1. Answer True or False for each of the following.
Alan Greenspan is the current chair of the Federal Reserve Board.
The Fed rarely changes the required reserve rate.
The FOMC is the policy making arm of the Federal Reserve.
When the Federal reserve buys securities it raises the money supply.
Holding money in the expectation of better future investments is known as the precautionary demand for money
2. Identify for each of the following whether the actual multiplier in the banking system is rising or falling?
Banks increase their reserves beyond what is necessary.
The Federal Reserve lowers the target Fed Funds rate.
Households hoard currency more than before.
The Federal Reserve raises the Required Reserve Rate.
Currency increasingly disappears into the underground economy or overseas.
The Federal Reserve sells bonds.
1. Answer True or False for each of the following.
Alan Greenspan is the current chair of the Federal Reserve Board.
The Fed rarely changes the required reserve rate.
The FOMC is the policy making arm of the Federal Reserve.
When the Federal reserve buys securities it raises the money supply.
Holding money in the expectation of better future investments is known as the precautionary demand for money
2. Identify for each of the following whether the actual multiplier in the banking system is rising or falling?
Banks increase their reserves beyond what is necessary.
The Federal Reserve lowers the target Fed Funds rate.
Households hoard currency more than before.
The Federal Reserve raises the Required Reserve Rate.
Currency increasingly disappears into the underground economy or overseas.
The Federal Reserve sells bonds.
Related textbook solutions
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.
