Sub part (a): 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 the 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 in 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 required reserve ratio of the checking accounts is 10 percent, which means that the multiplier value of the economy can be calculated as follows: Money multiplier = 1 Reserve ratio = 1 0.10 = 10 Therefore, the value of the money multiplier in the economy is 10 Sub part (b): To determine The impact of selling of bonds on the money supply and reserves.

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Question

Definition Definition Capital reserves held by banks or financial institutions over and above the reserves that are required to be maintained by the regulator toward its liabilities and for internal controls. For commercial banks, excess reserve is the amount over the standard reserve as decided by the central bank. These excess reserve funds are available in the form of cash and cash equivalents.

Chapter 16, Problem 8PA

Sub part (a):

To determine

The impact of selling of bonds on the money supply and reserves.

Sub part (b):

To determine

The impact of selling of bonds on the money supply and reserves.

Expert Solution & Answer

Chapter 16 Solutions

Bundle: Principles of Macroeconomics, Loose-Leaf Version, 7th + Aplia, 1 term Printed Access Card

Ch. 16.1 - Prob. 1QQ Ch. 16.2 - Prob. 2QQ Ch. 16.4 - Prob. 4QQ Ch. 16 - Prob. 1QR Ch. 16 - Prob. 2QR Ch. 16 - Prob. 3QR Ch. 16 - Prob. 4QR Ch. 16 - Prob. 5QR Ch. 16 - Prob. 6QR Ch. 16 - Prob. 7QR

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Similar questions

If the central bank sells 500 in bonds to a bank that has issued 10,000 in loans and is exactly meeting the reserve requirement of 10, what will happen to the amount of loans and to the money supply in general?
Explain how to use the discount rate to expand the money supply.

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