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Brief Principles of Macroeconomics...

8th Edition
N. Gregory Mankiw
ISBN: 9781337091985

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BuyFindarrow_forward

Brief Principles of Macroeconomics...

8th Edition
N. Gregory Mankiw
ISBN: 9781337091985
Textbook Problem

Assume that the banking system has total reserves of $100 billion. Assume also that required reserves are 10 percent of checking deposits and that banks hold no excess reserves and households hold no currency.

a. What is the money multiplier? What is the money supply?

b. If the Fed now raises required reserves to 20 percent of deposits, what are the change in reserves and the change in the money supply?

Subpart (a):

To determine

The money multiplier and the money supply of the economy.

Explanation

The Federal Reserve is the central bank of the US economy, and it is usually known as the Fed. The Fed has the responsibility of keeping the economy controlled from fluctuations, and it has to control the money supply of the economy through its monetary policies. When the purchase of the government bonds from the public takes place, it will provide the money to the public, which will increase the consumption of the economy. As a result of the multiplier effect, the money supply in the economy will increase by the multiplier times.

It is given that the total reserves with the banking system are $100 billion and the reserve requirement is only 10 percent of the checking deposits that the bank holds. Thus, the money multiplier of the economy can be calculated as follows:

Money multiplier=1Reserve ratio=10.10=10

Therefore, the value of the money multiplier in the economy is 10

Subpart (b):

To determine

The money multiplier and the money supply of the economy.

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