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Consider the following information about banking system:

Reserves (R) = $500 billion

Currency (C) = $400 billion

Required Reserves (RR) = $80 billion

Required Reserve Ratio (r) = 0.1

a. If the excess reserve ratio increases by 0.06, while 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?

b. What should be done by the Fed sell or buy?

c. 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?

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Anne Gillian Duero
Anne Gillian DueroLv10
28 Sep 2019
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Related questions

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?

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.

3. Assume that bank deposits (D) are $3,200 billion, the required reserve ratio is 10%, and currency in circulation is $400 billion. What can the Fed do (in terms of open market operations) to lower the money supply by $100 billion? Explain. (Note assume that there are no excess reserves.)

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