Suppose the Fed decides to stimulate the economy. Assume there is no cash leakage and required reserve ratio is 20% now, and banks have no excess reserves.
Show how the Fed would increase M1 by 1 million dollars by changing the reserve ratio.
Show how the Fed would increase M1 by 1 million dollars through open market operation. (You are expected to make some assumptions and work out some numbers to get full credit. If you can break the answer in parts like initially and ultimately, that will be fantastic!
Suppose the Fed decides to stimulate the economy. Assume there is no cash leakage and required reserve ratio is 20% now, and banks have no excess reserves.
Show how the Fed would increase M1 by 1 million dollars by changing the reserve ratio.
Show how the Fed would increase M1 by 1 million dollars through open market operation. (You are expected to make some assumptions and work out some numbers to get full credit. If you can break the answer in parts like initially and ultimately, that will be fantastic!
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Related questions
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 | ||
| 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. 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.
