Banks play an important role in the economy as regards to the money supply that is how to create money. Why do banks take actions that result in the creation of money and growth in the money supply?

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Elin HesselLv2

6 Jun 2018

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1. Describe the three functions of money. 2. Explain the role banks play in the creation of money. 3. Describe the five-step process that starts with an increase or decrease in the money supply and ends with an increase or decrease in GDP. 4. Evaluate current monetary policy.

Assume that the banking system has total reserves of $100 million. Assume also that the reserve requirement for checking deposits is 10 percent and that banks do not hold any excess reserves. There is also no currency held by households.

a) What is the money multiplier? What is the money supply?

b) If the FED raises required reserves to 20 percent of deposits, what are the change in reserves and the change in money supply?

c) Now suppose the FED lowers the requirement from 10 percent 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?

d) If the FED sells $1 million of government bonds, what is the effect on the economy's reserves and money supply? Use 10 percent required reserve ratio.

e) If the FED buys $5 million of government bonds, what is the effect on the economy's reserves and money supply? Use 10 percent required reserve ratio.

crimsonbadger400

Question 26.26. In a system of 100-percent-reserve banking, (Points : 5)

banks do not accept deposits.
banks do not influence the supply of money.
loans are the only asset item for banks.
All of the above are correct.

Question 27.27. If the reserve ratio is 20 percent, the money multiplier is (Points : 5)

2.
4.
5.
8.

Question 28.28. If an economy uses silver as money, then that economy

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Banks play an important role in the economy as regards to the money supply that is how to create money. Why do banks take actions that result in the creation of money and growth in the money supply?

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