the money into his checking account at First Main Street Bank. Given the required reserve ratio (r), First Main Street Bank was required to hold $_______ as required reserves and could $_______ to make loans.arrow_forwardSuppose that Maria makes a new cash deposit of $75,000. If the assumptions of the multiplier-deposit expansion process hold, (with the required reserve ratio set at 20%), this deposit will ________(INCREASE /DECREASE) the money supply by $____________ . (Note: Currency held by the public is counted in the money supply as part of M1.)arrow_forward
- Q10 Refer to Figure 27-1. A rightward shift of the money demand curve can be caused by Question 10 options: an increase in the price level. a decrease in the price level. a decrease in real GDP. an increase in the rate of interest. Both (A) and (C) Note:- Please refrain from offering handwritten solutions. Please ensure that your response maintains accuracy and quality to avoid receiving a downvote. Take care of plagiarism. Answer completely. You will get up vote for sure.arrow_forwardIf the actual overnight rate is below the Bank of Canada’s target for the overnight rate, the Bank of Canada will _______. lower the interest rate it pays commercial banks on their reserves held with the Bank of Canada increase commercial bank reserves reduce reserves of commercial banks purchase government securities in the open marketarrow_forwardThe initial condition of the banking system is as follows: $500 billion in reserve, $4,500 billion in loans and investments, and 5,000 billion in deposits. The required reserve is 10%. The Fed buys $100 billion government securities using open market operation, and lowers the reserve requirement to 5%. The banking system converts 85% excess reserves to loans, but borrowers return only 65% of these funds to the banking system as deposits. What is the maximum amount of loans in the banking system as a result of such Fed operation?arrow_forward
- Based on Keynesian economic theory, which of the following will occur if the Central Bank increases the money supply? Select one: The price level will rise while the real rate of interest and the level of investment remains unchanged The real rate of interest will fall and as such investment will increase Aggregate demand will fall as prices rise The nominal rate of interest will fall but the real rate of interest will also fall as the price level falls. As a result, investment remains unchangedarrow_forwardWhen the Fed embarked on a policy known as quantitative easing, they slowly lowered the federal funds rate target until it was equal to zero. they reduced the required reserve ration by one-quarter point per month for 12 months. bought longer-term securities than are usually bought in open market operations. opened up lending to primary dealers, commercial banks, and investment banks.arrow_forwardRefer to Figure 11.1. The money demand curve will shift from Md2 to Md1 if Group of answer choices interest rates fall. interest rates rise. the price level increases. nominal output decreases.arrow_forward
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