MACROECONOMICS (LOOSELEAF)-PACKAGE
13th Edition
ISBN: 9781337492317
Author: Baumol
Publisher: CENGAGE L
expand_more
expand_more
format_list_bulleted
Question
Chapter 15, Problem 4TY
a)
To determine
To Describe: The money supply
b)
To determine
To Describe: The amount of M.
c)
To determine
To Explain: The relationship between
Expert Solution & Answer
Want to see the full answer?
Check out a sample textbook solutionStudents have asked these similar questions
The Federal Reserve and the money supply
Suppose the money supply (as measured by checkable deposits) is currently $300 billion. The required reserve ratio is 25%. Banks hold $75 billion in reserves, so there are no excess reserves.
The Federal Reserve (“the Fed”) wants to decrease the money supply by $32 billion, to $268 billion. It could do this through open-market operations or by changing the required reserve ratio. Assume for this question that you can use the simple money multiplier.
If the Fed wants to decrease the money supply using open-market operations, it should ______(buy/sell) $_________
billion worth of U.S. government bonds.
If the Fed wants to decrease the money supply by adjusting the required reserve ratio, it should ______(increase/decrease) the required reserve ratio.
THis is one question . please answer with an explanation.
Question 2
If reserves increase, banks have the ability to make more loans, which as we have
seen would increase the money supply. Suppose the Fed uses open market
operations to add $1 million in reserves to the banking system, and all banks keep a
ratio of reserves to deposits of 20%. Then according to the money multiplier formula,
by how much will the money supply ultimately increase? (Answer in millions, to the
nearest .1 million if your answer is not an integer.)
Your Answer:
Answer
D View hint for Question 2
Question 3 (.
Chapter 11 mentions that in the past the Fed did not pay interest on accounts that
banks kept with it, but that since 2008 it has paid interest on these accounts. Does
the Fed paying interest have any effect on the ratio of reserves to deposits that
banks choose to hold? Does it increase the reserve ratio, decrease it, or have no
effect on it? Explain briefly. (Graded for participation only.)
Suppose the money supply (as measured by checkable deposits) is currently $300 billion. The required reserve ratio is 20%. Banks hold $60 billion in reserves, so there are no excess reserves.
The Federal Reserve (“the Fed”) wants to decrease the money supply by $17.5 billion, to $282.5 billion. It could do this through open-market operations or by changing the required reserve ratio. Assume for this question that you can use the simple money multiplier.
If the Fed wants to decrease the money supply using open-market operations, it should ___ (buy or sell) $_____ (fill in blank) billion worth of U.S. government bonds.
If the Fed wants to decrease the money supply by adjusting the required reserve ratio, it should ________ (increase or decrease) the required reserve ratio.
Knowledge Booster
Similar questions
- Consider a banking system where the Federal Reserve uses required reserves to control the money supply. (This was the case in the U.S. prior to 2008.) 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 (Percent) Simple Money Multiplier (Dollars) 5 10 A higher reserve requirement is associated with a money supply. Suppose the Federal Reserve wants to increase the money supply by $200. Again, you can assume that banks do not hold excess reserves and that households do not hold currency. If the reserve requirement is 10%, the Fed will use open-market operations to 2$ worth of U.S. government bonds. Now, suppose that, rather than immediately lending out all excess reserves, banks begin…arrow_forwarddo fast.arrow_forwardSuppose the Federal Reserve conducts an open market purchase from a bank for $300 million. Assuming the required reserve ratio is 10%, what would be the effect on the money supply in each of the following situations? If there are many banks, all of which make loans for the full amount of their excess reserves, the money supply will increase by $ million. (Enter your response as a whole number.)arrow_forward
- Suppose for each dollar of demand deposits the public holds $0.30 in currency. Suppose further that banks are required to hold required reserves equal to 0.12 of their demand deposits. If the monetary base is $5,000, determine the money supply (M). If the reserve requirement ratio on demand deposits increases to 0.15, how will your answer to section (a) be affected? If the public stops carrying currency, how will your answer to section (a) be affected? If the central bank sells $200 of government securities, how will your answer to section (a) be affected?arrow_forwardI am not sure how to even begin this problem.arrow_forwardAssume 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 $100. Determine the money multiplier and the money supply for each reserve requirement listed in the following table. Reserve Requirement Simple Money Multiplier Money Supply (Percent) (Dollars) 25 10 A lower reserve requirement is associated with a money supply. Suppose the Federal Reserve wants to increase the money supply by $100. 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 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.…arrow_forward
- Suppose that the Central Bank has currently set the reserve requirements in the economy to beequal to 10%. Assume that there is no cash drain. Suppose also that in this economy there are$400 in initial deposits and $6,000 of cash.6. Given the above, what is the total Money Supply (MS) in the economy?arrow_forwardAssume 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 $400. Determine the money multiplier and the money supply for each reserve requirement listed in the following table. Reserve Requirement Simple Money Multiplier Money Supply (Percent) (Dollars) 20 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 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.…arrow_forwardCan you help me answer this questionarrow_forward
- 1) Why does the Federal Reserve rely on Open Market Operations the most to influence the money supply? ( Max 200 words) 2) Why would the Federal Reserve rarely change the Required Reserve Ratio? ( Max 200 words) 3) How do expansionary actions by the Federal Reserve increase the money supply? ( Max 100 words) 4) How do contractionary actions by the Federal Reserve decrease the money supply? ( Max 100 words) 5) Can monetary policy fix economic shocks? ( Max 200 words)arrow_forwardThe following table gives the quantity of money demanded at various price levels (P), the money demand schedule. In the following table, fill in the column labeled Value of Money. Price Level (P) Value of Money (1/P) 0.80 1.00 1.33 2.00 Quantity of Money Demanded (Billions of dollars) 2.0 2.5 4.0 8.0 Now consider the relationship between the quantity of money that people demand and the price level. The lower the price level, the required to complete transactions, and the money people will want to hold in the form of currency or demand deposits. Assume that the Federal Reserve initially fixes the quantity of money supplied at $2.5 billion. money Use the orange line (square symbol) to plot the initial money supply (MS₁) set by the Fed. Then, referring to the previous table, use the blue connected points (circle symbol) to graph the money demand curve.arrow_forwardSuppose that the central bank buys $1.5 million worth of government bonds from banks. Suppose that the banks desired reserve ratio is 0.25. -What happens in the long run to the money supply if the public, other than banks, does not add to its currency holdings and the banks do not keep more than the desired reserves? -Will total credit in the economy expand or contract and by how much? Justify your answer. -Also, did the central bank’s purchase happened during a recession or an expansion?arrow_forward
arrow_back_ios
SEE MORE QUESTIONS
arrow_forward_ios
Recommended textbooks for you
- Economics (MindTap Course List)EconomicsISBN:9781337617383Author:Roger A. ArnoldPublisher:Cengage Learning
Economics (MindTap Course List)
Economics
ISBN:9781337617383
Author:Roger A. Arnold
Publisher:Cengage Learning