Consider the following information about the banking system:
Reserves (R) = $500 billion
Currency (C) = $400 billion
Required Reserves (RR) = $80 billion
Required Reserve Ratio (r) = 0.1
a. What is the value of excess reserves in the banking system?
b. What is the value of deposits in the banking system?
c. What is the value of the money supply (M1)?
d. What is the size of the monetary base?
e. What is the value of the money multiplier? What does it tell us?
f. If the excess reserve ratio increases by 0.06, while the value of the required reserve ratio and currency to deposits ratio stay the same, what will be the value of the money multiplier? The value of the money supply?
g. If the Fed wishes to have the value of the money supply in the economy at the initial level (part c), how should it respond?
h. How much in government bonds should the Fed sell or buy?
i. If the Fed buys from Chase 10 million in government bonds, given the money multiplier in part f, what would be the change in the money supply?
Consider the following information about the banking system:
Reserves (R) = $500 billion
Currency (C) = $400 billion
Required Reserves (RR) = $80 billion
Required Reserve Ratio (r) = 0.1
a. What is the value of excess reserves in the banking system?
b. What is the value of deposits in the banking system?
c. What is the value of the money supply (M1)?
d. What is the size of the monetary base?
e. What is the value of the money multiplier? What does it tell us?
f. If the excess reserve ratio increases by 0.06, while the value of the required reserve ratio and currency to deposits ratio stay the same, what will be the value of the money multiplier? The value of the money supply?
g. If the Fed wishes to have the value of the money supply in the economy at the initial level (part c), how should it respond?
h. How much in government bonds should the Fed sell or buy?
i. If the Fed buys from Chase 10 million in government bonds, given the money multiplier in part f, what would be the change in the money supply?
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.
