1- an economy begins in long-run equilibrium, and then a change in goverment regulations allows banjs to start paying interest on checking accounts. recall that the money stock is the sum of currency and demand deposits, including checking accounts, so this regulatory change makes holding money more attractive.
a-How does this change affect the demand for money?
b-What happens to the velocity of money?
c-If the Fed keeps the money supply constant, what will happend to the output and prices in the short run and in the long run?
d-If the goal of the Fed is to stabilize the price level, should the Fed keep the money supply constant in response to this regulatory change?if not, what should it do? Why?
e-If the goal of the Fed is to stabilize output, how would your answer to part(d) change?
1- an economy begins in long-run equilibrium, and then a change in goverment regulations allows banjs to start paying interest on checking accounts. recall that the money stock is the sum of currency and demand deposits, including checking accounts, so this regulatory change makes holding money more attractive.
a-How does this change affect the demand for money?
b-What happens to the velocity of money?
c-If the Fed keeps the money supply constant, what will happend to the output and prices in the short run and in the long run?
d-If the goal of the Fed is to stabilize the price level, should the Fed keep the money supply constant in response to this regulatory change?if not, what should it do? Why?
e-If the goal of the Fed is to stabilize output, how would your answer to part(d) change?
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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.
