ECON 330 Chapter Notes -Complete Control, Money Supply, Primary Dealer

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maroonchimpanzee63

12 Feb 2014

School

University of Maryland

Department

Economics

Course

ECON 330

Professor

Dr.Neri

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Document Summary

All banks are required to hold some of the funds they acquire as deposits in an account at the fed. Reserves (for banks) consist of deposits at the fed and vault cash. Vault cash is currency that is physically held by banks and stored in vaults overnight. Reserve requirements: for every dollar of checkable deposits, banks are required to hold a fraction as reserves. Banks also hold excess reserves--reserves in excess of required reserves. The three policy tools that fed uses to manipulate the money supply are: Open market operations (affect reserves and monetary base) Discount lending--changes in borrowed reserves (affect the monetary base) Changes in reserve requirements (affects the money multiplier) The fed of late has focussed on the federal funds rate a primary instrument of monetary policy. The market for reserves is where the federal funds rate is determined (supply and demand analysis of reserves).

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)	Simple Money Multiplier	(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.

byzantiumarmadillo380

According to statistics provided by the Federal Reserve, the total reserves of commercial banks currently equal $1.63 trillion. Required reserves are $130 billion, so excess reserves total approximately $1.50 Trillion. The reserve requirement is 10 percent on transaction deposits, which include accounts that offer unlimited checking privileges, and there is no reserve requirement on time deposits. Non- transaction deposits currently amount to $2 trillion. Assume that changes in reserves held by banks affect transaction deposits only.

a. According to the information given in the problem, determine the total amount of transaction deposits held in commercial banks.

b. What are the total deposits- transaction and non-transaction - commercial banks?

c. What would happen to deposits if the Fed mandated that commercial banks eliminate their excess reserves?

d. How much would total required reserves be if total deposits remained at the level computed in part b, but the Fed imposed a 2 percent reserve requirement on non-transaction deposits and maintained the same 10 percent requirement on transaction deposits?

e. Would the existing reserves be sufficient to meet reserve requirements if the Fed imposed a 10 percent requirement for both transaction deposits and existing non-transaction deposits?

silverrabbit806

In the Federal Funds Market, the demand schedule for reserves is given as follows: i = 130/(R+0.1) where R is the number of reserves. The public held all of its deposits in transaction accounts.

a) When the federal funds rate was 0.05 (i=0.05) as it was in 2007, what was the number of reserves the banks held (R)?

b) In 2007 only, the currency held by the public was 5000, the required reserve ratio was 0.1 and banks only held required reserves. What was the money multiplier in 2007?

c) Now, suppose in 2009 the federal funds rate was i = 0.0025. How many reserves did the banks hold? Note: They may hold excess reserves in 2009.

d) If the currency held by the public was 5000 in 2009 and the number of deposits was the same as it was in 2007, what was the multiplier in 2009?

ochrefish550

ECON 330 Chapter Notes -Complete Control, Money Supply, Primary Dealer

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