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Suppose that the reserve requirement for checking deposits is 10 percent and that banks do not hold any excess reserves. a. If the Fed sells $1 million of government bonds, what is the effect on the economy’s reserves and money supply? b. Now suppose the Fed lowers the reserve requirement to 5 percent, but banks choose to hold another 5 percent of deposits as excess reserves. Why might banks do so? What is the overall change in the money multiplier and the money supply as a result of these actions?

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Principles of Macroeconomics (Mind...

7th Edition
N. Gregory Mankiw
Publisher: Cengage Learning
ISBN: 9781285165912
BuyFind

Principles of Macroeconomics (Mind...

7th Edition
N. Gregory Mankiw
Publisher: Cengage Learning
ISBN: 9781285165912

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Chapter
Section
Chapter 16, Problem 8PA
Textbook Problem

Suppose that the reserve requirement for checking deposits is 10 percent and that banks do not hold any excess reserves.

a. If the Fed sells $1 million of government bonds, what is the effect on the economy’s reserves and money supply?

b. Now suppose the Fed lowers the reserve requirement to 5 percent, but banks choose to hold another 5 percent of deposits as excess reserves. Why might banks do so? What is the overall change in the money multiplier and the money supply as a result of these actions?

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