ECON 102 Chapter Notes - Chapter 16: Openmarket, Open Market Operation, Federal Funds Rate

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2 Mar 2018

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ECON 102 Full Course Notes

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If banks hold all deposits in reserve, banks do not influence the supply of money. The smaller the money multiplier: basically just understand the intuition of the reciprocal of a larger denominator. Tool type 1: how the fed influences the quantity of reserves: fed alters the quantity of reserves in the economy by buying and selling bonds in open market operations or by making loans to the banks. Lower reserves decreases money supply: lower discount rate encourages banks to borrow increases reserves increases money supply. Reserve requirements: reserve requirements: regulations on the minimum amount of reserves that banks must hold against deposits, reserve requirements influence how much money the banking system can create with each dollar of reserves. Increase in reserve requirement: raises reserve ratio, lowers the money multiplier, decreases money supply: decrease in reserve requirement: lowers reserve ratio, raises the money multiplier, increases the money supply.

Related Questions

Explain the following statement whether true or false.

1- Assume that when $80,000 cash enters the banking system, the money supply ultimately increases by $320,000. Assume also that all banks do not hold excess reserves and that the entire money supply consists of demand deposits. Then the total legal reserves for all banks will amount to $40,000, and total loans and investments for all banks will be equal to $ 280,000.

2- Banks cannot affect or contribute to changes in the money supply if they were required to hold all reserve deposits.

3-Nowadays, a credit card is similar to a check, in money definition, according to macroeconomics.

silverlion359

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

Suppose households hold $0.30 in currency for every $1 they have as demand deposits (checking accounts). Also, banks hold 20% of their deposits as reserves.

A. If the Federal Reserve buys $10 of government bonds from banks, by how would would the following change (include a minus sign if the value falls)?
i. the money supply (M1)
ii. the monetary base

B. Instead of Bonds being sold, suppose that households chose to hold less in currency and more in demand deposits. Explain how that would change
i. Money supply (M1)
ii. the monetary base

viridianserval415

ECON 102 Chapter Notes - Chapter 16: Openmarket, Open Market Operation, Federal Funds Rate

ECON 102 Full Course Notes

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