8 The reserve reguirement open market operetiees and the mon

8. The reserve reguirement, open market operetiees, and the moneysopply form of money is demand deposits. To simpläfy do not hold excess reserves and that households de not hold currency, se the only hat banks d supoose the banking system has total reserves of $400 Determine the money multipller and the money supply for each reserve analysis, s requirement lsted in the tollowing table. Money Supply (Percent) Simple Money Maltiplier (Dollars A higher reserve requirement is associated with a money Suppose the Federal Reserve wants to inrease the money supply by $200. Again, yow can assume that barks do not hold excess reserves hos.. do not hold currency, ne reserve reomment is 10%, the Fed wase opennaket operations to 5 operations to of us. govemment bonds Now, suppose that, rather than immeiately lending out all excess reserves, banks begin holding some excess reserves due to uncertain coeilors.Speckaly, barks increase the percentage of deposits heid as reserves from 10% to 25%. This increase in the reserve ratio causes the Which of the following statements help to eslain why, in the real world, the Fed cannot precisely contral the money supply? Check all that apply ?The Fed cannot prevent banks trom lening out neaired reserve The Fed cannot control the amount of money that households choose to hold as currency The Fed cannet control whether and to what extent banks hold excess reserves

Solution

Simple Money Multiplier forumla = 1 / r (r = Reaserve requirement)

at 20%,

Simple Money Multiplier = 5 (1 / 20%) and Money Supply = Multiplier * reserves = 5 * $400 = $2000

at 10%,

Simple Money Multiplier = 10 (1 / 10%) and Money Supply = Multiplier * reserves = 10 * $400 = $4000

1. For a given level of reserves, a higher reserve requirement is associated with a smaller money supply.

2. To increase money supply the fed will use open markets to buy $20 worth of US government bonds

3. Increase in reserve ratio casuses money multiplier fall to 4.

4. Under these conditions fed need to buy $50 worth of US government bonds

5. Select All that apply.

Option B and Option C