ECON1001 Lecture Notes - Lecture 12: Federal Reserve System, Money Multiplier, Cash Cash
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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 $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 | Ā | Ā |
10 | Ā | Ā |
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. Specifically, banks increase the percentage of deposits held as reserves from 10% to 25%. This increase in the reserve ratio causes the money multiplier to to . Under these conditions, the Fed would need to worth of U.S. government bonds in order to increase the money supply by $200.
Which of the following statements help to explain why, in the real world, the Fed cannot precisely control the money supply? Check all that apply.
- The Fed cannot control the amount of money that households choose to hold as currency.
- The Fed cannot prevent banks from lending out required reserves.
- The Fed cannot control whether and to what extent banks hold excess reserves.
1.
Assets |
Liabilities |
Reserves $2,000 |
Deposits $10,000 |
Loans 8,000 |
Ā |
Refer to Table.
Starting from the situation as depicted by the T-account, if someone deposits $500 into the First Bank of Fairfield, and if the bank makes new loans to keep its reserve ratio unchanged, then the number of new loans that it makes will be $320.
$400.
$680.
$750.
8.00 per cent 8.42 per cent 95.00 per cent |
medium of exchange unit of account None of the above is correct. |
generally lend out a majority of the funds deposited. cause the money supply to fall by lending out reserves. All of the above are correct. |
inflation but not employment. employment but not inflation. neither inflation nor employment. |
5. If a bank desires to hold no excess reserves, the reserve requirement is 5 per cent, and it receives a new deposit of $1,000 |
its required reserves increase by $50.
its total reserves initially increase by $1,000.
it will be able to make a new loan of up to $950.
All of the above are correct.